-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CwsF9JtME8KQGJ+KQzRXbcCu3EOfjw7+QPWPASSLy8R4jegXjwVaWzQBoGace38/ yeGklih3r3/+0X8tgsRmRA== 0000950136-96-000981.txt : 19961106 0000950136-96-000981.hdr.sgml : 19961106 ACCESSION NUMBER: 0000950136-96-000981 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19940827 FILED AS OF DATE: 19961105 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: JENNIFER CONVERTIBLES INC CENTRAL INDEX KEY: 0000806817 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FURNITURE STORES [5712] IRS NUMBER: 112824646 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09681 FILM NUMBER: 96654514 BUSINESS ADDRESS: STREET 1: 419 CROSSWAYS PK DR CITY: WOODBURY STATE: NY ZIP: 11797 BUSINESS PHONE: 5164961900 MAIL ADDRESS: STREET 2: 419 CROSSWAYS PARK DR CITY: WOODBURY STATE: NY ZIP: 11797 10-K 1 FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended Commission File number 1-9681 August 27, 1994 JENNIFER CONVERTIBLES, INC. (Exact name of registrant as specified in its charter) Delaware 11-2824646 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 419 Crossways Park Drive Woodbury, New York 11797 5712 (Address of principal executive office) (Primary Standard Industrial Classification Code Number) Registrant's telephone number, including area code (516) 496-1900 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of voting stock held by non-affiliates of registrant as of November 30, 1994: $33,018,367. Shares of Common Stock outstanding as of November 30, 1994: 5,700,725 DOCUMENTS INCORPORATED BY REFERENCE NONE PART I Item 1. Business Recent Developments In late November 1994, just prior to the date the Company expected to file this Annual Report, the Company was advised by KPMG Peat Marwick ("Peat"), its independent auditors at the time, that its method of accounting for its licensees should be changed and would likely require a restatement of previously announced financial results. The fiscal 1993 and 1994 financial statements included herein consolidate the operating losses of certain limited partnership licensees (the "LPs"), to the extent such losses exceed the capital contributions of the limited partners. In addition, on December 2, 1994, as more fully discussed under "Certain Relationships and Related Transactions," a special committee of the Company's Board of Directors delivered a summary report which concluded that the Company had meritorious claims against three members of its management, an affiliated private company and others. The Company announced these matters publicly in a press release on December 2, 1994. In March 1995 the Company received a response to such report prepared on behalf of one of the members of its management which concluded that there were no valid claims. As more fully discussed under "Legal Proceedings," the Company and certain of its management became involved in class action and derivative litigations relating to the matters referred to above and, on May 3, 1995, the Securities and Exchange Commission commenced an investigation relating to such matters. On May 2, 1995, BDO Seidman, the Company's auditors for the 1993 fiscal year, advised the Company that BDO Seidman, had withdrawn its opinion with respect to the Company's financial statements for the fiscal year ended August 31, 1993. In March 1996, as described in "Legal Proceedings," the Company announced that it had entered into memoranda of understanding ("MOUS") with the other parties in the class action and derivative litigations (other than Selig Zises, Peat and BDO Seidman) for the purpose of settling such litigations. The transactions set forth in the MOUS and the settlement of such litigation are subject, among other things, to execution of definitive documentation and Court approval. Due primarily to the events referred to above, the Company has been unable to file this Annual Report until now, more than one year after the filing deadline. As a result of such filing delay, the Company is simultaneously filing this Annual Report, its Quarterly Reports on Form 10-Q for the quarters ended November 26, 1994, February 25, 1995, May 27, 1995, November 25, 1995, February 24, 1996 and May 25, 1996 (the "Quarterly Reports") and its Annual Report on Form 10-K for the fiscal year ended August 26, 1995 (the "1995 Annual Report"). Much of the information given in this Annual Report is out of date and has been superseded by the information given in the Quarterly Reports and the 1995 Annual Report. Accordingly, this Annual Report should be read in conjunction with the Quarterly Reports and the 1995 Annual Report. Unless expressly otherwise stated, information in this Annual Report is as of August 27, 1994. Unless otherwise set forth herein, the term the "Company" includes Jennifer Convertibles, Inc., a Delaware corporation, and its direct or indirect subsidiaries. Business Overview The Company is the owner and licensor of the largest group of sofabed specialty retail stores in the United States, with 147 Jennifer Convertibles(R) stores located on the Eastern seaboard, in the Midwest, on the West Coast and in the Southwest. As of August 27, 1994, the Company also operated 19 "Jennifer Leather" ("Jennifer Leather") stores and two "Elegant Living" ("Elegant Living") stores. Of the Jennifer Convertibles(R) stores, as of August 27, 1994, 34 were owned by the Company and 113 were licensed by the Company. 2
NUMBER OF STORES IN OPERATION AS OF AUGUST 27, 1994 ============================================================================ PRIVATE ELEGANT TOTAL LPS AND OTHE COMPANY TOTAL CONVERTIBLES LEATHER LIVING COMPANY LICENSEES(1) (2) STORES ---------------------------------------------------------------------------- REGION TRI-STATE AREA NEW YORK 6 10 2 18 5 24 47 NEW JERSEY 9 3 12 5 17 CONNECTICUT 4 4 1 5 ---------------------------------------------------------------------------- SUBTOTAL 19 13 2 34 11 24 69 ARIZONA 4 4 CALIFORNIA 25 25 FLORIDA 2 2 16 18 GEORGIA 4 4 ILLINOIS 18 18 INDIANA 3 3 KANSAS 1 1 MARYLAND 3 1 4 3 7 MASSACHUSETTS 7 2 9 9 MICHIGAN 6 6 MISSOURI 8 8 NEW HAMPSHIRE 2 2 2 OHIO 5 5 PENNSYLVANIA 6 6 VIRGINIA 2 2 2 WISCONSIN 3 3 WASHINGTON, D.C. 1 1 2 2 ---------------------------------------------------------------------------- TOTAL 34 19 2 55 113(3) 24 192 ============================================================================
(1) These include the LPs, which are licensees whose accounts are included in the consolidated financial statements of the Company, and licensees (the "Unconsolidated Licensees") whose accounts are not so included. (2) These 24 stores are not owned and do not pay royalties to the Company. They operate in New York (the "Private Stores") and 21 of such stores are owned by a company (the "Private Company") that, as of August 27, 1994, was owned by individuals who were directors, principal stockholders and/or executive officers of the Company and, therefore, may be deemed an affiliate of the Company. The remaining three stores are sublicensees of the Private Company and one of such stores is owned by the father of an executive officer of the Company. The 24 New York stores are operated in substantially the same way as the Company-owned stores. See "Notes to Consolidated Financial Statements - Footnote - Related Party Transactions." (3) Effective September 1, 1994, the Company acquired the entire limited partnership interest in Jennifer L.P. II and effectively acquired 21 of the Jennifer Convertibles(R) stores reflected in the column which, as of August 27, 1994, had been licensed to and operated by such LP. See "Certain Relationships and Related Transactions." 3 Jennifer Convertibles(R) stores specialize in the retail sale of a complete line of sofabeds and companion pieces, such as loveseats, chairs and recliners, designed and priced to appeal to a broad range of consumers. The sofabeds and companion pieces are made by several manufacturers and range from expensive, high-end merchandise to relatively inexpensive models. The Jennifer Leather stores specialize in the retail sale of leather livingroom furniture. The Company is the largest dealer of Sealy(R) sofabeds in the United States. Merchandise is displayed in attractively decorated model room settings in the store designed to show the merchandise as it would appear in the customer's home. In order to generate sales, the Company and its licensees rely on the attractive image of the stores, competitive pricing, prompt delivery and extensive advertising. The table below sets forth information with respect to the number of stores (Company-owned and licensed) opened since fiscal 1986: Fiscal Years 1994 1993 1992 1991 1990 1989 1988 1987 ---- ---- ---- ---- ---- ---- ---- ---- Company-owned stores open at end of period (1)(2)(3) 55 34 33 33 39 42 31 13 Licensed stores open at end of period(3) 113 87 42 15 0 0 0 0 --- --- -- -- -- -- -- -- Total stores open at end of period 168 121 75 48 39 42 31 13 === === === === === === === === - ---------- (1) Stores acquired from affiliated companies are reflected as opened in the year they were opened by the affiliate, not in the year they were acquired by the Company. (2) For fiscal 1994, includes the 19 Jennifer Leather and two Elegant Living stores open at the end of such fiscal year. (3) Effective September 1, 1994, the Company acquired the entire limited partnership interest in Jennifer L.P. II and effectively acquired 21 Jennifer Convertibles(R) stores that had been theretofore licensed to and operated by such LP. For fiscal 1994, such stores are included as licensed stores. See "Certain Relationships and Related Transactions." Store Image and Merchandise The Company believes that the image presented by its stores is an important factor in its overall marketing strategy. Accordingly, stores are designed to display the Company's merchandise in attractive model room settings. All Jennifer Convertibles or Jennifer Leather stores, as the case may be, are of a similar clearly defined style, are designed as showrooms for the merchandise and are carpeted, well-lighted and well-maintained. Inventories for delivery are maintained in separate warehouses. The Company displays a variety of sofabeds and companion pieces (including cocktail tables) at each Jennifer Convertibles retail location with carpeting, and certain accessories (some of which are for sale). In contrast to certain of its competitors that primarily target particular segments of the market, the Company attempts to attract customers covering a broad socio-economic range of the market and, accordingly, offers a complete line of sofabeds made by a number of manufacturers in a variety of styles at prices currently ranging from approximately $400 to $2,200. The Jennifer Leather stores similarly offer a complete line of leather living room furniture in a variety of styles and colors at prices currently ranging from approximately $499 to $6,000. The Company generally 4 features attractive price incentives to promote the purchase of merchandise. In addition to offering merchandise by a number of brand name manufacturers, the Company offers merchandise at its Jennifer Convertibles and Jennifer Leather stores under the "Jennifer" brand name. Although each style of sofabed, loveseat, chair and recliner is generally displayed at Jennifer Convertibles stores in one color and fabric, samples of the other available colors and fabrics are available. On selected merchandise, up to 300 different colors and fabrics are available without extra charge and up to 2,000 different colors and fabrics are available on selected items for an additional charge. Leather furniture is offered in a number of different grades of leather and colors. The Company currently emphasizes contemporary and traditional sofabeds and companion pieces in the Jennifer Convertibles stores and contemporary leather pieces in the Jennifer Leather stores. The Company generates additional revenue by selling tables and offering related services, such as fabric protection and a lifetime warranty. Fabric protection services are obtained from, and the warranty is given by, the Private Company, which retains approximately 1/3 of the revenues generated from such services. See "Certain Relationships and Related Transactions." Merchandise ordered from inventory (approximately 55% of sales in the Jennifer Convertibles stores and 35% of sales in the Jennifer Leather stores) is generally available to be delivered to customers within 48 to 72 hours of placing an order. Customers who place orders for items, colors or fabrics not in inventory ("special orders") must generally wait three to five weeks for delivery, except for Italian leather merchandise which may take up to 20 weeks. The Company believes that its delivery times on stocked items and special orders are significantly faster than the usual delivery times for furniture and that its ability to offer quick delivery of merchandise represents a significant competitive advantage. Operations Generally, the Company's stores are open seven days per week. Stores 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. The Company's licensed stores are substantially the same in appearance and operation as the Company-owned stores. The Company and its licensees have regional managers throughout the United States. The regional managers supervise store management and monitor stores within their assigned region to ensure compliance with operating procedures. Regional managers report to and coordinate operations in their region with the Company's executive management. An inventory of approximately 70% of the items displayed in the stores, in the colors and fabrics displayed, is usually maintained at the Private Company's warehouse facilities (described below.) The Company and its licensees typically require a minimum cash, check or credit card deposit of 33% of the purchase price when a sales order is given, with the balance, if any, payable in cash or certified or official bank check upon delivery of the merchandise. The balance of the purchase price is collected by the independent trucker making the delivery. 5 Marketing The Company and its licensees advertise in newspapers, transit and other media and on television in an attempt to saturate its marketplaces. The Company's approach to advertising requires the Company to establish a number of stores in each area it enters. 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. The Company's and the LP's expenditures for advertising were approximately $11,400,000 (11.7% of sales) in the fiscal year ended August 27, 1994 as compared to approximately $7,200,000 (11.1% of sales) in the prior year. The Company creates advertising campaigns which are used by the Company's stores and may be used by the Private Stores. The Private Company bears an amount which approximates its pro rata share of advertisements which target customers in New York, New Jersey and Connecticut. (See "Certain Relationships and Related Transactions.") However, the Company also advertises independently of the Private Company outside of the New York metropolitan area. The Company is entitled to reimbursement from its licensees, which are responsible for their respective costs of advertising. The approach and format of such advertising is usually substantially the same for the Company and its licensees. The Company has the right to approve the content of all licensee advertising. In order to further understand its markets, the Company carefully monitors its sales, interviews customers and obtains other information reflecting trends in the furniture industry and changes in customer preferences. The Company also reviews industry publications, attends trade shows and maintains close contact with its suppliers to aid in identifying trends and changes in the industry. Leasing Strategy and Current Locations The Company considers the ability to obtain attractive, high-traffic store locations to be critical to the success of its stores. The Company, together with outside real estate consultants, selects sites and negotiates leases on behalf of its 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, the Company picks the specific locations within such territory. Although a real estate consultant typically screens sites within a territory and engages in preliminary lease negotiations, each site is inspected by an officer of the Company and the Company is responsible for approval 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 auto or other forms of transportation and provide convenient parking. The locations currently leased by the Company and its licensees range in size from 1,900 square feet to a little over 8,000 square feet. The Company anticipates that stores opened in the future will range from approximately 2,000 square feet to 4,000 square feet. Management believes that optimal store size for a Jennifer Convertibles store is approximately 3,000 square feet while optimal store size for a Jennifer Leather store is 3,500 square feet. Stores may be freestanding or part of a strip shopping center. 6 Sources of Supply Effective January 1, 1994, the Company assumed from the Private Company the responsibility for purchasing merchandise for itself, its licensees and the Private Company. The Company acquired from the Private Company the inventory that was in the warehouse on January 1, 1994 for $2,575,000 which was the Company's cost basis. The Company currently purchases merchandise, for its stores and the stores of its licensees and the Private Company, from a variety of domestic manufacturers generally on 40 or 60 day terms. The combined purchasing power of the Company, its licensees and the Private Company enables them to receive the right, in some instances, to market exclusively certain products, fabrics and styles. See "Certain Relationship and Related Transactions." The Company's principal suppliers of sofabeds are Klaussner Furniture, Inc. ("Klaussner") and Sealy Furniture of Maryland, Inc. ("Sealy Maryland"). Sealy(R) brand name sofabeds are the Company's largest selling brand name item and the Company believes that Sealy(R) brand name mattresses are the largest selling mattresses in the world and have the highest consumer brand awareness. The Company also believes that Sealy Maryland is the largest manufacturer of Sealy(R) brand name convertible sofabeds. The Company is the largest sofabed specialty retailer and the largest Sealy(R) sofabed dealer in the United States. During the fiscal year ended August 27, 1994, the Company purchased approximately 73% of its merchandise from Klaussner and approximately 22% of its merchandise from Sealy Maryland. Leather furniture is purchased primarily from Klaussner and Industrie Natuzzi S.p.A. Licensing Arrangements In fiscal 1991, the Company shifted its focus from owning and operating stores to a licensing program under which it licensed stores in exchange for an ongoing royalty. As of August 27, 1994, an aggregate of 114 licensed stores were open. Among the reasons for the Company's shift to licensing had been that Jennifer Convertibles stores typically experience losses for three to four years. The Company had believed that the losses from stores operated by licensees would not be included in the Company's financial statements. In November 1994, the Company's accountants advised the Company that the losses of certain licensees in excess of the capital contributions of the limited partners must be included in the Company's financial statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." As a result of such conclusion, the Company is no longer actively seeking to license additional stores. The Company's arrangements with its licensees typically involve providing the licensee with a license, bearing a royalty of 5% of sales, to use the name Jennifer Convertibles(R). The Company's existing licensing arrangements are not uniform and vary from licensee to licensee. Generally, however, the Company either manages the licensed stores or, if the licensee is a partnership, has a subsidiary act as general partner of such partnership, in each case, for 1% of the licensees' profits. The arrangements generally have a term ranging between 10 and 20 years (and may include options on the licensee's part to extend the license for additional periods) and involve the grant of exclusivity as to defined territories. In some cases, the Company also has an option to purchase the licensee or the licensed stores for a price based on an established formula or valuation method. Investors in certain licensees have, in certain circumstances (including a change of control of the Company), the right to put their investments to the Company for a price based upon an established formula or valuation method. The Private Company currently provides warehousing, fabric protection and other services to licensees on substantially the same basis as such services are provided to the Company and, as of January 1, 1994, the Company purchases merchandise for the licensees. As of August 27, 1994, the Company was owed an aggregate of $11,721,000 for royalties advances, and merchandise by its licensees, $8,177,000 of which was overdue. Of such amount, $8,437,000 due from LPs is not reflected as a receivable 7 on the Company's financial statements as a result of the consolidation of the LPs and $3,284,000 due from Unconsolidated Licensees was reserved against in such financial statements due to doubts as to collectability. Most of the investors in the licensees have other relationships with the Company or its current or former management. See "Certain Relationships and Related Transactions." In January 1993, the Company began to test market specialty retail sofa stores operating under the name Elegant Living, specializing in the sale of upholstered furniture and Jennifer Leather, specializing in the sale of leather furniture. In February 1993, the Company entered into a series of agreements pursuant to which a limited partnership (the "Elegant Partnership") was established, with a subsidiary of the Company as the general partner, for the purpose of operating these test market stores in the New York Metropolitan area. Effective November 30, 1993, the Company acquired the limited partner's interest in the Elegant Partnership for $2,250,000. The Company, by acquiring all interests in the Elegant Partnership, acquired five Jennifer Leather stores and four Elegant Living stores. The Company converted two of the Elegant Living stores to Jennifer Leather stores. Subsequent to the acquisition of the Elegant Partnership interest, the Company opened additional Jennifer Leather stores and, as of August 27, 1994, had open 19 Jennifer Leather stores and two Elegant Living stores. See "Certain Relationships and Related Transactions." Although the Company does not believe that certain transactions in which licenses were granted to operate stores were subject to state and Federal laws regulating the offer and sale of franchises, the applicability of such laws is uncertain as applied to the Company's licensing program, and there can be no assurance that a court would not take the position that the Company should have complied with such laws in connection with those transactions. In order to reduce or eliminate this uncertainty, in 1993 the Company offered certain licensees the opportunity to rescind their license agreements. All such licensees declined such offers of rescission. Warehousing and Related Services Effective January 1, 1994, the Company and the Private Company entered into a new warehousing agreement (the "New Warehousing Agreement") which terminated the original Warehousing and Purchasing Agreement (the "Original Warehousing Agreement") entered into in 1986. Pursuant to the New Warehousing Agreement (which expires in 2001), during fiscal 1994, the Company utilized a 150,000 square foot warehouse facility in Inwood, New York (the "Warehouse") which is owned and operated by the Private Company. The New Warehousing Agreement also covers the satellite warehouse facilities that the Private Company has leased in Florida, Illinois, California and Long Island, New York which facilities, together with the Warehouse (collectively, the "Warehouse Facilities"), service Company-owned and licensed stores and the Private Stores. On June 29, 1988, in connection with its guarantee of $6,500,000 of debt financing on the Warehouse, the Company acquired a 10-year option to purchase the Warehouse (subject to a ground lease with a non-affiliate expiring in February 2035) for an amount equal to its original appraised value of $9,000,000, increasing by $900,000 each year of the option period thereafter. The original financing for the Warehouse was refinanced by the Private Company in September of 1993 with new debt financing of $5,000,000, which debt was again refinanced in October 1994. As of August 27, 1994, such debt was repayable with interest at a floating rate (as determined in the applicable agreement) over a five-year period with a final maturity date of October 7, 1999. As of August 27, 1994, the Company guaranteed a portion of this debt equal, at any time, to 60% of the aggregate amount of the debt then outstanding. The entire amount of such debt has also been guaranteed by Messrs. Greenfield, Love and Seidner and the Private Company. As of August 27, 1994, the Company uses the Warehouse Facilities to service all of the Company-owned and licensed stores. Although the Company is not obligated to use the Warehouse Facilities, it has done so to avoid the administrative and other costs associated with developing and maintaining the infrastructure 8 required to manage warehousing and handling independently. The New Warehousing Agreement provides that the Private Company is not obligated to provide services for more than 300 Company-owned stores. The Company pays the Private Company a monthly warehouse fee (the "Warehouse Fee") equal to 5% of the retail selling price of all merchandise (including the retail selling price of any related services, such as fabric protection and merchandise warranties) delivered from the Warehouse Facilities to customers of the Company-owned stores plus 5% of the retail selling price of all merchandise delivered from the Warehouse to Company-owned stores for display purposes. In addition, the Private Company has separately contracted with the Company's licensees to provide warehousing and handling services for licensed stores for a fee equal to 5% of the retail price of merchandise delivered to the licensees' customers and on other terms substantially similar to those under the New Warehousing Agreement. The Private Company also provides a number of other services, including arranging for freight deliveries, providing customer services, data entry processing and related services, fabric protection and warranty services and other customer services. In addition to the Warehouse Fee, the Company pays the Private Company a portion (approximately one-third) of the fabric protection and merchandise warranty revenues collected from customers and the Company also pays the Private Company for freight charges based on quoted freight rates. See "Certain Relationships and Related Transactions." The Private Company is only obligated to provide warehousing for 300 Company-owned stores. If the Company expands to more than 300 Company-owned stores or if the Warehouse Facilities, for some reason, can not service all such stores, the Company may be required to purchase or lease warehousing facilities to serve such additional stores. In such event, the Company believes that adequate public warehousing facilities would be available for such services. The Company would also incur certain warehousing costs not incurred by the Company for stores serviced by the Warehouse Facilities. Trademarks The trademarks Jennifer Convertibles(R) and With a Jennifer Sofabed, There's Always a Place to Stay(R) are registered with the U.S. Patent and Trademark Office and now owned by the Company. The Private Company, as licensee, was granted a perpetual royalty-free license to use and sublicense the proprietary marks in the State of New York, subject to certain exceptions. See "Certain Relationships and Related Transactions." Employees As of August 27, 1994, the Company had 449 employees, including nine executive officers. The Company trains personnel to meet its expansion needs by having its most effective managers and salespersons train others and evaluate their progress and potential for the Company. The Company believes that its employee relations are satisfactory. None of the Company's employees are represented by a collective bargaining unit. The Company has never experienced a strike or other material labor dispute. Competition The Company competes with other furniture specialty stores, major department stores, individual furniture stores, discount stores and chain stores, some of which have been established for a long time in the same geographic areas as the Company's stores (or areas where the Company or its licensees may open stores). The Company believes that the principal areas of competition with respect to its business are store image, price, delivery time, selection and service. The Company believes that it competes effectively with such retailers because its stores offer a broader assortment of convertible sofabeds than most of its competitors and, as a 9 result of volume purchasing, it is able to offer its merchandise at attractive prices. The Company also advertises more extensively than many of its competitors and offers substantially faster delivery on most of its items. 10 Item 2. Properties The Company maintains its executive offices in Woodbury, New York pursuant to a lease which expires in the year 2005. As of August 27, 1994, the Company and the LPs lease all of their store locations pursuant to leases which expire between 1995 and 2009. None of its leases expire until fiscal 1995, at which time three leases will expire although the lessee has an option to renew each such lease. The leases are usually for a base term of at least five years. For additional information concerning the leases, see Note 9 of "Notes to Consolidated Financial Statements." Item 3. Legal Proceedings As of August 27, 1994, there were no material pending legal proceedings to which the Company was a party. However, subsequent to August 27, 1994, the Company became involved in a number of proceedings described below. A. The Class Action Litigation Beginning in December 1994, a series of 11 class actions were brought against the Company, various of its present and former officers and directors, and certain third parties, in the United States District Court for the Eastern District of New York. The complaints in all of these actions alleged that the Company and the other defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder in connection with the press release (the "Press Release") issued by the Company on or about December 2, 1994. All of these class actions have been consolidated under the caption In Re Jennifer Convertibles, Case No. 94 Civ. 5570, pending in the Eastern District of New York (the "Class Action Litigation"). In March 1996, the parties in the Class Action Litigation signed a Memorandum of Understanding for the purpose of settling the Class Action Litigation (the "Class Action MOU"). The terms of the Class Action MOU (which are described below) are subject to a stipulation of settlement and other documentation to be submitted to the United States District Court for the Eastern District of New York, as well as the approval of the terms of the settlement by that Court. The Class Action MOU also provides that the settlement of the Class Action Litigation is contingent upon final Court approval of the proposed settlement set forth in another Memorandum of Understanding dated March 18, 1996 with respect to certain derivative actions pending in: (a) the United States District Court for the Eastern District of New York; (b) the Supreme Court of the State of New York; and (c) the Court of Chancery in the State of Delaware (the "Derivative Action MOU"). These derivative actions and the terms of the Derivative Action MOU, are also described below. The Class Action MOU provides for the payment to certain members of the class and their attorneys of an aggregate maximum amount of $7 million in cash and preferred stock having a present value of $370,000. The cash portion of the settlement will be funded entirely by insurance company proceeds. The stock portion of the settlement will be provided by the Company based on a new issue of preferred stock of the Company having an aggregate present value of $370,000, which will bear an annual dividend of 7% and 11 which will be convertible into the Company's Common Stock (at such time as the Company's Common Stock trades at $7.00 per share or higher) at $7.00 per share. The settlement of the Class Action Litigation is a claims made settlement, meaning that the actual amount of cash and stock to be paid out will depend on the number of persons entitled to participate in the settlement who actually file valid proofs of claim. All those who purchased Common Stock during the period from December 9, 1992 through December 2, 1994 and who held their stock through December 2, 1994, will be entitled to participate in the settlement. The Class Action MOU also provides that the defendants will not object to an application by plaintiffs' attorneys for fees and expenses of up to 1/3 of the total of the maximum amount of the cash and stock proceeds of the settlement, without regard to the number of class members who filed valid proofs of claim. B. The Derivative Litigation Beginning in December 1994, a series of six actions were commenced as derivative actions on behalf of the Company, against Harley J. Greenfield, Fred J. Love, Edward B. Seidner, Bernard Wincig, Michael J. Colnes, Michael Rosen, Al Ferarra, William M. Apfelbaum, Glenn S. Meyers, Lawrence R. Haut, Jara Enterprises, Inc., Jerome I. Silverman, Jerome I. Silverman Company, Selig Zises and BDO Seidman & Co.1 in: (a) the United States District Court for the Eastern District of New York, entitled Philip E. Orbanes v. Harley J. Greenfield, et al., Case No. CV 94-5694 (DRH) and Meyer Okun and David Semel v. Al Ferrara, et al., Case No. CV 95-0080 (DRH); Meyer Okun Defined Benefit Pension Plan, et al. v. BDO Seidman & Co., Case No. CV 95-1407 (DRH); and Meyer Okun Defined Benefit Pension Plan v. Jerome I. Silverman Company, et. al., Case No. CV 95-3162 (DRH); (b) the Court of Chancery for the County of New Castle in the State of Delaware, entitled Massini v. Harley Greenfield, et. al., Civil Action No. 13936 (WBC); and (c) the Supreme Court of the State of New York, County of New York, entitled Meyer Okun Defined Benefit Pension Plan v. Harley J. Greenfield, et. al., Index No. 95-110290 (collectively, the "Derivative Litigation"). The complaints in each of these actions assert various acts of wrongdoing by the defendants, as well as claims of breach of fiduciary duty by the present and former officers and directors of the Company, including but not limited to claims relating to the matters described in the Press Release. In March 1996, all of the parties to the derivative action (including the Company), except for Selig Zises ("Zises") and BDO Seidman & Co. ("Seidman") signed a Memorandum of Understanding for the purpose of settling all of the claims involving those parties in the Derivative Litigation (the "Derivative Litigation MOU"). The terms of the Derivative Litigation MOU (which are discussed below) are subject to a stipulation of settlement and other documentation to be submitted to the appropriate Court(s), as well as Court approval of the terms of the settlement. The Derivative Litigation MOU also provides that the settlement of the Derivative Litigation is contingent upon final Court approval of the proposed settlement set forth in the Class Action MOU, by the United States District Court for the Eastern District of New York. The terms of the Class Action MOU have already been described above. -------- 1 Each of these individuals and entities is named as a defendant in at least one action. 12 The Derivative Litigation MOU annexes as Exhibit A thereto a signed agreement (the "Settlement Agreement") dated March 5, 1996 between the Private Company and the Company. The Settlement Agreement, although signed, provides that it too is subject to and dependent upon Court approval of the settlement of the Derivative Litigation. The Settlement Agreement is designed to restructure the relationship between the Private Company and the Company, in order to reduce and eliminate any alleged actual or potential conflicts of interest, and to provide tangible benefits to the Company. The Settlement Agreement contemplates, inter alia, as follows: 1. From the date of the execution of the Settlement Agreement until December 31, 1997, the Private Company will bill the Company for services under a new warehousing agreement, a warehousing fee of 8.3% of the retail selling price of merchandise leaving the Warehouse Facilities for Company stores and their customers and a redelivery fee equal to 3% of the retail selling price of merchandise which is required to be redelivered to customers, under certain circumstances. The Company will be entitled to a reduction in the warehousing fee to the extent, and as of the date, that the Company assumes the costs of providing certain non-warehousing services presently provided by the Private Company to the Company. The Settlement Agreement contemplates that once the Company has assumed all of these services, the warehousing fee shall be reduced to 7.2%, which will then be the warehousing fee until December 31, 1997, and that under all circumstances, from January 1, 1998 through December 31, 1998, the warehousing fee shall be 7.2%. Upon the effective date of the Settlement Agreement, the Company will no longer pay the Private Company separately for "fabric protection" services. 2. In the event that the volume of merchandise shipped from all of the Private Company's warehouses to Company stores during calendar year 1996 fails to equal a retail selling price of $135,000,000, the Company shall pay the Private Company an additional fee of $65,000 for each million dollars of the shortfall (the "Shortfall Payments"), but in no event more than $650,000. The Private Company will repay the Company for the Shortfall Payments in the following manner: (i) 50% in 1997 if $140,000,000 or more in shipments is achieved; (ii) 50% in 1998 if $140,000,000 or more in shipments is achieved; and (iii) the balance of any Shortfall Payments not repaid by the Private Company to the Company under (i) and (ii) above will be repaid over seven years in equal monthly installments, without interest, beginning on January 1, 1999. The Company anticipates that it will not achieve sales of $135,000,000 in calendar 1996 and, accordingly, it will be liable for the Shortfall Payments if the settlement is approved as contemplated. 3. On January 1, 1999, the Private Company will assign to the Company all of its real property interests in or to the various warehouse facilities then being operated by the Private Company (including all related computer hardware), including any fee simple and/or leasehold interest,subject only to any mortgages, purchase money security agreements, leasehold obligations, racking and forklifting expenses, and other operation expenses relating to such property interest and the mortgage on the Inwood warehouse. The Settlement Agreement also provided that, as of December 31, 1998, the aggregate of all mortgages on the Warehouse would not exceed $2,850,000 and that, to the extent that the aggregate of all such mortgages was less than $2,850,000 as of that date, the Company would pay the Private Company the difference between $2,850,000 and the actual amount of such mortgages by way of set-off against the Private Company's obligation to the Company for warehousing services. 4. The Settlement Agreement provided that if the Private Company sold the Warehouse before December 31, 1998 (as it did in June 1996), then the Private Company would pay the Company $25,000 per month starting January 1, 1999 for a period of 84 months. The Settlement Agreement also provided that 13 if the Warehouse was sold for more than $4,500,000 (net of all reasonable and customary expenses and brokerage commissions), the Company would also be entitled to any such excess. However, the Warehouse was sold in June 1996 for less than $4,500,000. 5. Commencing January 1, 1999, and continuing for seven years, the Company will provide the Private Company all warehousing services formerly provided by the Private Company to the Company for a fee equal to 2% of the Private Company's deemed retail selling price, plus an additional fee for any fabric protection services sold by the Private Company to customers, payable at the then current invoice rate. 6. The Private Company will purchase the interest of the limited partners in the LPs known as Jennifer, LP III, Jennifer, LP IV, Jennifer, LP V (the "Partnerships") and the stock of the shareholders of Southeastern Florida Holding Co., Inc. ("S.F.H.C.") and the Private Company will assign these interests and stock to the Company at no cost (except as described below). As of March 15, 1996, S.F.H.C. and the Partnerships own an aggregate of 58 licensed Jennifer Convertibles stores which, after such assignment, will be wholly-owned by the Company. In this connection, the Private Company and the Company will release the aforementioned limited partners and the shareholders, officers and directors of S.F.H.C. from all claims, including all obligations under the notes referred to below. Although it is not reflected in the Settlement Agreement, it is currently contemplated that the limited partners of the Partnerships will receive 10-year warrants to purchase an aggregate of 180,000 shares of Common Stock at $7.00 per share. In addition, the maturity date of three-year notes (with an aggregate remaining balance of $300,000) originally entered into by them in connection with their purchase of warrants (the "Original Warrants"), expiring June 1998, to purchase an aggregate of 180,000 shares of Common Stock at $15.625 per share, will be extended to 10 years after the settlement is approved. The extended notes will bear interest at a rate of 7.12% per annum, and 10% of the principal amount of such notes will be due each year. Such notes will be secured by the Original Warrants to purchase an aggregate of 105,636 shares of Common Stock (representing the unpaid for Original Warrants) and the Company's sole remedy, until the notes mature, upon any default in the payment of principal of such notes, will be to cancel a proportionate number of Original Warrants. There is no signed agreement with the limited partners as to the transfer of the interests in the Partnerships and S.F.H.C. described above and there can be no assurance that the Private Company will be able to obtain such agreements and to transfer the interests in the Partnerships and S.F.H.C. on the terms contemplated above or at all. If the Private Company is unable to obtain such agreements and to make the transfer, the settlement will not be consummated on the terms outlined above or possibly, at all. 7. The Private Company agrees to pay the Company, under the offset agreement described in Paragraph 11 below, $1,400,000 in resolution of certain intercompany accounts as of August 26, 1995 to be paid $17,000 per month to be applied toward principal and interest, with interest computed at 6% annually. 8. Commencing January 1, 1999, the Private Company will provide a license to the Company permitting the Company to use and change the Private Company's computer program without fee. As of January 1, 1999, the Company will also assume the obligations and personnel of the computer department presently maintained by the Private Company. 9. On or after the effective date of the Settlement Agreement, and through December 31, 1998, although the Private Company will continue to be responsible to apply fabric protection (at no additional charge to the Company), the Company will be responsible for any claims on breach of warranty relating to fabric protection, (irrespective of whether the sale was made by the Private Company or the Company), provided, that, as to such claims made as to merchandise sold by the Private Company, the Company may bill the Private Company for outside parts and labor directly expended in connection therewith. 14 10. The Private Company will assume and pay the $1,200,000 debt of certain stockholders of S.F.H.C. to S.F.H.C. in 84 equal monthly installments without interest, beginning January 1, 1999. 11. As of the effective date of the Settlement Agreement, the Private Company and the Company will enter into an offset agreement similar to the one described under "Certain Relationships and Related Transactions" dealing with the offset of obligations for the period not covered by the initial offset agreement and providing for cash payments to the extent that any amounts due under such agreement exceeds $1,000,000. 12. Royalties aggregating $100,147 from certain licensees managed by the Private Company will be paid in 84 equal monthly installments, commencing January 1, 1999, without interest. The Derivative Litigation MOU also provides, inter alia, as follows: 1. All of the plaintiffs in the derivative actions and the Company will release all of current and former officers and directors, including Isabelle Silverman, and the defendants in the derivative actions (except for Zises, Peat and Seidman), from all claims which were or could have been asserted against them in the Derivative Litigation or in any other Court including, but not limited to: (a) the matters discussed or referred to in the Final Report of Counsel to the Independent Committee of the Board of Directors of Jennifer Convertibles, Inc., dated January 26, 1995 (as described under "Certain Relationships and Related Transactions"); (b) the draft complaint in a proposed action entitled Zises, et. ano. v. Greenfield, et al., (S.D.N.Y.) dated March 30, 1994; (c) all transactions publicly disclosed by Jennifer through the date of filing with the SEC of its Annual Report on Form 10-K for the year ended August 26, 1995; and (d) the negotiation and approval of the settlement of the Class Action Litigation. 2. Although one or more of the derivative actions may continue against Zises, Peat and/or Seidman, the Derivative Litigation MOU contains provisions designed to relieve those defendants who will be receiving releases and Isabelle Silverman from any claims by Seidman, Zises and/or Peat for contribution or indemnification. 3. The defendants in the derivative actions will not object to an application by counsel for the plaintiffs in the derivative actions for an award of attorneys' fees and expenses up to an aggregate of $795,000. Of this amount, the first $500,000 will be funded by an insurance carrier for one of the defendants other than the Company; $165,000 will be paid in cash by the Private Company, and the remaining portion of fees and expenses will be paid by the Company in preferred stock having a present value of up to $130,000. The preferred stock to be issued by the Company will be of the same type and will be subject to the same terms and conditions as the preferred stock to be issued in connection with the Class Action Litigation described above. C. SEC Investigation. On May 3, 1995, the Securities and Exchange Commission commenced a formal investigation as to the Company. Subpoenas have been issued to the Company and certain of its current and former management and the Company and such persons have furnished various contracts, records and information. 15 D. Other Litigation The Company is also subject, in the ordinary course of business, to a number of litigations in relation to leases for those of its stores which it has closed or relocated. 16 Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting for the Company for 1994 was held on August 22, 1994. The following directors were elected at such meeting as per the following: Election of Directors For Withhold - --------------------- --- -------- Harley J. Greenfield 4,941,487 44,636 Fred J. Love 4,941,487 44,636 Edward B. Seidner 4,941,487 44,636 Bernard Wincig 4,953,487 32,636 Michael J. Colnes 4,898,987 87,136 Michael N. Rosen 4,909,387 76,736 As of August 27, 1994, such persons constituted the Company's Board of Directors. Donald F. Wellington, who was appointed to the Board of Directors on September 19, 1994, resigned from the Board as of December 11, 1994. Mr. Rosen resigned from the Board of Directors on November 1, 1994. On February 7, 1995, Edward Bohn and Kevin J. Coyle were appointed to the Board of Directors. Mr. Colnes resigned from the Board of Directors on February 10, 1995 citing certain disagreements with management of the Company as to certain of the Company's transactions, operations, policies and practices. Information concerning such disagreements is incorporated herein by reference to the Company's Current Report on Form 8-K dated February 10, 1995 (the "Colnes 8-K"). Mr. Love resigned on August 10, 1995. In addition to the election of directors, the appointment of BDO Seidman as auditors was ratified by a vote of 4,923,903 for; 45,865 against; and 16,355 abstaining. See "Changes in and Disagreements with Accountants on Accounting and Financial Disclosure." 17 PART II Item 5: Market For Registrant's Common Equity and Related Stockholder Matters The principal market for the Common Stock during the fiscal year ended August 27, 1994 was the Nasdaq National Market(R) (the "NASDAQ NMS"). The following table sets forth, for the fiscal periods indicated, the high and low sales prices for the Common Stock as reported by the NASDAQ NMS. The Common Stock was delisted from the NASDAQ NMS effective April 17, 1995. High Low ----- ----- Fiscal Year 1994: 1st Quarter..................... $ 14 5/8 $ 11 1/2 2nd Quarter..................... 16 12 1/4 3rd Quarter..................... 14 3/4 8 3/4 4th Quarter..................... 10 7/8 7 1/4 Fiscal Year 1993: 1st Quarter..................... $ 10 7/8 $ 7 3/4 2nd Quarter..................... 17 10 1/2 3rd Quarter..................... 18 5/8 13 1/8 4th Quarter..................... 14 1/8 11 1/4 As of November 30, 1994, there were approximately 290 holders of record and approximately 4,178 beneficial owners for the Common Stock. As of November 30, 1994, the bid and asked prices of the Common Stock were $7 1/4 and $7 3/4, respectively. Dividend Policy The Company has never paid a dividend on its Common Stock and does not anticipate paying dividends on the Common Stock at the present time. The Company currently intends to retain earnings, if any, for use in its business. There can be no assurance that the Company will ever pay dividends on its Common Stock. The Company's 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 the Company's earnings, financial requirements and general business conditions. The Company's revolving loan agreement prohibits the payment of dividends. 18 Item 6. Selected Financial Data
Item 6. Selected Financial Data - --------------------------------- The following table presents certain selected financial data for Jennifer Convertibles, Inc. and subsidiaries: (in thousands, except share data) Operations Data: Year Ended Year Ended Year Ended Year Ended Year Ended - --------------------------------- 8/27/94 8/31/93 8/31/92 8/31/91 8/31/90 ---------- ----------- ----------- ----------- ----------- Net sales $97,420 $64,348 $33,383 $25,999 $32,117 ---------- ----------- ----------- ----------- ----------- Cost of sales, including store occupancy, warehousing, delivery and fabric protection 67,974 43,898 20,741 16,804 21,247 Selling, general and administrative expenses 34,139 22,652 10,618 8,452 10,143 Termination of consulting agreement, legal and other costs 6,604 - - - - Write off of purchased limited partners' interests 3,482 - - - - Provision for losses on amounts due from Unconsolidated Licensees 3,284 - - - - Loss from store closings - - - - 233 Depreciation and amortization 2,091 1,583 555 518 612 ---------- ----------- ----------- ----------- ----------- 117,574 68,133 31,914 25,774 32,235 ---------- ----------- ----------- ----------- ----------- Operating (loss) income (20,154) (3,785) 1,469 225 (118) ---------- ----------- ----------- ----------- ----------- Other income (expense): Royalty income 644 711 779 175 - Interest income 473 674 237 - 11 Interest expense (61) (640) (164) (137) (252) Gain on sale of securities 336 61 - - - Other income, net 1,374 696 74 179 109 ---------- ----------- ----------- ----------- ----------- 2,766 1,502 926 217 (132) ---------- ----------- ----------- ----------- ----------- (Loss) earnings before income taxes (benefit), minority interest and extraordinary item (17,388) (2,283) 2,395 442 (250) Income taxes (benefit) (322) 113 968 265 147 ---------- ----------- ----------- ----------- ----------- (Loss) earnings before minority interest and extraordinary item (17,066) (2,396) 1,427 177 (397) Extraordinary item-utilization of net operating loss carryforwards - - 748 143 - Minority interest share of losses 2,449 2,902 - - - ---------- ----------- ----------- ----------- ----------- Net (loss) earnings ($14,617) $506 $2,175 $320 ($397) ========== =========== =========== =========== =========== (Loss) earnings per common and common equivalent share: Before extraordinary item ($2.56) $0.09 $0.34 $0.06 ($0.13) Extraordinary item - - 0.16 0.05 - ---------- ----------- ----------- ----------- ----------- Net (loss) earnings per share ($2.56) $0.09 $0.50 $0.11 ($0.13) ========== =========== =========== =========== =========== Weighted average number of common and common equivalent shares 5,700,725 6,013,000 4,605,000 2,985,000 2,981,000 ========== =========== =========== =========== =========== Cash dividends - - - - - ========== =========== =========== =========== =========== Store data: 8/27/94 8/31/93 8/31/92 8/31/91 8/31/90 - --------------------------------- ---------- ----------- ----------- ----------- ----------- Company-owned stores open at end of period 55 34 33 33 39 Consolidated licensed stores open at end of period 99 73 28 3 - Licensed stores not consolidated open at end of period 14 14 14 12 - ---------- ----------- ----------- ----------- ----------- Total stores open at end of period 168 121 75 48 39 ========== =========== =========== =========== =========== Balance Sheet Data: 8/27/94 8/31/93 8/31/92 8/31/91 8/31/90 - --------------------------------- ---------- ----------- ----------- ----------- ----------- Working capital $1,240 $11,573 $11,053 $1,615 $1,646 Total assets 44,922 37,488 28,819 8,291 9,825 Long-term obligations 477 118 11,733 384 1,413 Total liabilities 37,137 15,305 16,539 4,471 6,603 Stockholders' equity 7,785 22,183 12,280 3,820 3,222 Stockholders' equity per share $1.37 $3.69 $2.67 $1.26 $1.08
19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW The Company is the owner and licensor of sofabed specialty retail stores that specialize in the sale of a complete line of sofabeds and companion pieces such as loveseats, chairs and recliners and specialty retail stores that specialize in the sale of leather furniture. For the fiscal years ended August 31, 1992 and August 31, 1993, the Company did not consolidate the operations of the LP's of which subsidiaries of the Company served as general partners. In November 1994, during the course of its audit, KPMG Peat Marwick, the Company's independent auditor at the time, advised the Company that its method of accounting for the LP's should be changed and would likely require a restatement of previously announced financial results. In addition, on December 2, 1994, as more fully discussed under "Certain Relationships and Related Transactions," a special committee of the Company's Board of Directors delivered a summary report which concluded that the Company had meritorious claims against three members of its management, the Private Company and others. The Company announced these matters publicly in a press release on December 2, 1994. As more fully discussed under "Legal Proceedings," the Company and certain of its management became involved in class action and derivative litigations relating to such matters and, on May 3, 1995, the Securities and Exchange Commission commenced an investigation relating to such matters. In November 1994, the Company determined that it should consolidate the operating losses of such LP's, to the extent they exceeded the capital contributions of the limited partners, in its financial statements for the fiscal year ended August 27, 1994 and the Company subsequently determined that such accounting treatment would have been the appropriate treatment for the 1993 and 1992 fiscal years as well. Accordingly, the 1994 consolidated financial statements include the operations of such LP's in excess of capital contributed by the limited partners as well as those of the Company and its subsidiaries. The 1993 financial statements have been restated to reflect such accounting treatment. However, information as to the 1993 fiscal year is unaudited. On May 2, 1995, BDO Seidman withdrew its opinion on the 1993 financial statements previously audited by it. The 1992 financial statements of the Company have not been restated, as the effect of consolidating the operating losses of the LP's for that year are immaterial to the previously reported results. In connection with the preparation of this 10-K filing, KPMG Peat Marwick has not given consent to the inclusion of their audit report dated November 18, 1992 on the Company's financial statements for the year ended August 31, 1992. 20 The operating losses in excess of capital contributions of the LP's that are included in the consolidated financial statements are as follows: Years Ended ----------- (In Thousands) 8/31/93 8/27/94 -------- -------- Total operating losses before capital contributions of LP's $(7,013) $(9,781) -------- -------- Total capital contributions 2,902 2,449 -------- ------- Net operating losses $(4,111) $(7,332) ======== ======== Two of the LP's, the losses of which are included in the table above for the fiscal year ended August 27, 1994 were subsequently acquired by the Company. The losses of such LP's for that year totalled $2,596,000. The Company relies upon the Private Company to provide and maintain all data entry processing and other related services that support its business. Employees of the Private Company provide these services as well as other related services such as all accounts payable (non-merchandise), all payroll preparation services, inventory control reporting, certain store cash recording and initial review of cash activity and store customer service. The Company has for all fiscal years prior to September 1, 1994 engaged the accounting firm of Jerome I. Silverman Company ("JISCO") to provide general accounting and tax services. Effective September 1, 1994, the Company terminated the accounting and tax services of JISCO and hired nineteen employees who had previously worked directly for JISCO. This group, under the direction of a new Executive Vice President and Chief Financial Officer hired on August 1, 1994, established the Company's general accounting offices. In the fiscal year ended August 26, 1995, the new Chief Financial Officer of the Company has been unable to establish internal controls over the financial data processed by the Private Company. Additionally, the independent auditors have disclaimed an opinion on the consolidated financial statements, in part because "the Company does not have an adequate system of internal accounting controls over the financial information processed for the Company by the Private Company". See the Report of Management included elsewhere herein discussing management's responsibility in this area and actions to be taken to rectify the issues. RESULTS OF OPERATIONS: FISCAL YEAR ENDED AUGUST 27, 1994 COMPARED TO YEAR ENDED AUGUST 31, 1993: Net sales increased by 51.4% to $97,420,000 for the fiscal year ended August 27, 1994 as compared to $64,348,000 for the year ended August 31, 1993. This increase is attributable in part to the purchase on November 30, 1993 of nine new stores (four Elegant Living and five Jennifer Leather) and the opening of 14 new Jennifer Leather stores as well as the opening of 37 new Jennifer Convertibles stores in the LP's. The balance of the increase was attributable to maturation of previously opened stores. In this connection, comparable store sales increased by 3.4%. 21 All royalty income earned in the fiscal year ended August 27, 1994 has been fully reserved due to uncertainty as to the collectibility of such amounts from the Unconsolidated Licensees. Cost of sales increased 54.8% from $43,898,000 for the year ended August 31, 1993 to $67,974,000 for the fiscal year ended August 27, 1994. The dollar increase of $24,076,000 is attributable to the higher sales while the increase in the cost of sales as a percentage of sales from 68.2% to 69.8% is essentially due to higher store occupancy costs in the current fiscal year as a result of new store openings. Warehouse expenses of $4,871,000 and fabric protection services of $3,298,000 provided by the Private Company increased from $3,217,000 and $2,323,000, respectively, from the previous year due to the higher sales volume in the current fiscal year. Selling, general and administrative expenses were $34,139,000 for the fiscal year ended August 27, 1994, as compared to $22,652,000 for the year ended August 31, 1993, an increase of $11,487,000, or 50.7% over the prior year. This increase was due principally to direct costs associated with the higher number of stores in operation in the current fiscal year. Selling, general and administrative expenses as a percentage of sales was 35.0% for the fiscal year ended August 27, 1994 as compared to 35.2% in the prior year. Advertising expenses increased by $4,199,000, or 58.7%, over the prior year essentially due to the initial advertising programs for the opening of the new Jennifer Leather stores as well as the new Jennifer Convertibles stores opened by the LP's. Salaries increased $3,937,000, or 44.5%, due to the acquisition of Jennifer Leather and Elegant Living stores, expansion of Jennifer Leather and Jennifer Convertibles stores, the assumption of purchasing and advertising responsibilities from the Private Company and the hiring of additional executive officers and other staff. Termination of consulting agreement, legal and other costs for the fiscal 1994 period totalled $6,604,000, which included the following: A) A payment to JCI Consultants L.P. ("JCI") of $2,500,000 on July 29, 1994 to terminate the February 1992 consulting agreement and to enter into a related standstill agreement with JCI and its affiliates which restricts their ability to acquire more than 5% of the Company's Common Stock until August 1, 2000. The Company had previously paid $522,000 in prior fiscal years and, with the payment on July 29, 1994, JCI agreed to waive the right to receive any further consulting fees which could have totalled approximately $6,500,000 over the remaining term of the consulting agreement. In addition to this payment during the year, the Company made additional payments to JCI pursuant to the terms of the consulting agreement of $400,000 and wrote-off previously capitalized costs in connection with the agreement of approximately $572,000. B) Legal and accounting costs of $1,209,000 in connection with a Committee appointed by the Company's Board of Directors to investigate allegations made in a draft complaint delivered to the Company in March 1994. C) Legal and accounting fees totalling $618,000 for the Chief Executive Officer and President of the Company in connection with his response to the Report of the Committee of the Board of Directors. 22 D) Audit fees for the fiscal year ended August 27, 1994 totalled $1,305,000, which were larger than normal due to the change in the Company's auditors referred to in Item 9, the inability to gain access to the work papers of the predecessor accounting firms, the increased scope of the review concerning the Private Company in light of the Committee report, and consolidation of the accounts of the Consolidated Partnerships. The write-off of $3,482,000 relates to the purchase of limited partners' interests in Jennifer LP II and Elegant Living. The provision for loss on amounts due from Unconsolidated Licensees of $3,284,000 is due to the uncertainty of collection. Interest expense decreased by $579,000 to $61,000 in the fiscal year ended August 27, 1994 due principally to the redemption of $11,500,000, 8 1/2% convertible subordinated debentures ("Debentures") on February 19, 1993. Interest income decreased by $201,000 to $473,000 for the fiscal year ended August 27, 1994 as compared to the prior year. The decrease reflects the sale of the investments in government securities in the second fiscal quarter of the year, and a generally lower level of interest rates paid on the Company's cash investments throughout the year. Other income increased to $1,374,000 in the fiscal year ended August 27, 1994 from $696,000 in the prior year. This increase is primarily attributable to adjustments related to cancelled customer orders. The prior year amount includes a one-time gain of $480,000. Net (loss) in the fiscal year ended August 27, 1994 was $(14,617,000) compared to net earnings of $506,000 in the prior year, an increase of loss of $15,123,000. The primary reason for the larger loss was due to the $6,604,000 in connection with the termination of the consulting agreement and the legal, accounting and other costs related to the Committee as discussed, an increase in the net operating losses of the limited partnerships of $2,851,000, the write-off of the excess of the purchase price of the limited partners' interests over their net assets acquired of $3,482,000 and the reserve for losses on amounts due from the Unconsolidated Licensees of $3,284,000. YEAR ENDED AUGUST 31, 1993 COMPARED TO YEAR ENDED AUGUST 31, 1992: Net sales increased by 92.8% to $64,348,000 for the year ended August 31, 1993 as compared to $33,383,000 for the prior year. The increase in sales was due to the consolidation of the LP's and the opening of new Jennifer Convertibles stores in these LP's and an intensified merchandising and marketing effort along with an upturn in general economic conditions. The balance of the increase was attributable to the maturation of previously opened stores. In this connection, comparable store sales (those open for a full year in each period) increased by 15.2% for the year ended August 31, 1993, as compared to the prior year. 23 Cost of sales increased 111.6% from $20,741,000 for the year ended August 31, 1992 compared to $43,898,000 for the corresponding 1993 period. Cost of sales increased in dollar terms due to the consolidating of the LP's and the higher sales levels. As a percentage of sales, the amounts were 68.2% as compared to 62.1% for the prior year. This percentage increase was due to higher occupancy costs and freight costs for the new LP stores. Warehouse expenses of $3,217,000 and fabric protection services of $2,323,000 provided by the Private Company increased from $1,669,000 and $1,061,000, respectively, from the previous year due to higher sales in the 1993 year. Selling, general and administrative expenses were $22,652,000 for the year ended August 31, 1993, representing a 113.3% increase as compared to the year ended August 31, 1992. This increase was due to the consolidating of the LP's and direct costs associated with increased sales as well as certain costs incurred in connection with the Company's licensing program. Selling, general and administrative expenses as a percentage of net sales increased to 35.2% for the year ended August 31, 1993 as compared to 31.8% for the same period in 1992, primarily due to higher opening costs in connection with the new LP stores. Interest expense increased 290% from $164,000 in the year ended August 31, 1992 to $640,000 for the corresponding period in 1993, due principally to the issuance in July 1992 of $11,500,000 in 8- 1/2% convertible subordinated debentures ("Debentures"), all of which were converted into Common Stock in February 1993. Interest income increased 184% to $674,000 for the year ended August 31, 1993 as compared to $237,000 for the corresponding period in 1992. This increase reflects the investment of funds from the sale of Debentures in July 1992 and the exercise of Common Stock warrants during fiscal 1992. Other income increased from $74,000 for the year ended August 31, 1992 compared to $696,000 for the corresponding 1993 period. Included in the 1993 year is $480,000 from a gain on the sale of subsidiaries as compared to $60,000 during the 1992 period. Net earnings for the year ended August 31, 1993 were $506,000, a decrease over the prior year of $1,669,000. This was primarily due to the consolidation of the operating losses of the LP's with the results of the Company. LIQUIDITY AND CAPITAL RESOURCES: As of August 27, 1994, the Company and LP's had available working capital of $1,240,000 compared to $11,573,000 at August 31, 1993 and had available cash and cash equivalents of $13,089,000 compared to $16,182,000 at August 31, 1993. The Company is continuing to fund the operations of the LP's which, as described above, continue to generate operating losses. All losses of the LP's have been consolidated in the Company's consolidated financial statements. Additionally, the Company's receivables from the Private Company and the Unconsolidated Licensees, including S.F.H.C., increased by $5,249,000 in the 1994 fiscal year. These entities have losses and capital deficiencies. Accordingly, a reserve for possible non-collection of receivables in the amount of $3,284,000 for the 1994 fiscal year has been provided for amounts due from the Unconsolidated Licensees and S.F.H.C.. There can be no assurance that these receivables will be collected. The Company expects to continue to fund these operations in the future. 24 In September 1996, a Partnership Restructuring Agreement ("PRA") was signed which had an effective date of December 1994. This PRA eliminated the Agreements for LP's VI, VII and VIII and took $50 of the original capital contributions for these LP's (total $150) and applied such funds as a payment towards the original Warrants received by the limited partners in connection with LP's III, IV and V. This transaction has been reflected in the financial statements at August 27, 1994 and August 26, 1995. In addition, the warrant notes aggregating $300 for the remaining 180,000 original Warrants have been extended for ten years (with 10% of principal due annually) and will bear interest at 7.12% per annum. For each annual principal payment which is not made, 10,564 of the outstanding original Warrants shall be cancelled. On August 31, 1993, the Company entered into a credit agreement with a bank providing a revolving credit line of up to $2,000,000. Loans under the revolving credit line will bear interest per annum equal to the higher of the Federal funds rate in effect on such date plus 1.5% or the prime rate in effect on such date plus 1%. The credit line expires August 30, 1996. The Company did not draw down on the line of credit in the fiscal year ended August 27, 1994. In February 1995, the bank advised the Company that it was in breach of certain covenants under the credit agreement because of its failure to file financial statements. In March 1996, the credit agreement with the bank was terminated. For the year ended August 27, 1994 and year ended August 31, 1993, the Company spent $5,021,000 and $3,894,000, respectively, for capital expenditures. The Company's capital expenditures totalled approximately $4,292,000 during fiscal 1995 for the addition of 20 Company-owned Jennifer Leather stores, relocation of offices, new systems and for general maintenance of its stores. INFLATION: There was no significant impact on the Company's operations as a result of inflation during the fiscal year ended August 27, 1994. 25 Item 8. Financial Statements and Supplementary Data See Index immediately following the signature page Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Information in response to Item 9 is incorporated by reference to the Company's Current Report on Form 8-K dated May 5, 1995, the Company's Current Report on Form 8-K dated September 20, 1994 and the Company's Current Report on Form 8-K dated February 8, 1993. Item 10. Directors and Executive Officers of the Company The names and ages of the Company's directors and the Company's executive officers as of August 27, 1994 are as follows: Position(s) with the Name Age Company - ----------------------- --- --------------------- Harley J. Greenfield * 50 Chairman of the Board, Chief Executive Officer and President Fred J. Love * 48 Director Edward B. Seidner 41 Director and Executive Vice President Bernard Wincig 63 Director Michael J. Colnes 38 Director Michael Rosen 48 Director George J. Nadel 51 Executive Vice President, Chief Financial Officer and Treasurer Rami Abada 35 Executive Vice President and Chief Operating Officer Ronald E. Rudzin 32 Senior Vice President - Retail Stores Leslie Falchook 34 Vice President - Administration Kevin Mattler 37 Vice President - Store Operations Howard Horowitz 44 Vice President - Real Estate/Construction Lawrence R. Haut 34 Vice President - General Counsel and Secretary * Mr. Greenfield and Mr. Love are brothers-in-law. The Company's directors are elected at the Annual Meeting of stockholders and hold office until their successors are elected and qualified. The Company's officers are appointed by the Board of Directors and serve at the pleasure of the Board of Directors. The Company currently has no compensation or nominating committees. The Board of Directors held six meetings during the 1994 fiscal year. None of the directors attended fewer than 75% of the number of meetings of the Board of Directors or any committee of which he is a member, held during the period in which he was a director or a committee member, as applicable. The Board of Directors has a Stock Option Committee, which as of August 27, 1994, consisted of Messrs. Wincig and Seidner. The Stock Option Committee held one meeting during the last fiscal year. The Stock Option Committee is authorized to administer the Company's stock option plans. 26 The Board of Directors has an Audit Committee, which during the fiscal year ended August 27, 1994, consisted of Mr. Colnes and William Apfelbaum. During such fiscal year, the Audit Committee held one meeting. The Audit Committee is responsible for reviewing the adequacy of the structure of the Company's financial organization and the implementation of its financial and accounting policies. In addition, the Audit Committee reviews the results of the audit performed by the Company's outside auditors before the Annual Report to Stockholders is published. Set forth below is a biographical description of each director and executive officer of the Company as of August 27, 1994. Harley J. Greenfield Mr. Greenfield has been the Chairman of the Board, Chief Executive Officer and President of the Company since August 1986. Mr. Greenfield has been engaged for more than 25 years in the furniture wholesale and retail business and was one of the co-founders of the Private Company which established the Jennifer Convertibles concept in 1975. Mr. Greenfield is a member of the Home Furnishings Association. Fred J. Love Mr. Love became a director of the Company in August 1986 and resigned on August 10, 1995. Mr. Love has been an officer and a director of the Private Company since he co-founded it with Mr. Greenfield in 1975. Mr. Love has been engaged for more than 20 years in the furniture wholesale and retail business. Mr. Love is a member of the Home Furnishings Association. Edward B. Seidner Mr. Seidner became a director of the Company in August 1986 and an Executive Vice President of the Company in September 1994. From 1977 until November 1994, Mr. Seidner was an officer and a director of the Private Company. Mr. Seidner has been engaged for more than 15 years in the furniture wholesale and retail business. Mr. Seidner is a member of the Home Furnishings Association. Bernard Wincig Mr. Wincig became a director of the Company in September 1986. Mr. Wincig has been an attorney in private practice since 1962. Mr. Wincig received his Juris Doctor degree from Brooklyn Law School. Michael J. Colnes Mr. Colnes became a director of the Company in May 1992. Mr. Colnes has been a private investor and consultant since June 1992. From January 1991 through June 1992, he had been an investment banker for Peers & Co. From 1986 until January 1991, he was a Managing Director at the Geneva Companies, a merger and acquisitions firm. Mr. Colnes has been an attorney admitted to practice in New York since 1982. Mr. Colnes resigned as a director on February 10, 1995, citing certain disagreements with the Company, as set forth in the Colnes 8-K. 27 Michael N. Rosen Mr. Rosen became a director of the Company in April 1993. Mr. Rosen is a senior member of the law firm of Robinson Silverman Pearce Aronsohn & Berman having been with the firm for over 25 years. Mr. Rosen received his Juris Doctor degree from Harvard Law School. He is a director of Barnes & Noble, Inc. and various of its affiliated companies. Mr. Rosen resigned from the Board of Directors on November 1, 1994. George J. Nadel Mr. Nadel joined the Company and became Executive Vice President, Chief Financial Officer and Treasurer in August 1994. Prior to joining the Company, from October 1989 to July 1994, Mr. Nadel was the Senior Vice President and Chief Financial Officer of Loehmann's Inc., a retail chain specializing in ladies clothing and accessories. Prior to joining Loehmann's, from June 1986 to October 1989, Mr. Nadel was the Chairman and Chief Executive Officer of The Dry Goods, Inc., a chain of discount department stores, which in November 1988 filed a Chapter XI petition in bankruptcy. Mr. Nadel has over thirty years experience in various senior financial officer positions with companies in the retail industry and is a Certified Public Accountant. Rami Abada Mr. Abada became the Executive Vice President and Chief Operating Officer of the Company on April 12, 1994. Prior to joining the Company, Mr. Abada had been employed by the Private Company since 1982. Ronald E. Rudzin Mr. Rudzin became Senior Vice President - Retail Stores on April 12, 1994. Prior to joining the Company, Mr. Rudzin had been employed by the Private Company since 1979. Mr. Rudzin was, and is, in charge of directing the sales force of the Company, including the Private Stores and licensed stores. Leslie Falchook Mr. Falchook has been a Vice President of the Company since September 1986. Mr. Falchook is primarily involved with the internal operations of the Company. Prior to joining the Company, Mr. Falchook had been employed by the Private Company since 1982. Kevin Mattler Mr. Mattler became Vice President - Store Operations on April 12, 1994 and has been with the Company since March 1988. Mr. Mattler is involved with, and supervises, the operation of the Company's licensed stores and during his tenure with the Company Mr. Mattler has been involved in all facets of its operations. Prior to joining the Company, Mr. Mattler had been employed by the Private Company since 1982. Howard Horowitz 28 Mr. Horowitz joined the Company in May 1992 and became Vice President - Real Estate/Construction on April 12, 1994. Mr. Horowitz is primarily responsible for site selection and coordinating the buildout and opening of new stores. Prior to joining the Company Mr. Horowitz was self employed as a general contractor. Lawrence R. Haut Mr. Haut joined the Company in January of 1994 and became Vice-President - - General Counsel and Secretary of the Company on April 12, 1994. Prior to January of 1994, Mr. Haut had been an attorney in private practice and was associated with the law firms of Schulte Roth & Zabel from January 1986 through May 1993 and Cooperman, Levitt & Winikoff from June 1993 through December 1993. Mr. Haut received his Juris Doctor degree from Fordham University School of Law. Mr. Haut left the Company to resume the private practice of law on December 15, 1994. Certain of the directors and former officers of the Company are defendants in the litigation described under "Legal Proceedings" above. See also "Certain Relationship and Related Transactions." 29 Item 11. Executive Compensation SUMMARY COMPENSATION TABLE The following table sets forth compensation paid for the fiscal years ended August 27, 1994, and August 31, 1993 and 1992 (or such shorter period as such employees were employed by the Company) of those persons who were (i) the chief executive officer at August 27, 1994, (ii) the one other most highly compensated executive officer of the Company at August 27, 1994 whose total annual salary and other compensation exceeded $100,000 and (iii) one former executive officer who served as an executive officer during such fiscal year and whose total annual salary and other compensation exceeded $100,000 during such fiscal year (collectively, the "Named Executive Officers"). ANNUAL LONG-TERM COMPENSATION COMPENSATION ------------ ------------ SECURITIES NAME AND UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY ($) OPTIONS (#) COMPENSATION - ------------------ ---- ---------- ----------- ------------ Harley J. Greenfield, 1994 $ 0(1) 0(1) $ 0 Chairman of the 1993 0(1) 25,000(1) 0 Board, Chief 1992 0(1) 272,047(1) 0 Executive Officer and President Leslie Falchook, 1994 144,670(2) 0 0 Vice President- 1993 133,000(2) 20,000(2) 0 Administration 1992 115,539(2) 0 0 Al Ferrara - (3) 1994 144,225 50,000 75,000 Executive Vice President and Chief Financial Officer - ----------------- (1) In recognition of his waiver of salary for the three years ended August 31, 1991, Mr. Greenfield was granted, during fiscal 1992, options to purchase 122,047 shares of Common Stock at $4.88 per share, the market value on the date of grant. In lieu of cash compensation under his five-year employment contract, on April 6, 1992, Mr. Greenfield was granted options to purchase 150,000 shares of Common 30 Stock at $8.375 per share, the market value on the date of grant. Such options vest at the rate of 30,000 shares per year, subject to acceleration for changes of control, mergers and similar events. Additionally, on January 25, 1993, Mr. Greenfield was granted fully-vested options to purchase 25,000 (as amended by an October 5, 1993 agreement) shares of Common Stock at $13.125 per share, the market value on the date of grant. Effective September 1, 1994, Mr. Greenfield began receiving a salary from the Company at an annual rate of $400,000. (2) In the fiscal years ended August 27, 1994, August 31, 1993, and August 31, 1992, the Private Company was responsible for $-0-, $39,000 and $30,000, respectively, of such salary, as a result of such officer performing certain services for the Private Company. On January 25, 1993, Mr. Falchook was granted options to purchase 20,000 shares of Common Stock at $13.125 per share, the market value on the date of grant. Such options vest over a three-year period. (3) Mr. Ferrara was Executive Vice President, Chief Financial Officer and Treasurer from January 1, 1994 until June 30, 1994, when his resignation from such positions became effective. In connection with such resignation, Mr. Ferrara received a severance payment in the aggregate amount of $75,000. In addition, as part of such severance the Company has agreed to purchase and transfer to Mr. Ferrara an automobile that had been leased for Mr. Ferrara's use during his tenure with the Company. In connection with Mr. Ferrara's joining the Company, he received options to purchase 50,000 shares of Common Stock at $15.50 per share, the market value on the date of grant. Such options terminated upon Mr. Ferrara's resignation. In addition to the aforementioned Named Executive Officers, two executive officers (Messrs. Rudzin and Abada) joined the Company in January 1994 at an annual salary of $150,000. During the fiscal year ending August 27, 1994, neither of such individuals received in excess of $100,000 and, accordingly, they are not included in the Summary Compensation Table. Effective August 1, 1994, George J. Nadel joined the Company as an Executive Vice-President and its Chief Financial Officer at an annual salary of $200,000. Lastly, effective September 1, 1994, Mr. Edward B. Seidner, a director of the Company since 1986, became an Executive Vice President of the Company and began receiving a salary from the Company at an annual rate of $300,000. Directors do not receive a fee for serving as such, but are reimbursed for out-of-pocket expenses incurred in connection with their services as such. In connection with a draft complaint (the "Complaint") that was delivered to the Company in March 1994, on behalf of an unnamed plaintiff, the Board of Directors appointed a Special Committee to investigate the allegations in the Complaint and certain other matters. See "Certain Relationships and Related Transactions-The Committee." Michael Colnes was the sole director comprising such committee and, for his services in such capacity during the fiscal year ended August 27, 1994, received compensation in the aggregate amount of $148,000, plus reimbursement for his out-of-pocket expenses incurred in connection with his services. Employment Agreements Effective as of September 1, 1991, the Company entered into a five-year employment agreement with Harley J. Greenfield. Pursuant to such agreement, Mr. Greenfield agreed to devote his full time to the business of the Company and not to compete with the Company during the term of his employment agreement and for 31 a period of one year thereafter. Pursuant to his employment agreement, in lieu of salary, Mr. Greenfield received options to purchase 150,000 shares of Common Stock at a purchase price of $8.375 per share, with such options vesting and becoming exercisable at the rate of 30,000 shares per year, subject to acceleration for certain changes of control, mergers, and similar events. Mr. Greenfield had waived his compensation under his prior employment agreement for the three years ended August 31, 1991. Effective September 1, 1994, Mr. Greenfield began receiving a salary from the Company at an annual rate of $400,000. The Company and Mr. Greenfield have not entered into a written employment agreement reflecting such increase. During the fiscal year ended August 27, 1994, Mr. Greenfield received approximately $708,000 of severance pay, distributions and other payments from the Private Company. Leslie Falchook entered into an employment agreement with the Company, dated May 1, 1992, pursuant to which he agreed to devote his full time to the business of the Company and not to compete with the Company during the term of his employment agreement and for a period of one year thereafter. Pursuant to his employment agreement (which expires August 31, 1996), Leslie Falchook received a salary at the rate of $139,000 per annum for the year ended August 27, 1994, which amount may be increased at the discretion of the Board of Directors. The Private Company agreed to pay $-0-, $39,000 and $30,000 of such salary for the fiscal years ended August 27, 1994 and August 31, 1993 and 1992, respectively, as a result of Mr. Falchook performing certain services for the Private Company with the consent of the Company. On May 12, 1992, the Company entered into a five-year employment agreement with Isabelle Silverman as Chief Financial Officer. Pursuant to such agreement, Ms. Silverman agreed to devote her full time to the business of the Company and not to compete with the Company during the term of her employment agreement and for a period of one year thereafter. Pursuant to her employment agreement, Ms. Silverman was receiving a salary at the rate of $125,000 per annum, and received options to purchase 40,000 shares of Common Stock at a purchase price of $8.375 per share, with such options becoming exercisable at the rate of 8,000 shares per year, subject to acceleration for certain changes of control, mergers, and similar events. Ms. Silverman resigned from her position effective January 1, 1994 and as part of Ms. Silverman's agreement with the Company to terminate her employment agreement the vesting of all 40,000 of such options was accelerated. Effective as of January 1, 1994, the Company entered into a five-year employment agreement with Al Ferrara as Chief Financial Officer. Pursuant to such agreement, Mr. Ferrara agreed to devote his full time to the business of the Company and not to compete with the Company during the term of his employment agreement and for a period of one year thereafter. Pursuant to his employment agreement, Mr. Ferrara received a salary at the rate of $300,000 per annum, and the Company agreed to grant him options to purchase an aggregate of 100,000 shares of Common Stock, of which options for 50,000 shares were granted on January 1, 1994, exercisable at $15.50 per share, which was the fair market value per share of Common Stock on January 1, 1994. Mr. Ferrara resigned from his positions with the Company effective June 30, 1994. In connection with such resignation the employment agreement and the options were terminated, and Mr. Ferrara received a severance payment in the aggregate amount of $75,000. In addition, as part of such severance the Company agreed to transfer title to Mr. Ferrara of the automobile that had been leased (up to such time) for Mr. Ferrara's use during his tenure with the Company and to pay all such costs of the transfer. Stock Option Plans 32 The Company has Incentive and Non-Qualified Stock Option Plans (the "Plans"), pursuant to which, as of August 27, 1994, options to purchase an aggregate of 556,547 shares of Common Stock were outstanding and under which options to purchase an aggregate of 290,453 shares of Common Stock were available for grant. In addition, options granted outside of the Plans to purchase an additional 180,000 shares of Common Stock were outstanding as of August 27, 1994. The Plans are administered by a Stock Option Committee (the "Committee") consisting of two persons appointed by the Board of Directors. As of August 27, 1994, the Committee consisted of Bernard Wincig and Edward B. Seidner. The Committee has full and final authority (a) to determine the persons to be granted options, (b) to determine the number of shares subject to each option and whether or not options shall be incentive stock options or non-qualified stock options, (c) to determine the exercise price per share of the options (which, in the case of incentive stock options, may not be less per share than 100% of the fair market value per share of the Common Stock on the date the option is granted or, in the case of a stockholder owning more than 10% of the stock of the Company, not less per share than 110% of the fair market value per share of the Common Stock on the date the option is granted), (d) to determine the time or times when each option shall be granted and become exercisable and (e) to make all other determinations deemed necessary or advisable in the administration of the Plans. In determining persons who are to receive options and the number of shares to be covered by each option, the Committee considers the person's position, responsibilities, service, accomplishments, present and future value to the Company, the anticipated length of his future service and other relevant factors. Members of the Committee are not eligible to receive options under the Plans or otherwise during the period of time they serve on the Committee and for one year prior thereto, but may receive options after their term on the Committee is over. Officers and directors, other than members of the Committee, may receive options under the Plans. The exercise price of all options granted under or outside of the Plans equalled or exceeded the market value of the underlying shares on the date of grant. 33 OPTION GRANTS IN LAST FISCAL YEAR The only options granted to Named Executive Officers during the fiscal year ended August 27, 1994 were the options to purchase 50,000 shares of Common Stock at $15.50 per share granted to Mr. Ferrara. Such options were terminated in connection with Mr. Ferrara's resignation. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
Number of Securities Underlying Value of Unexercised Unexercised Options at In-the-Money Options at Shares Acquired on Value August 27, 1994 August 27, 1994(1) Name Exercise (#) Realized Unexercisable Exercisable Unexercisable Exercisable - -------------------- ------------ -------- ------------- ----------- ------------- ----------- Harley J. Greenfield(2)(5) N/A N/A 90,000 207,047 $0 $350,275 Leslie Falchook(3)(5) N/A N/A 13,332 31,668 0 125,000 Al Ferrara(4)(5) N/A N/A 0 0 0 0 - --------------------
(1) Amount reflects the market value of the underlying shares of Common Stock as reported on the NASDAQ National Market System on August 27, 1994 ($7.75) less the exercise price of each option. (2) Includes (i) 122,047 options granted on September 17, 1991 at an exercise price of $4.88 per share, (ii) 150,000 options granted on April 6, 1992, at an exercise price of $8.375 per share, in connection with Mr. Greenfield's employment agreement, with such options vesting and becoming exercisable at the rate of 30,000 per year, with the first installment having become exercisable on April 6, 1993, and (iii) 25,000 options granted on January 25, 1993 at an exercise price of $13.125 per share. (3) Includes 25,000 options granted on March 7, 1988 to Mr. Falchook at an exercise price of $2.75 per share, which options have all vested and 20,000 options granted on January 25, 1993 to Mr. Falchook at an exercise price of $13.125 per share, of which 6,668 were exercisable at August 27, 1994. (4) Mr. Ferrara was granted 50,000 options at an exercise price of $15.50 per share on January 1, 1994. Such options were terminated in connection with Mr. Ferrara's resignation from his positions with the Company effective June 30, 1994. (5) All options were granted at an exercise price equal to the market value of the underlying Common Stock on the date of grant. 34 Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of August 27, 1994, information regarding the beneficial ownership of the Company's Common Stock by (i) each person who is known to the Company to be the owner of more than five percent of the Company's Common Stock, (ii) each of the Company's directors, (iii) each of the Named Executive Officers (as defined in Item 11) and (iv) by all directors and executive officers of the Company as a group: Amount and Nature Percent (%) of Class of Beneficial Outstanding as of Beneficial Owner Ownership(1) August 27, 1994 - ---------------- ----------------- -------------------- Harley J. Greenfield 1,289,000 (2) 21.8% Fred J. Love 585,662 (2) 10.3 Edward B. Seidner 604,662 (2) 10.5 Jara Enterprises, Inc. ("Jara") 343,579 (3) 6.0 Bernard Wincig 119,573 (4) 2.1 Michael J. Colnes 8,332 (5) * Michael Rosen 4,166 (6) * Leslie Falchook 56,668 (7) 0.1 Al Ferrara 0 0 All directors and executive 1,653,492 (2)(3)(4)(5)(6)(7) 27.0 officers as a group (thirteen (8) (13) persons) - ----------------- * Less than 1.0% (1) All of such shares are owned directly with sole voting and investment power, unless otherwise noted below. (2) Includes as to each such individual, the 343,579 shares of Common Stock beneficially owned by Jara. As of August 27, 1994, Messrs. Greenfield, Love and Seidner each owned 33-1/3% of Jara, although Mr. Greenfield's interest was in a voting trust administered by Messrs. Love and Seidner and Owen Wincig, the son of Bernard Wincig, a director of the Company. With the exception of 6,250 shares owned directly by Mr. Seidner, as of August 27, 1994, Messrs. Love and Seidner had each placed their directly owned shares of the Company's Common Stock in a voting trust, expiring October 15, 1996, administered by Mr. Greenfield as voting trustee. Mr. Greenfield has the power to vote or direct the vote of the shares of Common Stock in such trust. Accordingly, the number of shares shown as owned by Mr. Greenfield includes the shares as to which he is voting trustee. Mr. Greenfield and Mr. Love are brothers-in-law. See "Certain Relationships and Related Transactions." All shares directly owned by Messrs. Greenfield, Love and Seidner were, as of August 27, 1994, pledged to an investment bank to secure certain obligations to such investment bank. The address of Messrs. Greenfield and Seidner is c/o Jennifer Convertibles, 419 Crossways Park Drive, Woodbury, New York 11797. The address 35 of Fred J. Love is c/o Jennifer Convertibles, 245 Roger Avenue, Inwood, New York 11696. Includes, as to Mr. Greenfield only, 207,047 shares of Common Stock underlying vested stock options but does not include 90,000 shares of Common Stock underlying stock options not vested as of August 27, 1994. See "Executive Compensation." Does not include 1,200,000 shares of Common Stock underlying options, which become exercisable on April 1, 1996, owned by JCI Consultant, L.P. ("JCI") and as to which Mr. Greenfield would be voting trustee. See "Certain Relationships and Related Transactions." (3) Includes shares of Common Stock owned by three of Jara's wholly-owned subsidiaries. Jara's address is 245 Roger Avenue, Inwood, New York 11096. Does not include 50,000 shares of Common Stock pledged to Jara by Rami Abada, who became an executive officer of the Company in April 1994. (4) Includes 8,800 shares of Common Stock owned by Mr. Wincig's wife. (5) Does not include 4,168 shares of Common Stock underlying stock options granted, which have not yet vested, but does include 8,332 shares of Common Stock underlying options which have vested. (6) Does not include 8,334 shares of Common Stock underlying stock options granted, which have not yet vested, but does include 4,166 shares of Common Stock underlying options, which have vested. (7) Does not include 13,332 shares of Common Stock underlying options granted, which have not yet vested, but does include 31,668 shares of Common Stock underlying options which have vested. (8) Includes 75,000 shares of Common Stock underlying options granted to executive officers of the Company other than Named Executive Officers, which options have vested. Based on the Company's review of reports filed by directors, executive officers and 10% shareholders of the Company on Forms 3, 4 and 5 pursuant to Section 16 of the Securities and Exchange Act of 1934, all such reports were filed on a timely basis during fiscal year 1994. 36 Item 13. Certain Relationships and Related Transactions The Private Company In 1975, Harley J. Greenfield and his brother-in-law, Fred J. Love, formed the Private Company and created the Jennifer Convertibles concept with a single store on Park Avenue South in New York City. In 1977, they were joined by Edward B. Seidner and together the three expanded the Private Company until, by 1986, there were 21 Jennifer Convertibles stores operating in New York. The Company was incorporated in Delaware in August 1986 with the goal of expanding Jennifer Convertibles throughout the United States. To this end, an affiliated company, owned by Messrs. Greenfield, Love and Seidner (the "Licensor"), granted the Company the perpetual royalty-free, exclusive license (the "License") to use, sublicense and franchise the use of the trademark "Jennifer Convertibles(R)" which permitted the Company to open Jennifer Convertibles stores outside of New York State and the Private Company agreed, under the Original Warehousing Agreement, to support the Company by providing access to its warehousing and distribution facilities and by permitting the Company to take advantage of the Private Company's merchandise purchasing power (see "Business - Warehousing"). On March 18, 1987, the Company completed its initial public offering with five Jennifer Convertibles stores in New Jersey and Connecticut. As of August 27, 1994 (and until November 1994 when Messrs. Greenfield and Seidner sold their interests in the Private Company for a long-term note and options to purchase the Common Stock owned by Mr. Love and the Private Company), Harley J. Greenfield (the Chairman of the Board, Chief Executive Officer, President and a principal stockholder of the Company), Fred J. Love (a director and principal stockholder of the Company as of August 27, 1994) and Edward B. Seidner (a director, officer and principal stockholder of the Company) each owned 33-1/3% of Jara, which, together with its subsidiaries, comprises the Private Company, which owns or licenses the Private Stores. Following such sale, Mr. Love beneficially owns 100% of the Private Company. The Private Company is responsible for the warehousing for the Company-owned stores, the Company's licensed stores and the Private Stores, and leases and operates the Warehouse Facilities. Until December 31, 1993, the Private Company was also responsible for the purchasing and for certain advertising and promotional activities for the Company-owned stores, the Company's licensed stores and the Private Stores. Effective January 1, 1994, the Company assumed the responsibility for purchasing and advertising for itself, its licensees, and the Private Stores. The Private Company is responsible for an amount which approximates its pro-rata share of all advertising production costs and costs of publication of promotional material within the New York area. Until October 28, 1993, a corporation of which Messrs. Greenfield, Seidner and Love each owned 33-1/3% (the "Licensor") owned the trademarks "Jennifer Convertibles(R)" and "With a Jennifer Sofabed, There's Always a Place to Stay(R)" (collectively the "Marks"). On October 28, 1993, the Marks were assigned to the Company from the Licensor for nominal consideration, and the Company agreed to license such Marks to Jara in New York, as described below. Mr. Love is, and until November 1994, Mr. Seidner was, an executive officer and director of Jara and the Licensor and each receives substantial income from the Private Company. During the fiscal year ended August 27, 1994, Mr. Seidner received approximately $672,000 of salary, distributions and other payments from the Private Company. During the fiscal year ended August 27, 1994, Mr. Greenfield received 37 approximately $708,000 of interest, severance pay, distributions and other payments from the Private Company. As of August 27, 1994, Mr. Greenfield's stock in Jara was in a voting trust administered by Messrs. Love and Seidner and Owen Wincig, the son of Bernard Wincig, a director of the Company. With the exception of 6,250 shares owned directly by Mr. Seidner, as of August 27, 1994, the shares of Common Stock directly owned by Messrs. Love and Seidner were in a voting trust, expiring October 15, 1996, administered by Mr. Greenfield as voting trustee. In November 1994, Mr. Greenfield and Mr. Seidner sold their interests in the Private Company in exchange for notes (the "Jara Notes") and options (the "Buy-Out Options") to purchase the Common Stock owned by Mr. Love and the Private Company. The Jara Notes are $10,273,204 in aggregate principal amount ($5,136,602 owned by Mr. Greenfield and $5,136,602 owned by Mr. Seidner), bear interest at a rate of 7.5% per annum and are due in December 2023. Only interest is payable on the Jara Notes until December 1, 2001, and thereafter principal is payable monthly through the maturity date. The Jara Notes are secured by (i) a security interest in the Private Company's personal property, (ii) Mr. Love's personal guarantee of the Private Company's performance under the Jara Notes, and (iii) a stock pledge by Mr. Love of his stock in the Private Company to secure his obligations under the guarantees. Subject to court approval of the Settlement Agreement, Messrs. Greenfield and Seidner have agreed to subordinate, until January 1, 1999, their right to receive payments in respect of the Jara Notes, if the Private Company is in default in the payment of any cash obligation to the Company arising after August 7, 1996, subject to offset as between Messrs Greenfield and Seidner and the Private Company. Such subordination does not apply to any distribution in respect of a disposition of substantially all of the assets of the Private Company. The Buy-Out Options are exercisable for an aggregate of 585,662 shares of Common Stock (292,831 by Mr. Greenfield and 292,831 by Mr. Seidner) at a price of $15.00 per share until they expire on November 7, 2004. The License Pursuant to a license agreement between the Company and Jara, Jara has the perpetual, royalty-free right to use, and to sublicense and franchise the use of, the Marks in the State of New York. The license is exclusive in such territory, subject to certain exceptions. The Purchasing and Warehousing Agreement Prior to January 1, 1994, the Private Company and the Company were parties to a Warehousing and Purchasing Agreement (the "Original Warehousing Agreement") pursuant to which the Private Company was obligated to make merchandise available to the Company on the same basis as such merchandise was made available to the Private Stores and was obligated to promptly order merchandise requested by the Company to fill special orders. The Original Warehousing Agreement provided that the Private Company would sell such merchandise to the Company at the Private Company's cost. Additionally, the Private Company was obligated to provide certain warehousing and handling services to the Company for up to 100 Company-owned stores and 200 Company licensed stores. In return, the Company paid the Private Company a fee equal to 5% of the retail selling price of all merchandise (including the retail selling price of any related services, such as fabric protection and merchandise warranties) delivered to customers of the Company's 38 stores from the warehouse facilities operated by the Private Company, plus 5% of the retail selling price of all merchandise delivered from such warehouse facilities to Company-owned stores for display purposes. Effective January 1, 1994, the Company assumed the responsibility for purchasing for itself, its licensees and the Private Company. However, the Private Company continued to provide warehousing and handling services as described above. During the fiscal year ended August 27, 1994, the Company and the LPs paid warehouse fees to the Private Company aggregating approximately $4,871,000. During the fiscal year ended August 27, 1994, the Company and the LPs also purchased from the Private Company approximately $18,230,000 of merchandise and from January 1, 1994 (when the Original Warehousing Agreement was amended as described below) through August 27, 1994, the Private Company purchased from the Company approximately $7,478,000 of merchandise. Under the terms of the Warehousing Agreement, however, the Company was not obligated to use the Private Company's warehouse facilities or purchase through the Private Company. As part of the transfer of the purchasing function, the Private Company, agreed to pay $1,000,000 representing discounts and allowances received from suppliers with respect to merchandise previously delivered. Such payment was in the form of a note, dated May 28, 1994, calling for payment in 36 equal monthly installments and bearing interest at 8% per annum. The Private Company made $27,778 of payments on such note during the fiscal year ended August 27, 1994, leaving $972,222 principal amount outstanding as of August 27, 1994. The Private Company retained the right to receive discounts and allowances on merchandise purchased through the Company. The Company paid to the Private Company approximately $471,000 during fiscal 1994 representing such discounts and allowances. By agreement, dated May 19, 1995, between the Company and the Private Company, the parties agreed to settle a discrepancy as to certain discounts and allowances on merchandise owed to the Company by the Private Company and certain licensees managed by the Private Company for the period from January 1, 1994 to April 30, 1995. The agreement provides that the Private Company will pay the Company $473,000, $200,000 of which was paid in May 1995 and agreed to pay the balance in five equal installments (inclusive of interest at a rate of 10.5% per annum) through November 1, 1995. As of December 1995, all of such amounts had been paid. In addition, the Company agreed, beginning in May 1995, to pay the Private Company its share of discounts and allowances within 30 days of the end of each month. As set forth in "Business-Warehousing," the Private Company also provides certain other services at the Warehouse Facilities, including arranging for goods to be delivered to the Warehouse Facilities, satellite warehouses and customers and providing fabric protection, customer service and warranty services. The Private Company is reimbursed by the Company and its licensees for freight charges on deliveries to the Warehouse Facilities at the manufacturer's freight rate. The Private Company also provides fabric protection services, including a life-time warranty, to customers of the Company and its licensees. The Company retains approximately 2/3 of the revenues from fabric protection and the warranty. During the fiscal year ended August 27, 1994, the Company and the LPs paid $2,122,000 and $3,298,000, respectively, to the Private Company for freight charges and fabric protection. See "The Committee Report" below. As of August 27, 1994, the Warehouse was owned (subject to a ground lease) equally by two corporations, one of which is owned 33-1/3% by each of Messrs. Greenfield, Love and Seidner and the other 39 of which is partially owned by the brother-in-law of Isabelle Silverman, the Company's Vice President-Finance and Treasurer from May 1, 1992 to January 1, 1994. On June 29, 1988, the Company acquired a 10-year option to purchase the Warehouse (subject to a ground lease) for its appraised value, as of June 1988, of $9,000,000, increasing each year by $900,000. The option was granted in consideration of the guarantee by the Company, and others, of $6,500,000 of mortgage financing on the Warehouse. Unless an event of default occurs, only interest is payable on the mortgage financing until its maturity. The guarantors, other than the Company (i.e., Jara and Messrs. Greenfield, Love and Seidner), agreed to indemnify the Company against any loss under the guarantee and agreed to pay the Company an annual guarantee fee of $32,500, representing 1/2 of 1% of the amount guaranteed. As of August 31, 1993, the mortgage was refinanced and the amount guaranteed by the Company was reduced from $6,500,000 to $5,000,000 (which mortgage was scheduled to become due on October 7, 1994). The mortgage was refinanced again in October 1994 and is due over a five-year period with a final maturity date of October 7, 1999. The Company guaranteed a portion of the debt equal, at any time, to 60% of the aggregate amount of the debt then outstanding. The other guaranty and indemnity arrangements as to such refinancing are the same as for the original financing, and the Company is to receive an annual guarantee fee of 1/2 of 1% of the amount guaranteed, which was $25,000 in fiscal 1994. The Company also guarantees the lease for the Private Company's satellite warehouse in California. Such lease expires on September 30, 1998 and the annual base rent is: $133,000. Pursuant to an agreement dated September 1, 1993, the Company is indemnified against any liability arising under such guaranty by the Private Company. The Advertising Agreement On November 3, 1986, the Company entered into an agreement (the "Advertising Agreement") with the Private Company pursuant to which the Private Company and the Company cooperated in certain marketing activities. As discussed below, the Advertising Agreement terminated effective January 1, 1994. Under the Advertising Agreement, the Company selected, on a case-by-case basis, whether to participate with the Private Company in, and contribute to, a particular advertisement or program of advertisements. The Company was not bound to participate or contribute unless it so elected and unless the Company and the Private Company agreed on the substance, distribution and relative costs of the advertising. The Advertising Agreement contemplated that the Company would bear an equitable portion of the cost of advertising which benefitted the Company's New Jersey and Connecticut stores and set forth certain guidelines for determining the respective costs to the Private Company and the Company in cases where the two elected to cooperate, including the number of the Company's stores, as compared to the Private Stores, benefitted by such advertising and the number of targeted consumers of each estimated to be reached by such advertising. The Advertising Agreement also provided that in no event would the Company's cost under such agreement exceed 8% of the aggregate sales of the Company's New Jersey and Connecticut stores. The Advertising Agreement only applied to the Company's advertising in New Jersey and Connecticut. The Company had a similar agreement for its stores located in New York, except that such stores paid a flat 8% of sales for advertising. During the fiscal year ended August 27, 1994, the Company expended approximately $3,786,000, under both of the advertising agreements with the Private Company. The advertising agreements with the Private Company were terminated effective January 1, 1994, and the Company assumed the responsibility for advertising for itself, its licensees, and the Private Company. Under the new arrangement, 40 the Private Company bears an amount approximating its pro-rata share of all advertising production costs and costs of publication of promotional advertising material within the New York area. During the fiscal ended August 27, 1994, the Company charged the Private Company $1,360,000 representing such share from January 1, 1994. Other Matters As described under the heading "The Committee" below, a committee of the Board of Directors consisting of Michael Colnes concluded that the Company had claims against Messrs. Greenfield, Love, Seidner and the Private Company. JCI JCI, the holder of options to purchase up to 1,200,000 shares of Common Stock, and a consultant to the Company pursuant to a consulting agreement (the "Consulting Agreement"), became entitled to nominate one person to the Company's Board of Directors on April 1, 1993 and was to remain so entitled for so long as it beneficially owned at least 5% of the Company's outstanding Common Stock. JCI's nominee was Glenn S. Meyers who was appointed to the Board of Directors, but who was not nominated for reelection at the August 22, 1994 meeting of stockholders. The Consulting Agreement provided that the Company would pay JCI an amount each quarter equal to the greater of (i) 10% of the Company's pre-tax income for such quarter and (ii) $100,000, provided that the total fees payable under the Consulting Agreement were not to exceed $7,980,000. For the fiscal year ended August 27, 1994, the Company paid JCI $400,000 pursuant to the Consulting Agreement. On July 28, 1994, the Company entered into an agreement to terminate the Consulting Agreement for $2,500,000. At such time, $6,500,000 of the $7,980,000 maximum to be paid under the Consulting Agreement remained to be paid. In connection with the termination agreement, JCI agreed not to acquire more than an additional 5% of the Common Stock until July 28, 2000. Related parties of JCI also own a majority limited partnership interest in Jennifer Chicago, L.P. (the "Chicago Partnership"), an LP which operates, pursuant to a license agreement with the Company, 18 Jennifer Convertibles stores in the Chicago, Illinois area, and, until the Company purchased it as of September 1, 1994, Jennifer L.P. II ("L.P. II"), an LP which operated, pursuant to a license agreement with the Company, 22 Jennifer Convertible stores in the Detroit, St. Louis, Indianapolis, Milwaukee and Kansas City metropolitan areas. During the fiscal year ended August 27, 1994, the Company earned $1,203,000 of royalties from the Chicago Partnership and L.P.II, which are not separately shown in the financial statements due to the consolidation of such LPs for financial statement purposes. On November 24, 1992, Selig Zises, an affiliate of JCI as well as the majority limited partner in the Chicago Partnership, agreed to invest an aggregate of $1,250,000 in L.P. II. The investment was to be made on the same terms as the investment in the Chicago Partnership was made. Mr. Zises ultimately invested 41 $670,000 in L.P. II. As of August 27, 1994 the Company had outstanding loans to L.P. II in an aggregate amount of $3,012,000, which loans were payable in November 1995, with 12% interest due and were secured by the inventory of L.P. II. In addition, at August 27, 1994, the Company had advanced approximately $951,000 and had a receivable owing from L.P. II of approximately $1,248,000 resulting from purchases made on behalf of L.P. II. Due to disagreements between Mr. Zises and the general partner of L.P. II, a wholly-owned subsidiary of the Company, and the Company effective September 1, 1994, the Company purchased Mr. Zises' interests in L.P. II for $750,000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." JC Real Estate Ventures During fiscal 1994, JC Real Estate Ventures Inc. ("Ventures"), an affiliate of JCI, acted as a consultant to the Company in connection with site selection and other leasing activities in connection with the Company's licensing program. Ventures receives fees from the Company's licensees for such services. From time to time, JCI has also received certain fees from the Company's licensees. Elegant Living Partnership Effective November 30, 1993, the Company acquired, for $2,250,000, the limited partner's interest in the Elegant Partnership through the Private Company, which had owned the option to acquire such interest from the limited partner for $2,250,000. See "Business - Licensing Arrangements." Other Matters Isabelle S. Silverman, the Company's Vice President - Finance, Treasurer and Secretary from May 1, 1992 to January 1, 1994, is the daughter-in-law of Jerome I. Silverman, the sole proprietor of JISCO, an accounting firm which, until August 27, 1994, provided, through its personnel, substantial accounting, clerical and administrative services to the Company, the LPs and the Private Company. The Company and the LPs paid JISCO an aggregate of $921,000 during the fiscal year ended August 27, 1994 and such firm also received fees from certain of the Company's Unconsolidated Licensees. Investors in a number of the Company's licensees are clients of JISCO. By contract dated July 29, 1994, the Company terminated its retention of JISCO, effective August 27, 1994, and purchased, for approximately $257,000, assets of JISCO related to the accounting, administrative and clerical services previously rendered by JISCO to the Company, including obtaining the lease for approximately 6,997 square feet of space at 417-419 Crossways Park Drive, Woodbury, New York. In addition, Isabelle Silverman's brother-in-law is the 50% owner of a corporation which owned 50% of the Warehouse until December 1, 1994. As described under the heading "The Committee" below, a committee of the Board of Directors consisting of Michael Colnes concluded that the Company had claims against Jerome I. Silverman and Isabelle Silverman. In this connection, during fiscal 42 1994, the Company advanced $83,000 to a law firm representing Fred Love, the Private Company, Jerome I. Silverman and JISCO for legal fees incurred in connection with the report. Leslie Falchook, the Company's Vice President - Administration and his brother, who was an officer of the Company from 1986 until 1992, was the owner of 49% of one of the Private Stores until 1993. In January, 1994, Rami Abada, the Company's Executive Vice President and Chief Operating Officer, and Ronald Rudzin, the Company's Senior Vice President - Retail Stores, joined the Company. Mr. Abada and Mr. Rudzin each own interests in certain licensed Jennifer Convertibles stores. Mr. Abada owns a 20% interest in one corporation which owns six licensed Jennifer Convertibles stores. During the year ended August 27, 1994, such corporation incurred approximately $252,000 in royalties and $1,390,000 for merchandise purchases owed to the Company and also made principal and interest payments to the Company of approximately $121,000 in respect of a 9% secured note, due December 31, 2001, in the original principal amount of $810,000 (which principal amount was $661,000 as of August 27, 1994). In addition, such corporation owes the Company $500,000 principal amount under a Revolving Credit Agreement pursuant to which all available revolving credit loans have been drawn down. Such loans bear interest at prime plus 3% and were due on June 1, 1995 but not paid. Mr. Abada also owned a 20% interest in each of two corporations, which each own a licensed Jennifer Convertibles store. During the year ended August 27, 1994, such corporations incurred an aggregate of approximately $106,000 in royalties and $489,622 for merchandise purchases owed to the Company. Mr. Rudzin owns four licensed Jennifer Convertibles stores and his father owns two licensed Jennifer Convertibles stores which during the fiscal year ended August 27, 1994 incurred approximately $126,000 (for Mr. Rudzin's stores) and $148,000 (for Mr. Rudzin's father's stores) of royalties and $715,440 (for Mr. Rudzin's stores) and $776,299 (for Mr. Rudzin's father's stores) for merchandise purchases. During the fiscal year ended August 27, 1994, Mr. Abada received $315,168 of salary, distributions and other payments from such licensees and the Private Company and Mr. Rudzin received $152,331 of salary, severance pay, distributions and other payments from such licensees and the Private Company. Amounts owed to the Company as of August 27, 1994 by the corporate licensees referred to above (each of which is an Unconsolidated Licensee) have been fully reserved against in the accompanying financial statements due to uncertain collectibility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company and the Private Company, from time to time, use Wincig & Wincig, a law firm of which Bernard Wincig, a director of the Company and a stockholder, is a partner. Mr. Wincig owns a 20% interest in two Private Stores. Mr. Wincig received approximately $371,000 of legal fees from the Company and the LPs and an aggregate of approximately $420,000 of distributions from such Private Stores (representing amounts accrued over several years) and legal and consulting fees from the Private Company during the fiscal year ended August 27, 1994. From October 15, 1986 until November 1994, Mr. Wincig's son, a stockholder and a partner of Wincig & Wincig, was a director of Jara and was one of three voting trustees of the voting trust established in respect of Mr. Greenfield's shares in the Private Company. 43 Michael Rosen, a director of the Company during fiscal 1994, is a senior member of the law firm of Robinson Silverman Pearce Aronsohn & Berman, which firm provides certain legal services to the Company from time to time. William Apfelbaum, a director of the Company during fiscal 1994, is the Chief Executive Officer of Transportation Displays, Inc. ("TDI"), a company which provides certain advertising services to the Company and the LPs. During the fiscal year ended August 27, 1994, the Company and the LPs paid TDI $219,000 for such services. 44 The Committee Report On April 12, 1994, the Company's Board of Directors established a committee consisting of one director, Michael Colnes ("Colnes"), to investigate (i) allegations set forth in a draft complaint (the "Draft Complaint") delivered to the Company by counsel to Selig Zises and Glenn S. Meyers and (ii) related party transactions. Colnes was assisted in such investigation by the law firm of Schulte Roth & Zabel and the accounting firm of Ernst & Young, LLP. On December 2, 1994, Colnes delivered a summary report (the "Summary Report") concluding that the Company had meritorious claims against Harley J. Greenfield, Edward B. Seidner, Fred J. Love, the Private Company, Isabelle Silverman, and Jerome I. Silverman, a senior advisor to the Company. On January 26, 1995, Colnes delivered the final report (the " Committee Report"), which reaffirmed substantially all the conclusions contained in the Summary Report. In March 1995, the Company's Board of Directors received the response (the "Response") to the Committee Report. The Response, which was prepared on behalf of Mr. Greenfield, by the law firm of Skadden, Arps, Slate, Meagher & Flom and Ten Eyck Associates, Inc., an independent consulting firm headed by Ernest Ten Eyck, formerly an assistant chief accountant at the Securities and Exchange Commission, concluded that there were no valid claims. The Response stated, among other things, that "Based upon its unrestricted review of the books and records of both the Private Company and the Company...Ten Eyck found nothing in the Company-Private Company relationship that appears to be improper or reflects adversely on the integrity of the senior management of the Company, including Mr. Greenfield." Set forth below is a brief summary of those matters as to which the Committee Report recommended that the Company take legal action and the Response's reply. As set forth under "Legal Proceedings," in March 1996, the Company signed a Memorandum of Understanding designed to settle the issues raised by the Committee Report. See "Legal Proceedings." Rebates A. The Committee Report The Committee Report concluded that there were meritorious claims relating to rebates received by the Private Company from merchandise vendors, which were passed on to the Company, but not to the Company's licensees. The claims fall into three categories: (i) that the rebates paid to the Company were paid annually, rather than upon receipt by the Private Company, (ii) that rebates with respect to licensees were retained by the Private Company rather than paid to the Company, including, for a short period, rebates with respect to licensees which had entered into purchasing and warehousing contracts directly with the Company instead of with the Private Company, and (iii) that, when the Private Company agreed to transfer the rebates from licensees to the Company effective as of January 1, 1994 and agreed to give the Company a note (the 45 "Rebate Note") for $1,000,000 representing the amount of rebates for previously delivered merchandise, representatives of the Private Company misrepresented to the Company's Board of Directors that the Private Company did not have sufficient funds to pay the Rebate Note, on the basis of which misrepresentation the Board agreed to accept the Rebate Note rather than pressing for payment in cash. B. The Response The Response asserts that the Private Company was not contractually obligated to pass such rebates along to the Company and that the Committee Report acknowledged that such rebates were passed along as a matter of practice and not contract. The Response also asserts that the agreements with the licensees were quite clear that the licensees were not entitled to such rebates and that, during all relevant times, the purchasing and warehousing functions were performed for licensees entirely by the Private Company and were not and could not have been performed by the Company. The Response concludes that since the Company was not entitled to the rebates (but only received them as an accommodation), the Company can not complain about delay in the payment of such rebates. The Response also takes the position that due to a miscalculation the Company received approximately $450,000 in excess rebates for the fiscal years 1988 through 1993 which really belonged to the Private Company. In addition, the Response states that, since the Private Company was providing all the services to licensees, it would have been an unfair windfall for the Company to receive the related rebates. As to the Rebate Note, the Response argues that (1) since the Company is not entitled to rebates there was no misrepresentation and asserts that the Private Company had no obligation to pay the $1,000,000 at all, and (2) the Note bears interest, provides for an increased interest rate in the event of default and is being paid in a timely manner. Fabric Protection A. The Committee Report The Private Company provides fabric protection services, including a life-time warranty, to those customers of the Company and its licensees who purchase such services. Approximately 2/3 of the revenues from fabric protection are retained by the Company and its licensees. The remaining 1/3 (approximately $3,300,000 paid by the Company and the LPs for the year ended August 27, 1994) was paid to the Private Company and has been used, according to the Response, to cover the cost of fabric protection and warranty services and to fund the provision of additional services to the Company and the LPs which the Private Company was not obligated to provide. The Committee Report concluded that since the Company's Board of Directors had never approved the arrangement, the Company had a claim against the Private Company for an amount equal to the profit made by it for providing such services. 46 B. The Response The Response cites provisions of Delaware law to the effect that a related party transaction does not need to be approved by the disinterested members of the Board if the transaction is fair. The Response states, based on a survey of the prices charged for fabric protection by a number of non-affiliated third parties (which do not provide a life-time warranty) and certain consultants, that the price charged by the Private Company is "not only fair, but generous." Accordingly, the Response concludes that the Company has no claim for damages regarding fabric protection. Freight Charges A. The Committee Report The Private Company charges the Company and its licensees for delivery of merchandise from the manufacturer to its warehouse at a price equal to the manufacturer's freight rate for such delivery. The Original Warehousing Agreement was silent as to freight charges, other than for the statement that purchasing should be done "at cost." The amended warehousing agreement and purchasing agreement, each entered into in December 1993 (the "New Agreements"), specifically provided that the freight delivery component of cost should be based on the manufacturer's freight rate. From time to time, the Private Company hires independent truckers to deliver merchandise to its warehouse at a price less than the manufacturer's freight rate. The Committee Report concluded that the Company has a claim for the difference between the freight rate and the amount charged by the independent truckers. B. The Response The Response states that the Private Company actually charged the Company significantly less than "cost" for freight, primarily because the Private Company did not separately bill the Company for certain costs which it incurs for delivering merchandise from the central warehouse in New York to satellite warehouses or local distribution or staging areas in territories outside of New York. Accordingly, the Response concludes that the Private Company has not made any money on freight charges to the Company. 47 Assumption of Purchasing Responsibilities A. The Committee Report In connection with the Company's assumption from the Private Company of the merchandise purchasing function, effective January 1, 1994, the Committee Report claimed that Messrs. Greenfield, Love, Seidner and Silverman and Mrs. Silverman (i) misled the Company's Board of Directors that assuming the purchasing function would not entail additional cost (in connection with the transfer of the purchasing function, two new officers were appointed to the Company and six former employees of the Private Company, with salaries aggregating $166,000 per annum, became employees of the Company) and (ii) caused licensees to pay receivables of approximately $4,300,000 to the Private Company instead of to the Company, thereby allowing the receivable from the licensees (which the Committee believed to be insolvent) to grow. B. The Response The Response argues that there was no misrepresentation and that, among other things, disclosure in the Company's prior public filings had clearly indicated that the assumption of the purchasing function would involve additional costs. In addition, the Response notes that the addition of certain of the six employees was unrelated to the assumption of the purchasing function. The Response also states, among other things, that payments of receivables by licensees were made, as is customary, on the basis of oldest receivables first. Amounts due to the Private Company that were paid were for periods prior to December 31, 1993 and amounts due to the Company were for the period subsequent to January 1, 1994. Pass Through of Credit From Supplier A. The Committee Report According to the Committee Report, a principal supplier to the Company, the Private Company and the licensees gave a credit to the Private Company of $50,000 for each new Jennifer Convertibles store opened between September 1991 and February 1994 for a total of $3,500,000 million. The Committee concluded that this transaction was not disclosed to the Company's Board of Directors and that the Private Company should have passed such loans on to the Company's licensees, and that the Company was damaged by its failure to do so. 48 B. The Response The Response indicates that the arrangement between the Private Company and its supplier was never intended to be passed along to the Company's licensees. Pursuant to the Purchasing Agreements with the licensees, the Private Company bore most of the risk of carrying inventory and the terms upon which such licensees purchased from the Private Company, including payment terms, were set forth in the contracts with such licensees. In addition, because the credit was actually a loan which bore interest at 3% above prime, the Private Company did not benefit from, and the Company was not damaged by, the failure to pass the credit along to the licensees. Use of Rebates and Supplier Credit to Develop Warehouses A. The Committee Report The Committee Report states that the use by the Private Company of licensee rebates and supplier credits for which the Committee Report concluded (as set forth above) the Company had a claim in order to extend the Private Company's warehouse system was a usurpation of corporate opportunity which belonged to the Company. B. The Response The Response states that for the reasons discussed earlier the Company does not have a valid claim for the credits or the rebates and that, in any event, the warehousing function has always been performed by the Private Company since the Company's inception, and the Company has not had, until recently, the financing to open its own warehouse or the inclination to use such financing to open warehouses instead of stores. The Response, therefore, concludes that there was no usurpation of corporate opportunity. Other Claims A. The Committee Report Among other things, the Committee Report also concluded that the Company had claims for breach of fiduciary duty against the principal officers of the Company relating to the obstruction of its work by denying it full access to the books and records of the Private Company and for improper delegation of authority by Messrs. Greenfield, Seidner and Love to Mr. Silverman. 49 B. The Response The Response contends there is no support for the claim as to obstruction against Mr. Greenfield (who on several occasions voiced his support of Colnes' request for access) and indicates that Delaware law permits delegation of certain duties. The Colnes Letter On or about November 22, 1994, Colnes sent a letter to Harley Greenfield as President of the Company, calling Mr. Greenfield's attention to certain information which had come to Colnes' attention during the previous few days through his work on the Committee (the "Letter"). The Letter reviewed certain transactions recorded on the books and records of S.F.H.C., the owner of six licensee stores, the Private Company and its affiliates, the Company, and certain LPs (LPs III through V). Based on his review of the transactions, the Letter sets forth the following conclusions: (a) "It appears... that Private Company funds [totalling $300,000] were used by S.F.H.C. to acquire the stock of Summit"(2) Investment Group, Inc. ("Summit") from the Company, and that "no funds were contributed by the purported stockholders of S.F.H.C. to the acquisition of the stock of Summit;" (b) S.F.H.C. made a loan of $1,000,000 on behalf of one of its purported shareholders to invest in LP III, which funds were required by S.F.H.C. for its operations and not otherwise available for personal use by S.F.H.C. shareholders; and further, that S.F.H.C. was able to pay a total of more than $1,000,000 due from it to the Private Company by allowing its accounts payable to the Company to accumulate from zero to more than $1,000,000, most of which was older than 30 days; (c) "It appears... that [$500,000 in] Company funds were used by S.F.H.C. and ... shareholders for capital contributions to LPs IV and V and that no funds were contributed by either the limited partners of LPs III through V or the purported stockholders of S.F.H.C.; and further, that Private Company funds [totalling $1,100,000] were used for additional capital contributions to LPs IV and V." On April 3, 1995, Jerome I. Silverman, as accountant to the Private Company, responded to Mr. Greenfield regarding the various matters raised in the Letter (the "Silverman Response"). - -------- 2 S.F.H.C. was created for the specific purpose of acquiring Summit. 50 The Silverman Response states that the funding for S.F.H.C. and LPs III through V was consistent with the requirement that 80% or more of the equity interest in each of these entities be owned by parties who were not affiliated with either the Company or the Private Company, in order to enable the Company to take advantage of the accounting technique of off-balance sheet financing. With respect to the specific transactions discussed in the Letter, and its conclusions as summarized in (a), (b), and (c) above, the Silverman Response states: (a) The cash portion of the purchase price which S.F.H.C. paid for Summit [$270,000] represented only 20% of the equity of Summit (and therefore S.F.H.C.) and was put up by Mr. Abada, who personally borrowed those funds from the Private Company pursuant to a loan collateralized by 50,000 shares of Common Stock. The remaining 80% in S.F.H.C. is owned by three other individuals who are not affiliated with either the Company or the Private Company, and that 80% equity interest was acquired for an interest-bearing note from S.F.H.C. to the Company which is being paid on a current basis; (b) At the time the $1,000,000 loan from S.F.H.C. was made to a shareholder to fund his capital contribution to LP III, the Private Company still had responsibility for purchasing and there were no trade accounts payable from S.F.H.C. to the Company; (c) The $500,000 in loans from the Company to S.F.H.C. was consistent with the loans made to other licensees of the Company and was contemplated by the "Use of Proceeds" section in the Prospectus for the Debenture offering and the revolving credit agreement, and the decision as to the manner in which those funds were used was within the authority of the shareholders of S.F.H.C. or Mr. Silverman as their duly authorized representative; and further, the Private Company funds used for the additional capital contributions to LPs IV and V were secured by promissory notes from the limited partners of those LPs to the Private Company. 51 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Financial Statements. See the Index immediately following the signature page. (b) Reports on Form 8-K. During the quarter ended August 27, 1994, the Company filed one Current Report on Form 8-K reporting on the following: Item 5 - Other Events with respect to the termination on July 28, 1994 of the Consulting Agreement, dated February 25, 1992, between the Company and JCI Consultant, L.P. (c) Exhibits. 3.1 - Certificate of Incorporation of the Company (Incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement -File Nos. 33-22214 and 33- 10800 (the "Registration Statement") 3.2 - By-Laws of the Company. (incorporated herein by reference to Exhibit 3.2 to Form 10-K for 1995) 4.1 - Form of Underwriter's Warrant for the purchase of shares of Common Stock (Incorporated herein by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-2 - File No. 33-47871 (the "Registration Statement on Form S-2")) 10.1 - Incentive and Non-Qualified Stock Option Plan, as amended (Incorporated herein by reference to Exhibit 10.4 to the Registration Statement) 10.2 - Warehousing and Purchasing Agreement, dated as of November 3, 1986, between the Company and the Private Company (Incorporated herein by reference to Exhibit 10.10 to the Registration Statement) 52 10.3 - License Agreement, dated as of November 3, 1986, between the Company and Jennifer Convertibles, Inc., a New York corporation (Incorporated herein by reference to Exhibit 10.11 to the Registration Statement) 10.4 - Advertising Agreement, dated as of November 3, 1986 between the Company and the Private Company (Incorporated herein by reference to Exhibit 10.12 to the Registration Statement) 10.5 - Voting Trust Agreement, effective as of October 15, 1986, among Harley J. Greenfield, Fred J. Love, and Edward B. Seidner (Incorporated herein by reference to Exhibit 10.13 to the Registration Statement) 10.6 - Option Agreement, date June 29, 1988, among the Company, IDC and JCI (Incorporated herein by reference to exhibit 10.7 to the Registration Statement) 10.7 - Amendments to the Warehousing and Purchasing Agreement referred to in 10.2 (Incorporated herein by reference to Exhibit 10.21 to the Registration Statement) 10.8 - Agreement, dated March 21, 1991, between JCI Consultant, L.P. and Jennifer Convertibles, Inc. (Incorporated herein by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated March 21, 1991) 10.9 - Stock Option Agreement, dated March 21, 1991, between Jennifer Convertibles, Inc. and JCI Consultant L.P. (Incorporated herein by reference to Exhibit 2 to the Company's Current Report on Form 8-K dated March 21, 1991) 10.10 - Voting Trust Agreement, dated March 21, 1991, between Harley J. Greenfield, Jennifer Convertibles, Inc. and JCI Consultant L.P. (Incorporated herein by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated March 31, 1991) 10.11 - Registration and Sales Agreement, dated March 21, 1991, between Jennifer Convertibles, Inc., JCI Consultant, L.P., Harley J. Greenfield, Fred J. Love, Edward B. Seidner and Jara Enterprises, Inc. (Incorporated herein by reference to Exhibit 4 to the Company's Current Report on Form 8-K dated March 21, 1991) 53 10.12 - Agreement of Limited Partnership of Jennifer Chicago, L.P. (the "Partnership"), dated July 24, 1991 (Incorporated herein by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated July 24, 1991) 10.13 - Purchase Option Agreement, dated July 24, 1991, between Jennifer Convertibles, Inc. and the limited partner of the Partnership (Incorporated herein by reference to Exhibit 2 to the Company's Current Report on Form 8-K dated July 24, 1991) 10.14 - Omnibus Agreement, dated July 24, 1991, between Jennifer Convertibles, Inc. and the Partnership (Incorporated herein by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated July 24, 1991) 10.15 - Warehousing and Purchasing Agreement, dated July 24, 1991, between Jennifer Convertibles Inc., and the Partnership (Incorporated herein by reference to Exhibit 4 to the Company's Current Report on Form 8-K dated July 24, 1991) 10.16 - Amendment to Employment Agreement with Harley Greenfield dated November 15, 1991. (Incorporated herein by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1991) 10.17 - Employment Agreement with Harley J. Greenfield, dated April 6, 1992 (Incorporated herein by reference to Exhibit 10.1 to the Registration Statement on Form S-2) 10.18 - Employment Agreement with Isabelle Silverman, dated May 12, 1992 (Incorporated herein by reference to Exhibit 10.2 to the Registration Statement on Form S-2) 10.19 - Employment Agreement with Leslie Falchook, dated May 1, 1992 (Incorporated herein by reference to Exhibit 10.3 to the Registration Statement on Form S-2) 10.20 - Amended and restated 1991 Incentive and Non-Qualified Stock Option Plan (Incorporated herein by reference to Exhibit 10.29 to the Registration Statement on Form S-2) 10.21 - Amendment to Stock Option Agreement dated February 25, 1992 between the Company and JCI (Incorporated herein by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated February 25, 1992) 54 10.22 - Letter Agreement dated February 25, 1992 among the Company, JCI and Harley J. Greenfield, amending a Voting Trust Agreement (Incorporated herein by reference to Exhibit 2 to the Company's Current Report on Form 8-K dated February 25, 1992) 10.23 - Amended and Restated Registration and Sale Agreement dated as of February 25, 1992 among the Company, JCI, Harley J. Greenfield, Fred J. Love, Edward B. Seidner and Jara (Incorporated herein by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated February 25, 1992) 10.24 - Letter Agreement dated February 25, 1992 between the Company and JCI. (Incorporated herein by reference to Exhibit 4 to the Company's Current Report on Form 8-K dated February 25, 1992) 10.25 - Consulting Agreement dated November 4, 1991 between the Company and the Ladenburg, Thalmann & Co., Inc. (Incorporated herein by reference to Exhibit 10.34 to the Registration Statement on Form S-2) 10.26 - New Warehousing Agreement dated May 13, 1992 among Jennifer Purchasing and Warehousing, Inc. Jennifer - New York, Inc. and the Company. (Incorporated herein by reference to Exhibit 10.35 to the Registration Statement on Form S-2) 10.27 - The Company's Current Report on Form 8-K dated February 18, 1993 10.28 - The Company's Current Report on Form 8-K dated September 20, 1994 10.29 - The Company's Current Report on Form 8-K dated May 5, 1995 10.30 - Credit Agreement dated August 31, 1993 by and between Jennifer Convertibles, Inc. and IBJ Schroder Bank and Trust Company 10.31 - Warehousing Agreement, dated as of December 31, 1993, between Jennifer Convertibles, Inc. and Jennifer Warehousing, Inc. (Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ending February 26, 1994) 55 10.32 - Purchasing Agreement, dated as of December 31, 1993, between Jennifer Convertibles, Inc. and Jara Enterprises, Inc. (Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ending February 26, 1994) 10.33 - Advertising Agreement, dated as of December 31, 1993, between Jennifer Convertibles, Inc. and Jara Enterprises, Inc. (Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ending February 26, 1994) 10.34 - Amendment No. 1 to Warehousing Agreement, dated as of May 28, 1994, amending the Warehousing Agreement referred to in 10.29 10.35 - Amendment No. 1 to Purchasing Agreement, dated as of May 28, 1994, amending the Purchasing Agreement referred to in 10.30 10.36 - License Agreement, dated as of October 28, 1993, among Jennifer Convertibles Licensing Corp. and Jara Enterprises, Inc. (Incorporated herein by reference to Exhibit 2 to the Company's Current Report on Form 8-K dated November 30, 1993) 10.37 - Letter Agreement terminating the Settlement Agreements referred to in 10.8 and 10.24. (Incorporated herein by reference to the Company' Current Report on Form 8-K dated August 1, 1994) 10.38 - Asset Purchase Agreement, dated as of July 29, 1994 between Jennifer Convertibles, Inc. and Jerome I. Silverman 11.1 - Statement re: Computation of Net (Loss) per share (for fiscal years ended August 27, 1994 and August 31, 1993 and 1992 22.1 - Subsidiaries of the Company (d) Financial Statement Schedules. All Schedules are omitted for the reason that they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. 56 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. By: /s/ Harley J. Greenfield ------------------------------------- Harley J. Greenfield, Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated below. 57 NAME POSITION DATE - ---- -------- ---- /s/ Harley J. Greenfield Chairman of the Board, October 31, 1996 - ----------------------------- President and Chief Harley J. Greenfield Executive Officer (Principal Executive Officer) /s/ George J. Nadel Executive Vice President, October 31, 1996 - ----------------------------- Chief Financial Officer George J. Nadel and Treasurer (Principal Financial Officer and Principal Accounting Officer) /s/ Edward B. Seidner Director October 31, 1996 - ----------------------------- Edward B. Seidner /s/ Bernard Wincig Director October 31, 1996 - ----------------------------- Bernard Wincig /s/ Edward Bohn Director October 31, 1996 - ----------------------------- Edward Bohn /s/ Kevin J. Coyle Director October 31, 1996 - ----------------------------- Kevin J. Coyle 58 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Index to Financial Statements Independent Auditors' Disclaimer of Opinion..........................F1 Report of Management.................................................F3 Consolidated Balance Sheets at August 27, 1994 and August 31, 1993......................................................F4 Consolidated Statements of Operations for the years ended August 27, 1994, August 31, 1993 and August 31, 1992.................F5 Consolidated Statements of Stockholders' Equity for the years ended August 27, 1994, August 31, 1993 and August 31, 1992......................................................F6 Consolidated Statements of Cash Flows for the years ended August 27, 1994, August 31, 1993 and August 31, 1992.................F7 Notes to the Consolidated Financial Statements.......................F8 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Jennifer Convertibles, Inc. Woodbury, New York We were engaged to audit the accompanying consolidated balance sheet of Jennifer Convertibles, Inc. (the "Company") and subsidiaries as at August 27, 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. The financial statements as at and for the year ended August 31, 1993, before restatement to consolidate the limited partnerships referred to in the seventh paragraph hereof, were audited by other auditors who originally issued an unqualified report thereon dated November 12, 1993. On May 2, 1995, such auditors withdrew their opinion stating that information had come to their attention causing them to believe that they could no longer rely on management's representations. We were not engaged to audit the financial statements of the Company as at and for the year ended August 27, 1994 until subsequent to that date. The Company was unable to furnish us with documentation to enable us to satisfy ourselves as to the opening balances for such year. In addition, certain significant records and documents pertaining to the year ended August 31, 1994 could not be located. Further, the Company recorded significant charges and credits in the fiscal year ended August 26, 1995 as to which it was unable to furnish us with sufficient documentation to enable us to determine whether any portion of such charges and credits was applicable to the year ended August 27, 1994. As discussed in Note 3, a company owned by three officers of the Company (the "Private Company") performed purchasing, warehousing and inventory control, distribution, fabric protection, customer service, store cash management, advertising, data processing and other services on behalf of the Company for all or part of the periods covered by the accompanying financial statements. Effective January 1, 1994, the Company began providing the purchasing and advertising services for itself, the Private Company and other affiliates. The Private Company was unable to provide us with documentation for certain of the transactions performed by the Private Company on behalf of the Company. The Company does not have an adequate system of internal accounting controls over the financial information processed for the Company by the Private Company. Further, the chief financial officer of the Company has stated that the Company is seriously deficient regarding the adequacy of internal controls that support its operations. As a result of this lack of control, the chief financial officer has stated that he is unable to provide certain representations we requested regarding the Company's financial statements. F-1 Because of the matters discussed in the preceding four paragraphs, we are unable to express, and we do not express, an opinion on the accompanying financial statements as at and for the year ended August 27, 1994. No representation to the contrary should be expressly or implicitly assumed from the issuance of the accompanying financial statements. As discussed in Note 1, in 1993 the Company did not consolidate the limited partnerships in which it was the general partner. At the end of fiscal 1994, it was determined that the limited partnerships were controlled by the Company which was funding their losses in excess of the limited partners' investment. Accordingly, the limited partnerships have been consolidated for fiscal 1994 and the 1993 financial statements have been restated from those previously issued to include the accounts of the limited partnerships. As discussed in Note 9, in December 1994 and January 1995, the Company and certain of its officers became defendants in class and derivative actions. The Company is attempting to settle the above litigations and has agreed to terms which, subject to the execution of definite agreements and court approval, would settle the class action and derivative litigations. Further, in May 1995, the Securities and Exchange Commission commenced an investigation relating to the aforementioned matters. The outcome of these matters is not presently determinable and an unfavorable outcome could have a material adverse affect on the Company's ability to continue as a going concern. Attention is directed to Note 1 with respect to various operational problems which the Company has experienced in the past two years and management's plans for contending with these problems. Attention is also directed to Notes 1, 3, 9 and 13 with respect to various related party transactions. Richard A. Eisner & Company, LLP New York, New York December 22, 1995 With respect to Note 13 September 26, 1996 F-2 Jennifer Convertibles, Inc. 419 Crossways Park Drive Woodbury, New York 11797 October 28, 1996 REPORT OF MANAGEMENT: Management is responsible for the preparation, integrity and objectivity of the Company's financial statements and all other financial information included in this report as well as maintaining a system of internal controls as a fundamental requirement for the operational and financial integrity of results. Management and the Audit Committee of the Board of Directors recognizes the seriousness and significance of the problems enumerated in the Report of Independent Auditors. We are now managing the financial functions that have previously been provided by the Private Company. The accounting professional staff has been strengthened over the last year and a new internal audit function has been added. A new Steering Committee has been established which is headed by one of our independent directors charged with responsibility for reviewing, examining and modifying the various data processing programs that support our business. Additionally, settlement of the class action lawsuits and derivative litigations, along with the new operating agreements with the Private Company, as described elsewhere, eliminates the burden and expense of these matters. Based upon the steps undertaken as described above, we believe that substantial progress has been made to eliminate the problems identified in the Auditors' Report. Very truly yours, JENNIFER CONVERTIBLES, INC. /S/ HARLEY GREENFIELD Harley Greenfield, President, Chief Executive Officer /S/ GEORGE J. NADEL George J. Nadel, Executive V.P., Chief Financial Officer F3 JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except share data)
ASSETS August 27, 1994 August 31, 1993 ------ ---------------- ---------------- Current assets: Cash and cash equivalents $ 13,089 $ 16,182 Merchandise inventories 10,148 3,872 Due from limited partners 1,000 - Refundable income taxes 2,258 1,068 Prepaid expenses 1,717 249 Accounts receivable 1,719 329 Other current assets 1,475 893 ----------- ----------- Total current assets 31,406 22,593 Store fixtures, equipment and leasehold improvements, at cost, net 8,701 4,373 Due from Unconsolidated Licensees, net of reserves of $3,284 in 1994 and $0 in 1993 - 2,083 Due from Private Company 1,832 - Deferred lease costs and other intangibles, net 1,929 1,588 Goodwill, at cost, net 604 621 Other assets (primarily security deposits) 450 1,135 Investments in government securities - 5,095 ----------- ----------- $ 44,922 $ 37,488 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable, trade $ 15,391 $ 1,406 Customer deposits 9,460 5,648 Due to Private Company - 2,216 Accrued expenses and other current liabilities 5,315 1,750 ----------- ----------- Total current liabilities 30,166 11,020 Deferred rent and allowances 6,494 3,718 Long-term obligations under capital leases 477 118 ----------- ----------- Total liabilities 37,137 14,856 ----------- ----------- Minority interest in Elegant Partnership - 449 ----------- ----------- Commitments and contingencies Stockholders' equity: Preferred stock, par value $.01 per share. Authorized 1,000,000 shares; no shares issued - - Common stock, par value $.01 per share. Authorized 10,000,000 shares; issued and outstanding 5,700,725 shares at August 27, 1994 and 5,697,725 shares at August 31, 1993 57 57 Additional paid-in capital 22,911 22,392 Notes receivable from warrant holders (300) - Accumulated (deficit) (14,883) (266) ----------- ----------- 7,785 22,183 ----------- ----------- $ 44,922 $ 37,488 =========== ===========
Attention is directed to the foregoing Accountant's Disclaimer of Opinion and to the accompanying Notes to the Consolidated Financial Statements. F4 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except share data)
Year ended Year ended Year ended August 27, 1994 August 31, 1993 August 31, 1992 --------------- --------------- --------------- Net sales $97,420 $64,348 $33,383 -------------- -------------- -------------- Cost of sales, including store occupancy, warehousing, delivery and fabric protection (including charges from Private Company of $28,521, $37,085 and $19,480) 67,974 43,898 20,741 Selling, general and administrative expenses (including advertising charges from Private Company of $3,786, $7,158 and $1,971) 34,139 22,652 10,618 Termination of consulting agreement, legal and other costs 6,604 - - Write off of purchased limited partners' interests 3,482 - - Provision for losses on amounts due from Unconsolidated Licensees 3,284 - - Depreciation and amortization 2,091 1,583 555 -------------- -------------- -------------- 117,574 68,133 31,914 -------------- -------------- -------------- Operating (loss) income (20,154) (3,785) 1,469 -------------- -------------- -------------- Other income (expense): Royalty income 644 711 779 Interest income 473 674 237 Interest expense (61) (640) (164) Gain on sale of securities 336 61 - Other income, net 1,374 696 74 -------------- -------------- -------------- 2,766 1,502 926 -------------- -------------- -------------- (Loss) earnings before income taxes (benefit), extraordinary item and minority interest (17,388) (2,283) 2,395 Income taxes (benefit) (322) 113 968 -------------- -------------- -------------- (Loss) earnings before extraordinary item and minority interest (17,066) (2,396) 1,427 Extraordinary item - utilization of net operating loss carryforwards - - 748 Minority interest share of losses 2,449 2,902 - -------------- -------------- -------------- Net (loss) earnings ($14,617) $506 $2,175 ============== ============== ============== (Loss) earnings per common and common equivalent share: Before extraordinary item ($2.56) $0.09 $0.34 Extraordinary item - - 0.16 -------------- -------------- -------------- Net (loss) earnings per share ($2.56) $0.09 $0.50 ============== ============== ============== Weighted average number of common and common equivalent shares 5,700,725 6,013,000 4,605,000 ============== ============== ==============
Attention is directed to the foregoing Accountant's Disclaimer of Opinion and to the accompanying Notes to the Consolidated Financial Statements. F5 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended August 27, 1994, August 31, 1993 and 1992 (in thousands, except share data)
Common stock Additional Notes receivable ------------------------ paid-in from Accumulated Shares Par value capital warrant holders (deficit) Totals ------ ---------- ------- --------------- --------- ------ Balances at August 31, 1991 3,025,888 $ 30 $ 6,736 $ - $ (2,947) $ 3,819 Exercise of outstanding stock warrants and underwriter's units for cash 1,152,581 12 5,001 - - 5,013 Exercise of Crown option 180,000 2 1,078 - - 1,080 Exercise of outstanding stock options for cash 25,000 - 100 - - 100 Issuance of underwriter's warrants in connection with convertible subordinated debt offering - - 93 - - 93 Net earnings - - - - 2,175 2,175 ---------- -------- ---------- ----------- ---------- ---------- Balances at August 31, 1992 4,383,469 44 13,008 - (772) 12,280 Conversion of debentures, net of related costs 1,314,256 13 9,384 - - 9,397 Net earnings - - - - 506 506 ---------- -------- ---------- ----------- ---------- ---------- Balances at August 31, 1993 5,697,725 57 22,392 - (266) 22,183 Exercise of outstanding stock options for cash 3,000 - 8 - - 8 Issuance of warrants in connection with limited partnership agreements - - 511 (300) - 211 Net (loss) - - - - (14,617) (14,617) ---------- -------- ---------- ----------- ---------- ---------- Balances at August 27, 1994 5,700,725 $ 57 $22,911 $ (300) $(14,883) $ 7,785 ========== ======== ========= =========== ========== ==========
Attention is directed to the foregoing Accountant's Disclaimer of Opinion and to the accompanying Notes to the Consolidated Financial Statements. F6 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands)
Year ended Year ended Year ended August 27, 1994 August 31, 1993 August 31, 1992 --------------- --------------- --------------- Cash flows from operating activities: Net (loss) earnings ($14,617) $506 $2,175 Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: Depreciation and amortization 2,091 1,583 555 Acquisition of limited partnership interests (3,000) - - Writeoff of purchased limited partnership interests 3,482 - - Provision for losses on amounts due from Unconsolidated Licensees 3,284 - - Deferred rent 2,776 1,947 28 (Gain) on sale of investment securities (336) (61) 83 (Gain) on sale of subsidiaries (102) (480) (60) Minority interest (449) 449 2 Changes in operating assets and liabilities: (Increase) in merchandise inventories (6,276) (1,538) (59) (Increase) in refundable income taxes (1,190) (1,068) - (Increase) in prepaid expenses (1,468) - - (Increase) in accounts receivable (1,390) - - (Increase) in other current assets (582) (408) (702) (Increase) decrease in due from Private Company and Unconsolidated Licensees (5,249) 1,633 (798) Decrease in other assets 685 173 - Increase in accounts payable trade 13,985 178 - Increase in customer deposits 3,812 2,831 1,084 Increase in income taxes payable - - 97 Increase in accrued expenses and other current liabilities 3,565 600 493 ------------ ----------- --------- Net cash (used in) provided by operating activities (979) 6,345 2,898 ------------ ----------- --------- Cash flows from investing activities: Capital expenditures (5,021) (3,894) (99) Deferred lease costs and other intangibles (1,673) - - Sale (purchase) of investments in government securities, net 5,431 2,904 (8,141) (Increase) decrease in due from limited partners (1,000) 985 (985) ------------ ----------- --------- Net cash (used in) investing activities (2,263) (5) (9,225) ------------ ----------- --------- Cash flows from financing activities: Net proceeds from convertible subordinated debentures - - 9,873 Net proceeds from issuance of common stock - - 5,382 Issuance of warrants 211 - - Exercise of stock options 8 - - Payment of debt conversion costs - (405) - Payments of obligations under capital leases (70) (304) (650) ------------ ----------- --------- Net cash (used in) provided by financing activities 149 (709) 14,605 ------------ ----------- --------- Net (decrease) increase in cash and cash equivalents (3,093) 5,631 8,278 Increase in cash due to consolidation of limited partnerships - 529 - Cash and cash equivalents at beginning of year 16,182 10,022 1,744 ------------ ----------- --------- Cash and cash equivalents at end of year $13,089 $16,182 $10,022 ============ =========== ========= Supplemental disclosure of cash flow information: Income taxes paid during the year $1,190 $1,171 $155 ============ =========== ========= Interest paid $61 $673 $48 ============ =========== =========
Supplemental disclosure of noncash transactions: See Note 7 -Stockholders' Equity See Note 9 -Commitments, Contingencies and Other Matters See Note 11 -Other Agreements-Summit Agreement Attention is directed to the foregoing Accountant's Disclaimer of Opinion and to the accompanying Notes to the Consolidated Financial Statements. F7 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) (1) Business and Basis of Preparation The consolidated financial statements include the accounts of Jennifer Convertibles, Inc. and subsidiaries (the "Company") and as described below, certain licensees. The Company is the owner and licensor of sofabed specialty retail stores that specialize in the sale of a complete line of sofabeds and companion pieces such as loveseats, chairs and recliners, specialty retail stores that specialize in the sale of upholstered furniture and specialty retail stores that specialize in the sale of leather furniture. As at August 27, 1994, 55 Company-owned stores operated under the Jennifer Convertibles, Jennifer Leather or Elegant Living names. Commencing in the latter part of the fiscal year ended August 31, 1992, the Company began licensing stores to limited partnerships ("LP's") of which a subsidiary of the Company is the general partner. The Company's subsidiary made nominal capital contributions to the LP's and the limited partners contributed approximately $6,710. All of the LP's have had losses since inception and the Company has made advances to them to fund such losses. For the fiscal years ended August 31, 1992 and 1993, the Company did not consolidate the operations of the LP's and recorded losses only to the extent of its nominal capital contributions. As at August 31, 1993, the Company had a receivable of approximately $3,400 for advances made to the LP's. In November 1994, it was determined that the Company had control of the LP's and, as a result, under generally accepted accounting principles, should consolidate the accounts of the LP's in its financial statements. Accordingly, the accompanying financial statements include the accounts of the LP's as well as those of the Company and its subsidiaries. The 1993 financial statements have been restated to consolidate the LP's which had the effect of recording in the Company's consolidated statement of operations the losses of the LP's in excess of the limited partners' capital contributions. See below for the effect of the restatement. The 1992 financial statements have not been restated as the effect of consolidating the operating losses of the LP's for that year are not material to the previously reported results. As at August 27, 1994, the LP's operated 99 stores under the Jennifer Convertibles name, the operations of which are included in the consolidated financial statements. During the year ended August 27, 1994 and subsequent thereto, the Company purchased the interest of certain limited partners (who had made capital contributions aggregating $2,670) for $3,000, which was $3,482 in excess of such limited partners' capital accounts at August 27, 1994. Such amount has been charged to operations in the year ended August 27, 1994. The Company has also licensed stores to parties which may be deemed affiliates ("Unconsolidated Licensees"). Under the applicable license agreements, the Company is entitled to a royalty of 5% of sales. As of August 27, 1994, the Company had made advances to such licensees aggregating $3,284 which has been reserved for in full due to the uncertainty of collection. As at August 27, 1994, 14 stores were operated by such licensees and the result of their operations are not included in the consolidated financial statements (See Notes 3 and 11). F8 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) Also not included in the consolidated financial statements are the results of operations of 24 stores in the New York Metropolitan Area which are owned by a company ("the Private Company") which, until November 1994 was owned by three of the officers/directors/principal stockholders of the Company. In November 1994, the Private Company agreed to redeem the stock in the Private Company of two of the principal stockholders (Harley Greenfield and Edward Seidner) for a note in the amount of $10,273 collateralized by the assets of the Private Company and due in 2023 (See Note 13). In connection with such transaction, Fred Love, the remaining principal stockholder, granted Messrs. Greenfield and Seidner options expiring in November 2004 to purchase the 585,662 shares of the Company's Common Stock owned by him and the Private Company for $15.00 per share. The Company, the LP's, the Private Company and the Unconsolidated Licensees have had numerous transactions with each other as more fully discussed in Note 3. Because of the numerous related party transactions, the results of operations are not necessarily indicative of what they would be if all transactions were with independent parties. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company incurred a net loss of $14,617 in the year ended August 27, 1994 and operating losses have continued. The Company has incurred losses of $12,068 for the year ended August 26, 1995 and the Company's equity and working capital have been substantially depleted. Additionally, the Company is involved in the following unresolved matters which may have a significant impact on the Company's operations: a) As discussed in Note 9, a report by an independent committee of the Board of Directors appointed to investigate a complaint relating to transactions between the Company and the Private Company which may result in claims by the Company. b) The Company has been served with 11 class action complaints and six derivative action lawsuits as discussed in Note 9. c) As discussed in Note 9, on May 3, 1995, the Securities and Exchange Commission has advised the Company that it has commenced a formal investigation into the affairs of the Company. Management has addressed the aforementioned issues, as follows: o As discussed in Note 13, the Company has agreed to terms which, subject to definitive agreements and court approval, would not only settle the class action and derivative litigations but change its operating relationship with the Private Company and resolve outstanding disputes relating to transactions between the Company and the Private Company. o Approximately 40 unprofitable stores have been closed in 1995 and 1996 and expense reduction plans have been implemented in 1996 throughout all operational areas of the Company. F9 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) o As discussed in Note 13, the Company has entered into a credit and security agreement with its largest supplier, Klaussner Furniture Industries, Inc. ("Klaussner") (which accounts for approximately 73% of the Company's purchases of merchandise) which, based on current terms, effectively extended the payment terms for merchandise shipped from 60 days to 81 days. As indicated above, the Company has restated its financial statements as at August 31, 1993 and for the year then ended to include the accounts of the LP's in which the Company is the general partner. Presented below is the effect of such restatement on previously reported results: Net sales (as previously reported) $38,704 Net sales of LP's 25,644 ------- Net sales, as restated $64,348 ======= Earnings before income taxes (as previously reported) $ 4,730 Losses of LP's (4,111) ------- Earnings before taxes, as restated $ 619 ======= The financial statements for the year ended August 31, 1993, before the above restatement, were reported upon by BDO Seidman. On May 2, 1995, BDO Seidman advised the Company that "information has come to our attention that causes us to conclude that we can no longer rely on management's representations and, accordingly, we are hereby withdrawing our opinion on the 1993 consolidated financial statements...(of the Company) expressed in our report dated November 19, 1993". They further advised that "this information causes us to believe that the 1993 financial statements may be materially misstated as a result of the accounting for the Company's investment in Jennifer L.P. III". (2) Summary of Significant Accounting Policies ------------------------------------------ Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of Jennifer Convertibles, Inc. and its subsidiaries and the LP's. A subsidiary of the Company is the general partner of each of the LP's. Fiscal Year ----------- Commencing with the year ending August 27, 1994, the Company has adopted a fiscal year ending on the last Saturday in August which would be either 52 or 53 weeks long. Previously, the fiscal year ended on August 31. Cash and Cash Equivalents ------------------------- The Company considers all short-term, highly liquid instruments with a maturity of three months or less to be cash equivalents. Cash equivalents, consisting principally of money market instruments and United States Treasury bills as of August 27, 1994 and August 31, 1993, total $6,325 and $2,800, respectively. F10 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) Merchandise Inventories ----------------------- Merchandise inventories are stated at the lower of cost (determined on the first-in, first-out method) or market and is physically located as follows: 8/27/94 8/31/93 ------- ------- Showrooms $ 4,685 $2,763 Warehouses 5,463 1,109 ------- ------ $10,148 $3,872 ======= ====== Vendor discounts and allowances in respect to merchandise purchased by the Company are included as a reduction of inventory and cost of sales. Investments in Government Securities ------------------------------------ Investments in government securities to be held for indefinite periods of time and not intended to be held to maturity are carried at the lower of cost or market. Store Fixtures, Equipment and Leasehold Improvements ---------------------------------------------------- Store fixtures and equipment, including property under capital leases, are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over estimated useful lives or, when applicable, the life of the lease, whatever is shorter. Betterments and major remodeling costs are capitalized. Leasehold improvements are capitalized and amortized over the shorter of their estimated useful lives or the terms of the respective leases. Goodwill -------- Goodwill consists of the excess of cost of the Company's investments in certain subsidiaries over the fair value of net assets acquired. Impairment is assessed based on cash flows of the related stores. Goodwill is being amortized over forty years from the acquisition date using the straight-line method. Accumulated amortization at August 27, 1994 and August 31, 1993 amounted to $521 and $504, respectively. Deferred Lease and Other Intangible Costs ----------------------------------------- Deferred lease costs, consisting primarily of lease commissions and payments made to assume existing leases are deferred and amortized over the term of the lease. Pre-opening costs are expenses associated with the opening of new stores which are deferred and amortized over a one year period. Deferred Rent and Allowances ---------------------------- Pursuant to certain of the Company's leases, rent expense charged to operations differs from rent paid because of the effect of free rent periods and work allowances granted by the landlord, Accordingly, the Company has recorded deferred rent and allowances of $6,494 and $3,718 at August 27, 1994 and August 31, 1993, respectively. Rent expense is calculated by allocating total rental payments, including those attributable to scheduled rent increases reduced by work allowances granted, on a straight-line basis, over the respective lease term. F11 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) Revenue Recognition ------------------- Sales are recognized upon delivery of the merchandise to the customer. A minimum deposit of 33% is typically required upon placing a sales order. (Loss) Earnings Per Share ------------------------- (Loss) earnings per share for the years ended August 27, 1994, August 31, 1993 and 1992 were computed by dividing the net (loss) earnings by the weighted average number of shares of Common Stock and Common Stock equivalents outstanding where applicable during the period using the modified treasury stock method. Fully diluted earnings per share for the year ended August 31, 1993, based on assumed conversion of convertible subordinated debentures is not presented as the effect is antidilutive. Advertising ----------- Advertising costs are expensed as incurred. Concentration of Risks The Company purchases 95% of its inventory from two suppliers (73% and 22%, respectively) under normal trade terms. The larger supplier, Klaussner Furniture Industries, Inc. has executed a Credit and Security Agreement with the Company (See Note 13). The Company utilizes many local banks as depositories for cash receipts received at its showrooms. Such funds are transferred weekly to concentration accounts maintained at one commercial bank. At August 27, 1994, amounts on deposit with this one bank totalled 24% of total cash. Use of Estimates ---------------- The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recent Pronouncements --------------------- In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" which is effective for the Company's 1996 financial statements. SFAS No. 123 allows companies to either account for stock-based compensation under the new provisions of SFAS No. 123 or under the provisions of APB No. 25, but requires pro forma disclosure in the footnotes to the financial statements as if the measurement provisions of SFAS No. 123 had been adopted. At this time, the Company intends to continue accounting for its stock-based compensation in accordance with the provisions of APB No. 25. As such, the adoption of SFAS No. 123 will not impact the financial position or results of operations of the Company. F12 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) (3) Related Party Transactions -------------------------- Prior to January 1, 1994, merchandise was purchased and warehoused for the Company and the L.P.'s by the Private Company under a 15-year Warehousing Agreement dated November 3, 1986. In connection with this agreement, the Private Company also provided services relating to purchasing, distribution, customer service, data entry processing and other related services. Such agreement did not preclude the Company from purchasing merchandise directly from other parties or using other warehousing facilities. Pursuant to this agreement, the Company was obligated to pay for inventory at the Private Company's cost, net of vendor discounts and allowances but the LP's did not receive the vendor discounts and allowances. On January 1, 1994, the Company assumed the purchasing responsibility for itself (see below). The Company and LP's pay a monthly warehousing fee equal to 5% of the retail sales prices and fabric protection revenue collected from customers. Additionally, the Private Company provides fabric protection, warranty services and freight services at pre-determined rates. The Company's cost of sales includes these charges. Revenue from customers for fabric protection services is included in net sales. Indicated below are the amounts charged by the Private Company: Year Ended 8/27/94 8/31/93 8/31/92 -------- -------- -------- Included in Cost of Sales: Purchases of inventory $18,230 $31,545 $16,750 Freight* 2,122 - - Fabric protection services 3,298 2,323 1,061 Warehousing fees 4,871 3,217 1,669 ------- ------- ------- Total $28,521 $37,085 $19,480 ----- ======= ======= ======= *For periods prior to January 1, 1994, freight was included in the purchases of inventory. The Company has negotiated new operating arrangements with the Private Company subject to execution of definitive agreements and court approval of the settlement of various class and derivative actions (See Note 13). The Company and the LP's rely upon the Private Company to provide and maintain substantially all data entry processing and other related services that support their business. These services provided to the Company are staffed by employees of the Private Company. Other related services principally include all accounts payable (non-merchandise), all payroll preparation services, inventory control reporting and certain store cash management activity. Additionally, customer service and lifetime fabric guarantees to customers, when purchased, are provided by the Private Company. Effective January 1, 1994, the Company assumed the responsibility from the Private Company for purchasing merchandise for itself, the LP's, the Unconsolidated Licensees and the Private Company. The Company acquired from the Private Company the inventory that was in the warehouse on January 1, 1994 for $2,575 which was the Private Company's cost basis for such inventory. During the year ended August 27, 1994 (which only includes the period January 1, 1994 through August 27, 1994) approximately $7,478 of inventory was purchased by the Private Company through the Company and $2,350 of inventory was purchased by Unconsolidated Licensees through the Company. In addition, effective January 1, 1994, the Private Company transferred to the Company the right to receive the benefit of any vendor discounts and allowances in respect to merchandise F13 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) purchased by the Company on behalf of the LP's and certain other licensees. The Company had always been entitled to the benefit of such discounts in respect to merchandise purchased by the Company for its stores. To evidence its obligation for the discounts that had accrued with respect to merchandise purchased by the Company, the Private Company executed a promissory note in the amount of $1,000. This note, which bears interest at 8% per annum, is payable in equal monthly installments over three years commencing August 1, 1994. In addition, since the Private Company retained the right to receive the benefit of any discounts refunded or credited by suppliers in respect of merchandise purchased by the Private Company through the Company, for the period January 1, 1994 through August 27, 1994, an amount equal to $471 was remitted to the Private Company on account of discounts for such period. Prior to January 1, 1994, the Company was party to Advertising Agreements with the Private Company. Pursuant to these agreements, the Company could elect, on a case-by-case basis, to participate in particular joint advertising programs with the Private Company for a fee not to exceed 8% of the aggregate sales of the Company's New Jersey and Connecticut stores. Such fee was based on an equitable portion (as defined in the Advertising Agreements) of the Private Company's costs. The Company had a similar agreement for its stores located in New York, except that such stores paid a flat 8% of sales for advertising. During the years ended August 27, 1994, August 31, 1993 and 1992, $3,786, $7,158 and $1,971, respectively, was expended under the Advertising Agreements. The amount expended under the Advertising Agreements for the fiscal year ended August 27, 1994 only includes the period September 1, 1993 through December 31, 1993, which was the period such agreements were in effect. Effective January 1, 1994, the Company assumed the responsibility of advertising for itself, the LP's, the Unconsolidated Licensees and the Private Company. Under the new arrangement, the Private Company and Unconsolidated Licensees are charged an amount which approximates their pro rata share of advertising costs which aggregated $1,718 for the year ended August 27, 1994. Two executive officers of the Company own interests in certain Unconsolidated Licensee stores. Rami Abada, Executive Vice President and Chief Operating Officer of the Company owns a 20% interest in Southeastern Florida Holding Corp. ("S.F.H.C.") which owns six licensed stores. During the year ended August 27, 1994, such corporation incurred approximately $252 in royalties to the Company and made principal and interest payments to the Company of approximately $151 in respect of a 9% secured note, due December 31, 2001 in the original principal amount of $810 (which principal amount was $661 as of August 27, 1994). In addition, S.F.H.C. owes the Company $500 under a Revolving Credit Agreement pursuant to which the entire available revolving credit loan has been drawn down. Such loan bears interests and is payable at prime plus 3% and was payable in full on June 1, 1995 but was not paid. The same executive also owns a 20% interest in two other corporations that are also part of the Unconsolidated Licensees. During the year ended August 27, 1994, such corporations incurred an aggregate of approximately $106 in royalties owed to the Company (See Note 13). Ronald Rudzin, Senior Vice President - Retail Stores of the Company owns four licensed stores and his father owns two licensed stores which during the two years ended August 27, 1994 incurred royalties aggregating approximately $283 and $294 owed to the Company (See Note 10). All amounts due from the Unconsolidated Licensees including S.F.H.C. are fully reserved due to the uncertainty of collection. F14 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) A reserve has been provided in the consolidated financial statements at August 27, 1994 for amounts due from these entities, as follows: Unconsolidated Private Licensees (Other Company than S.F.H.C.) S.F.H.C. Totals ------- -------------- -------- ------ Gross amount due $ 1,832 $ 972 $ 2,312 $ 5,116 Reserves -0- (972) (2,312) (3,284) -------- -------- -------- -------- Net Amount $ 1,832 $ -0- $ -0- $ 1,832 ======== ======== ======== ======= The Private Company has stated that, if the settlement described in Note 13 is not consummated, it may assert claims of approximately $1,200 against the Company for various additional amounts owed from prior years. The Company believes the claims are either without merit or would be exceeded by the amount of counter-claims the Company would make under the circumstances. Accordingly, the Company has not provided for any losses that may occur as a result of this assertion. Until October 28, 1993, the Private Company owned certain trademarks and had granted the Company a royalty-free license to use and to sublicense and franchise the use of such trademarks throughout the world, except New York State. On October 28, 1993 the Licensor, for nominal consideration, assigned these trademarks to the Company. The Company then granted the Private Company a perpetual, royalty-free license to use and to sublicense and franchise the use of such trademarks in the State of New York. The license is exclusive in such territory, subject to certain exceptions. The Company is one of the guarantors of a $5,000 bank mortgage on the Private Company's warehouse facility utilized by the Company which is payable in quarterly installments with a lump sum due in October 1999. The Company has guaranteed a portion of the debt equal, at any time, to 60% of the aggregate amount of the debt then outstanding (See Note 13 - Subsequent Events - Credit and Security Agreement with Klaussner, paragraph B). The Company is entitled to an annual fee of 1/2 of 1% of the amount guaranteed from the Private Company. The principal stockholders of the Company and the Private Company have agreed to indemnify the Company against any loss under the guarantee. In June 1988, the Company received a ten-year option to purchase the warehouse facility. The option price for the facility is its original appraised value of approximately $9,000 increasing by $900 each year during the option period. Effective September 1, 1991, the Company entered into a five-year employment agreement with its President and Chief Executive Officer, Harley Greenfield, pursuant to which he agreed to devote his full time to the business of the Company and not to compete with the Company during the term of his employment agreement or for a period of one year thereafter. In lieu of cash compensation, the President was granted options to purchase 150,000 shares of Common Stock at $8.375 per share, the market value on the date of grant, and therefore no compensation charge was recorded in any of the years. Such options vest at the rate of 30,000 shares per year, subject to acceleration for changes of control, mergers and similar events. Effective September 1, 1994, Harley Greenfield, the President and Chief Executive Officer, and Edward Seidner, who became an Executive Vice President on such date, began receiving a salary of $400 and $300 per annum, respectively, from the Company. In addition, they receive substantial economic benefits from the Private Company. F15 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) Effective January 1, 1994, Rami Abada, Executive Vice President and Chief Operating Officer, and Ronald Rudzin, Senior Vice President - Retail Stores, each began receiving a salary of $150 per annum from the Company. In addition, they receive substantial economic benefits from the Private Company and certain Unconsolidated Licensees. Another director (and stockholder) of the Company received approximately $371 in legal fees in 1994. Further, he owns a 20% interest in each of two Private Company stores and receives substantial economic benefits from the Private Company. (4) Investments in Government Securities The investment in government securities at August 31, 1993 is stated at the lower of cost or market and matures on July 15, 2002. During the fiscal year ended August 27, 1994, these securities were sold for a gain of $336. (5) Store Fixtures, Equipment and Leasehold Improvements August 27, August 31, 1994 1993 ---------- ---------- Automobiles $ 88 $ 88 Store fixtures and furniture 6,190 3,262 Leasehold improvements 4,850 2,525 Computer equipment 429 323 ------- ------ 11,557 6,198 Less: Accumulated depreciation and amortization 2,856 1,825 ------- ------ $ 8,701 $4,373 ======= ====== Equipment cost at August 27, 1994 includes $870, and accumulated depreciation and amortization includes $328 on equipment under capital leases. (6) Income Taxes Effective September 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". The cumulative effect of this accounting change did not have a material effect on the financial condition or results of operations for the Company. Components of income tax expense (benefit) are as follows: Year Ended ---------------------------- 8/27/94 8/31/93 8/31/92 ------- ------- ------- Current: Federal $(593) $113 $32 State 271 -- 166 ----- ----- ----- (322) 113 198 ----- ----- ----- Deferred: Federal -- -- 11 State -- -- 11 ----- ----- ----- -- -- 22 ----- ----- ----- Federal charge in lieu of income taxes -- -- 748 ----- ----- ----- $(322) $113 $968 ===== ===== ===== F16 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) Expected tax (benefit) based on the statutory rate is reconciled with actual tax (benefit) for the year ended August 27, 1994, as follows: "Expected" tax (benefit) (34.0)% Increase (reduction) in taxes resulting from: State income tax, net of federal income tax benefit 1.8 % Non-deductible items 7.0 % Other (2.5)% Establishment of valuation allowance 25.5 % ------ (2.2)% ====== The difference between the expected income tax expense and the actual income tax expense is due principally to the deduction of state income taxes in 1993 and 1992, and the deferred gain on sale of subsidiaries in 1993. In 1992, net operating loss carryforward were utilized to reduce federal income taxes which would otherwise have been payable. The benefit of this reduction has been shown as an extraordinary item in the statement of operations. The principal components of deferred tax assets, liabilities and the valuation allowance at August 27, 1994 are as follows: Deferred tax assets: Reserve for losses on loans and advances $1,314 Accrued partnership losses 2,491 Deferred rent expense 1,265 Inventory capitalization 216 Other expenses for financial reporting, not yet deductible for taxes 260 -------- Total deferred tax assets, before valuation allowance 5,546 Less: Valuation allowance (3,767) -------- Total deferred tax assets $1,779 ======== F17 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) Deferred tax liabilities: Difference in book and tax basis of fixed assets 1,342 Other 437 ----- Total deferred tax liabilities 1,779 ----- Net deferred tax assets $ -0- ====== The Company's deferred tax asset has been fully reserved since it is considered more likely than not that the amount will not be realized. At August 27, 1994, a valuation allowance of $3,767 was established. (7) Stockholders' Equity In 1992, the Company issued $11,500 principal amount of 8 1/2% Convertible Subordinated Debentures ("Debentures") due July 15, 2002. The Debentures were convertible into Common Stock at any time prior to maturity at a conversion price of $8.75 per share. Additionally, the Company issued to the underwriter (the "Debenture Underwriter") warrants to purchase 100,000 shares of Common Stock exercisable for a period of four years commencing July 1992, at a price equal to 120% of the closing price of the Common Stock on July 8, 1992 ($8.375). On January 18, 1993, the Company redeemed all $11,500 principal amount of its Debentures in exchange for the issuance of 1,314,256 shares of Common Stock. In connection with this transaction, the Debenture Underwriter and another consultant to the Company, JCI Consultant, L.P. (See Note 11), received $173 and $180, respectively, for financial consulting services. Debenture conversion costs of $494, including legal fees, accounting fees and miscellaneous fees, were paid by the Company in connection with the conversion. Stockholders' equity was increased by the $11,500 principal amount of Debentures converted into Common Stock, net of the related unamortized debt costs of $1,609 and the conversion costs of $494. In the fiscal year ended August 27, 1994, under the terms of the limited partnership agreements for LP III, LP IV, LP V, LP VI, LP VII and LP VIII (see Note 11), the three limited partners each purchased for $170 five-year warrants to purchase 60,000 shares of the Company's Common Stock at an exercise price of $15.625 per share. Each of the limited partners paid approximately $20 in 1994 and issued a $150 term note to the Company as payment for the warrants. These notes bear interest at a rate of 6% per annum and are payable in three annual installments of $50 each commencing in June 1994. The notes receivable from warrant holders are recorded in Stockholders' Equity and were not paid in 1995 in accordance with the terms of the note (See Note 13). F18 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) (8) Stock Options In November 1986, the Company adopted an Incentive and Non-Qualified Stock Option Plan (the "1986 Plan") under which 150,000 shares of Common Stock were reserved for issuance to selected management and other key employees of the Company. The Amended and Restated 1991 Incentive and Non-Qualified Stock Option Plan (the "1991 Plan" and together with the 1986 Plan hereinafter referred to as the "Plans") was adopted by the Company in September 1991 and amended in April 1992. Under the 1991 Plan, 700,000 shares of Common Stock were reserved for issuance to selected management and other key employees of the Company. The terms of both Plans are substantially similar. The exercise price with respect to qualified incentive options may not be less than 100% of the fair market value of the Common Stock at the date of grant. From time to time, the Company grants additional stock options outside of the Plans to individuals or entities in recognition of contributions made to the Company. Information regarding the Company's stock options under and outside the Plans is summarized below: Number of Shares ----------------------------- 1994 1993 1992 ------- ------- ------- Outstanding, beginning of year... 803,697 559,547 260,000 Granted (at $2.50 to $15.75 per share).............. 50,000 244,150 324,547 Exercised (at $2.75 to $4.00 per share)..................... ( 3,000) - (25,000) Canceled (at $2.75 to $15.75 per share) (114,150) - - --------- --------- --------- Outstanding, end of period (at $2.75 to $15.75 per share)..... 736,547 803,697 559,547 ========= ========= ========= Exercisable, end of period....... 545,053 548,931 397,047 ========= ========= ========= See Note 11 with respect to options outstanding held by JCI to purchase 1,200,000 shares of Common Stock of the Company. The number of shares of Common stock reserved for options available for grant under the Plans was 290,453 at August 27, 1994. (9) Commitments, Contingencies and Other Matters -------------------------------------------- Leases ------ The Company and LP's lease retail store locations under operating leases for varying periods through 2009 which generally are renewable at the option of the lessee. Certain leases contain provisions for additional rental payments based on increases in certain indexes. Future minimum lease payments and future minimum sublease rentals for all noncancelable leases with initial terms of one year or more consisted of the following at August 27, 1994: F19 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) Year Ending August ---------------------------------------- 1995......................... $ 12,045 1996......................... 11,967 1997......................... 11,848 1998......................... 11,197 1999......................... 10,322 Thereafter................... 44,934 --------- 102,313 Sub-lease income............. ( 2,218) --------- $100,095 ========= The Company has guaranteed the lease obligation of the California warehouse which is operated by the Private Company. The annual lease obligation of this location is $133 and the lease expires on September 30, 1998. Rental expense for all operating leases amounted to approximately $12,456, $7,097 and $2,896, net of sublease income of $211, $197 and $192 for the years ended August 27, 1994, August 31, 1993 and 1992, respectively. The Company and L.P.'s have long-term capital leases for certain equipment. The leases are for periods of three to five years with an option to purchase at the end of the lease periods for a nominal price. The following is a schedule of future lease payments for the capital leases: Year Ending August --------------------------------------- 1995.............................. $256 1996.............................. 187 1997.............................. 153 1998.............................. 153 1999.............................. 129 ---- 878 Amount representing interest...... (119) ---- Present value of minimum lease payments................... 759 Less: current portion............. 282 ---- $477 ==== Accrued Expenses and Other Current Liabilities ---------------------------------------------- The components of accrued expenses and other current liabilities are: 8/27/94 8/31/93 ------- ------- Sales tax $ 592 $ 184 Advertising 112 87 Payroll 300 135 Legal 1,589 100 Accounting 1,365 100 Other 1,357 1,144 ------ ------ $5,315 $1,750 ====== ====== Advertising Expense ------------------- Advertising expense for the years ended August 27, 1994, August 31, 1993 and August 31, 1992 aggregated $11,357, $7,158 and $1,971, respectively. F20 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) Other Conclusions of the Independent Committee A draft complaint ("Complaint") on behalf of an unnamed plaintiff was delivered to the Company in March 1994. The Complaint raised certain issues and potential causes of action that may exist in favor of the Company against the Private Company and others. The Company's President advised the Board of Directors that, in his view, the Complaint was without merit. The Board appointed an independent committee (the "Committee") consisting of one director to investigate the allegations in the Complaint and certain other matters. On November 22, 1994, the same director who was on the Committee submitted a letter to the President of the Company which contained information relevant to the (1) Funding of S.F.H.C. (See Note 11) and (2) the funding of Limited Partnerships ("L.P.'s") III through V (See Note 11). The letter essentially detailed the flow of funds from the Private Company, certain Unconsolidated Licensees and the Company to S.F.H.C. and its subsidiary ("Summit") (See Note 11) regarding these transactions. Additionally, it disclosed that as of August 27, 1994, S.F.H.C. had a receivable from officers of $1,861. It asserted "that neither (a) the payment to fund S.F.H.C.'s purchase of the stock of Summit nor (b) the capital contributions to LP's III through V were obtained from sources outside the Company or the Private Company". On December 2, 1994, the Board of Directors of the Company received the Summary Report of Counsel to the Independent Committee which, amongst other matters, concluded that it "has reviewed many significant related party transactions and recommends to the Board that the Company assert claims to recover damages for harm caused the Company". On January 26, 1995, the Board of Directors received the "Final Report of Counsel to the Independent Committee of the Board of Directors" which reached the same conclusions and recommendations. On March 10, 1995, the Board of Directors received the "Response of Harley Greenfield to the January 26, 1995 Final Report of Counsel to the Independent Committee" that asserted that there were no valid claims. On April 3, 1995, it received a similar response from a financial consultant to the Company to the letter dated November 22, 1994 from Michael Colnes to Harley Greenfield that asserted that there was nothing improper. Class Action and Derivative Action Lawsuits ------------------------------------------- Between December 6, 1994 and January 5, 1995, the Company was served with eleven class action complaints and six derivative action lawsuits which deal with losses suffered as a result of the decline in market value of the Company's stock as well as the Company having "issued false and misleading statements regarding future growth prospects, sales, revenues and net income". The Company and its counsel are attempting to resolve the lawsuits but they can not presently determine the ultimate outcome of such resolutions and its impact on the Company's financial condition and results of operations (See Note 13). F21 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) Securities and Exchange Commission Investigation On December 9, 1994, the Company was advised that the Securities and Exchange Commission (SEC) was conducting an inquiry of the Company's affairs "to determine whether there have been violations of the federal securities laws". The SEC requested that the Company voluntarily provide certain documents in connection with its December 2, 1994 press release "concerning the adjustment in the valuation of certain subsidiaries on the Company's balance sheet". Since that date, the SEC has also requested the Final Report of Counsel to the Independent Committee of the Board of Directors and the November 22, 1994 letter from a director of the Company to the President (as more fully described above). Additionally, the SEC requested the "responses" to these documents and the Company furnished them with the "Response of Harley Greenfield to the January 26, 1995 Final Report of Counsel to the Independent Committee" dated March 10, 1995 and the "Response of Jerome I. Silverman to the letter dated November 22, 1994 from Michael Colnes to Harley Greenfield" dated April 3, 1995. On May 3, 1995, the SEC commenced a formal investigation into the affairs of the Company. Subpoenas have been issued to the Company and certain of its current and former management to furnish various contracts and accounting records which have been complied with. The outcome of the SEC investigation is not presently determinable. NASDAQ Suspension Effective April 17, 1995, the NASDAQ Listing Qualifications Committee (the "Qualifications Committee") reviewed the request of the Company for an extension of its current exception to the filing requirements for continued listing on the NASDAQ National Market. The Qualifications Committee determined to deny the Company's request and accordingly, the Company's Common Stock was delisted from the NASDAQ stock market. (10) Sale of Subsidiaries In September 1990, the Company sold two of its stores to a licensee of a New York store, and effective December 27, 1990, the Company sold four of its stores for the assumption of certain liabilities and $10 in cash per store to the same licensee. During the fiscal year ending August 27, 1994, one of the purchaser's of such stores, formerly an employee of the Private Company, became an executive officer of the Company. The Company also entered into a ten-year license agreement with the purchasers pursuant to which such stores pay the Company a royalty of 5% of their sales for the right to use the "Jennifer Convertibles" name (See Note 3). The purchasers assumed the liabilities owed by such stores, including liabilities owed to the Company, in the form of six ten-year, non-interest bearing promissory notes with aggregate annual payments of approximately $150, with additional payments required based upon sales in excess of certain minimum amounts. Due to the lack of significant cash consideration at the date of sales, the Company accounted for the sales using the cost recovery method until the fourth quarter of 1993. During that quarter cumulative aggregate principal payments exceeded 25% of the value of the non-interest bearing notes discounted at an interest rate of 8% per annum. Based upon this substantive investment by the purchasers, the Company recognized the gain on the sales of $480 which is included in other income in the accompanying 1993 consolidated statement of operations. The balance of the notes, net of imputed interest at the rate of 8% are as follows: F22 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) August 27, August 31, ---------- ---------- 1994 1993 ---- ---- Notes receivable $ 810 $ 936 Less: imputed interest (270) (372) ------ ------ Notes receivable, net $ 540 $ 564 ====== ====== The purchasers of the stores have assumed the Company's obligations under the store leases. However, the Company remains a guarantor of the leases and, therefore, is contingently liable for claims arising under the terms of the respective leases in the aggregate amount of $40. (11) Other Agreements ----------------- JCI Consulting Agreement ------------------------ On July 29, 1994, the Company reached an agreement with JCI Consultant, L.P. ("JCI") to terminate a February 25, 1992 consulting agreement with JCI pursuant to which, among other things, JCI rendered advice on the establishment and financing of Company-owned and licensed stores. The consulting fees were to have been paid at the rate of $10 per month through February 1996, plus an amount each fiscal quarter through August 2010 equal to the greater of (i) $100 or (ii) 10% of the Company's consolidated pre-tax income for such quarter, until such time as an aggregate of $7,980 in consulting fees had been paid. Under the terms of the termination agreement, the Company paid $2,500 and JCI waived the right to receive any further consulting fees of approximately $6,500 (the remaining portion of the $7,980) which might otherwise have become payable over the term of the Consulting Agreement. JCI no longer has the right to nominate one person to the Company's Board of Directors but has retained all rights in and to the options to purchase 1,200,000 shares of Common Stock at $8.00 per share which were previously granted to JCI. Such options terminate on March 21, 2001 and become exercisable on April 1, 1996, subject to acceleration under certain circumstances. Under a ten-year Voting Trust Agreement expiring March 21, 2001, the Chief Executive Officer and President of the Company will be the voting trustee for the shares of Common Stock which may be received by JCI upon the exercise of the option. Furthermore, in connection with the termination of the Consulting Agreement, JCI agreed that, except for the aforementioned option shares, it would not at any time acquire, directly or indirectly, more than 5% of the issued and outstanding shares of Common Stock of the Company for a period ending July 29, 2000. Contemporaneous with the granting of the options to JCI, the Company, JCI, the Principal Stockholders and the Private Company entered into a registration and sale agreement (the "Registration Agreement") pursuant to which JCI has certain demand and "piggy-back" registration rights. Subject to certain exceptions, the Registration Agreement prohibits JCI from selling or transferring, or otherwise disposing of any of the option shares without the prior written consent of the Company until March 1996. In addition, subject to certain exceptions, the Registration Agreement grants a right of first refusal to the Company to purchase all option shares which are proposed to be sold. If the Company declines to exercise such right of first refusal, the Principal Stockholders and the Private Company will have the right of first refusal. F23 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) In connection with the offering of the Debentures (see Note 7), JCI received a fee of $230 for its assistance in introducing the Company to the Debenture underwriter and for negotiating certain of the terms of the Debentures offering. JCI also received $180 for financial consulting services in connection with the redemption of the Debentures. Chicago Partnership Agreement ----------------------------- In July, 1991, the Company entered into agreements pursuant to which a limited partnership, Jennifer Chicago, L.P. (the "Chicago Partnership"), was established for the purpose of operating Jennifer Convertibles stores in the Chicago, Illinois metropolitan area. Pursuant to a 20-year License Agreement, the Company receives a royalty of 5% of sales from the Chicago Partnership's stores and has given the Chicago Partnership the exclusive right to open Jennifer Convertibles stores in the defined territory. Pursuant to the Partnership Agreement, the limited partner (a party related to JCI) contributed $990 to the Partnership and agreed to make additional capital contributions of up to $100. The Company made a capital contribution of $10. Under the Partnership Agreement, allocations and distributions shall, subject to certain exceptions, be made 99% to the limited partners and 1% to the General Partner. The Company has consolidated and recorded the operating losses of the Partnership in excess of limited partner's capital contributions in the Consolidated Statements of Operations (see Note 1). Under a Purchase Option Agreement, the Company has the right, commencing July 24, 1996, to purchase all the limited partners' interests in the Partnership for a price equal to the fair market value thereof, as determined by one or more investment bankers selected by the Company and the limited partners. Also, the limited partners can put their interests to the Private Company if certain executives of the Company and the Private Company own less than 700,000 shares of the Company's Common Stock. Summit Agreement ---------------- On October 9, 1990, the Company and a wholly-owned subsidiary entered into a series of agreements with Crown Investment Group, Ltd. ("Crown"), an affiliate of Klaussner, and its wholly-owned subsidiary, Summit, pursuant to which six licensed stores were established in Florida. Under a licensing agreement, the Company receives a 5% royalty on sales by the Florida stores. Pursuant to a management agreement, the Company provides management services, subject to limitations, to the Florida stores and will receive, each fiscal year, a fee equal to 1% of the consolidated net pre-tax income of Summit and its subsidiaries. During fiscal 1994, 1993 and 1992, Summit and its subsidiaries had a consolidated net loss. Pursuant to a Put Agreement, Crown had the right, subject to certain conditions, to put all the capital stock of Summit to the Company for 180,000 shares of the Company's Common Stock. Pursuant to an agreement dated December 30, 1991 between Crown and S.F.H.C., Crown sold to the Company all of the capital stock in Summit in exchange for 180,000 shares of Common Stock of the Company. Simultaneously, the Company sold the Summit capital stock to S.F.H.C. in exchange for $270 in cash and a note in the principal amount of $810 (See Note 3 and 13). The note is secured by the stock of Summit, bears interest at a rate of 9% per annum is payable over ten years in equal monthly installments of $10. An individual who is an officer and stockholder of S.F.H.C. became an executive officer of the Company in 1994. Such officer is indebted to the Private Company in the amount of $300 in connection with the purchase by S.F.H.C. of Summit (See Note 3 for a discussion of reserves established for these amounts). F24 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) On June 1, 1993, S.F.H.C. and the Company entered into a Revolving Credit Agreement which allows S.F.H.C. to borrow up to $500 from the Company. The revolving credit loans bear interest at the prime rate plus 3.0%, and are payable in full on June 1, 1995. As of August 27, 1994, $500 had been advanced, and has been fully reserved for (See Note 3 for a discussion of reserves established for these amounts). The operations of this entity are not consolidated in the Company's Consolidated Statements of Operations. Second Limited Partnership Agreement ------------------------------------ In November, 1992, Jennifer L.P. II (the "Second Partnership") was established by the Company for the purpose of operating Jennifer Convertible stores in the Detroit, St. Louis, Indianapolis, Milwaukee and Kansas City metropolitan areas on the same terms as the Chicago Partnership (see above). The Company has recorded the operating losses of the partnership in excess of the limited partners' capital contributions in the Consolidated Statements of Operations until the date of acquisition (See Note 1). On September 1, 1994, the Company purchased the entire limited partnership interest in the Second Partnership for $750 which was written off in the current fiscal year. Elegant Partnership ------------------- In early 1993, the Company's subsidiary became a general partner in a limited partnership ("Elegant Partnership") formed for the purpose of test marketing specialty retail home furnishing stores, operating under the names "Elegant Living" ("Elegant Living") and "Jennifer Leather" ("Jennifer Leather"). The Elegant Living stores specialized in the sale of upholstered living room furniture. The Jennifer Leather stores specialized in the sale of leather furniture. The Elegant Partnership's limited partner made a capital contribution to the Partnership of $2,000. The Company has recorded the operating losses of the partnership in excess of the limited partners' capital contributions in the Consolidated Statements of Operations until the date of acquisition (See Note 1). Effective November 30, 1993, the Company acquired for $2,250, the limited partner's interest in the Elegant Partnership through the Private Company, which had owned the option to acquire such interest from the limited partner for $2,250. Such amount was written off in the current fiscal year. The Company acquired five Jennifer Leather and four Elegant Living stores. The limited partner is an affiliate of Klaussner. Pursuant to the terms of the purchase agreement, the proceeds were used to fully liquidate that limited partner's debt to a bank which debt was guaranteed by Messrs. Greenfield, Love and Seidner. F25 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) LP III, LP IV, LP V, LP VI, LP VII and LP VIII Partnership Agreements --------------------------------------------------------------------- The Company has entered into six additional Limited Partnership Agreements (the "Agreements") establishing L.P.'s III, IV, V, VI, VII and VIII which require the limited partners to invest $1,000 in each partnership. The Agreements call for the opening of 25 Jennifer Convertible stores in each partnership. Under the terms of the Agreements, the Company is to receive a fee of $10 per store, plus a royalty of 5% of the partnership's sales. The Company has recorded the operating losses of the LP's in excess of the limited partners capital contributions in the Consolidated Statements of Operations (see Note 1). The Company has also provided a $500 revolving credit loan to each of the operating LP's. These loans bear interest at the prime rate plus 3%. As part of the Agreements, the Company received options to purchase the limited partners' interests commencing January 1999 at a price of five times the partnership's earnings before income taxes for the prior year, as defined. Also, pursuant to the agreement, the limited partners' can require the Company to purchase their interest at the aforementioned price formula commencing January 1998. Also, the limited partners can put their interests to the Company for either 100,000 shares of stock of the Company or $1,000 compounded at 25% if there is a change in management, as defined, through the year 2002. The investors have also purchased, for approximately $510, warrants exercisable between June 1994 and June 1998 to purchase 180,000 shares of the Company's Common Stock at an exercise price of $15.625 per share. As of August 27, 1994, the limited partners have paid approximately $60 and signed three year notes to pay $150 per year as payment for these warrants (See Note 13). As of August 27, 1994, capital contributions from the limited partners of $1,000 had been received for L.P. III, $500 had been received for L.P. IV and $500 had been received for L.P. V and $50 had been received for L.P. VI. A total of $100 has been received as funding for LP VII and LP VIII, but such LP's had no operations in the fiscal year ended August 27, 1994. $1,000 was received on December 1, 1994 for L.P.'s IV and V (see Note 9 - Conclusions of the Independent Committee and Note 13). (12) Revolving Credit Loan --------------------- On August 31, 1993, the Company entered into a bank credit agreement whereby the Company can borrow up to $2,000 under a revolving credit loan that expires August 30, 1996. The interest rate is equal to the higher of the Federal funds rate in effect on such date as the funds are borrowed, plus 1.5% or the prime rate in effect on such date plus 1%. Borrowings are collateralized by inventory. The Company has not drawn down on the line of credit. On February 23, 1995, the Company was advised that it was in default under the terms of the Revolving Credit Agreement because of its failure to file financial statements. Such default triggered a cross-default in connection with the Company's guarantee of the bank mortgage on the Private Company's warehouse facility as described in Note 3 and suspended the Company's ability to borrow any amount under the revolving credit agreement. On March 5, 1996, the Company terminated this bank credit agreement (See Note 13). F26 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) (13) Subsequent Events ----------------- Settlement of Derivative Litigation: ------------------------------------ In March 1996, the Company signed a Memorandum of Understanding ("Derivative Memorandum") for the purpose of settling all of the claims involving those parties in the derivative litigation. The Derivative Memorandum is subject to a settlement of all claims against the Company, its present and/or former officers, directors, certain accountants, consultants and representatives, the Private Company, its present and/or former officers, directors, employees, accountants, consultants and/or representatives and the discontinuance of the class action litigation presently pending. It also is conditioned upon mutual releases between the Company and the Private Company. Attorney's fees will be funded by an insurance carrier for one of the defendants other than the Company for $500. The Private Company will pay $165 in cash and the Company will pay the remaining portion of fees and expenses in ("Preferred Stock"). The Preferred Stock will have an aggregate value of $130, paying an annual dividend of 7% and convertible into Common Stock (at such time as the Company's Common Stock trades at $7.00 per share or higher) at $7.00 per share. This settlement is subject to execution of definitive documents and final court approval. In accordance with FASB Statement No. 5, the $130 value of the Preferred Stock has been accrued at August 26, 1995 as part of estimated settlement costs. Settlement of Class Action Litigation: -------------------------------------- In March 1996, the Company and the parties in the class action litigation signed a Memorandum of Understanding ("Class Memorandum") which is subject to a Stipulation of Settlement to be submitted to the court for final approval. The Class Memorandum provides for the payment to certain members of the class and their attorneys of an aggregate maximum amount of $7,000 in cash and Preferred Stock having a value of $370. (Terms and conditions of such Preferred Stock are described above.) The cash portion of the settlement will be funded entirely by insurance company proceeds. In accordance with FASB Statement No. 5, the $370 value of the Preferred Stock has been accrued at August 26, 1995. The proposed settlement of the class action litigation is a claims made settlement. All claimants who purchased the Company's Common Stock during the period from December 9, 1992 through December 2, 1994 and who held their stock through December 2, 1994, will be entitled to participate in the settlement. Settlement with the Private Company: ------------------------------------ The Company signed an agreement ("Settlement Agreement") with the Private Company subject to execution of definitive agreements and court approval and settlement of the derivative and class action litigation. The Settlement Agreement restructures the relationship between the Private Company and the Company in order to reduce and eliminate any alleged actual or potential conflicts of interest. F27 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) A) (Warehouse Services): The Settlement Agreement contemplates that until December 31, 1997, the Company will pay the Private Company for all services under the warehousing agreement 8.3% of the retail sales prices, less the costs of certain services that will be assumed by the Company previously provided by the Private Company, but no lower than 7.2% of sales. For 1998, the fee will be 7.2%. Upon the effective date, the Company will no longer pay the Private Company separately for "fabric protection" services. The Company has also agreed to pay an additional warehouse fee during the calendar year 1996 if the total retail sales of the Company are less than $135 million. The Company will pay the Private Company $65 for each million dollar shortfall in annual sales, adjusted quarterly based upon current sales projections, up to $650. The Company has also agreed to pay a redelivery fee to the Private Company of 3% of selling price for customer deliveries that have to be re-delivered to customers under certain circumstances. In 1997 and 1998, if an annual sales level of $140 million is achieved, the Private Company will pay back 50% of previous shortfall payments in each of such years. To the extent the shortfall is not so repaid in full, starting on January 1, 1999, the Private Company will repay the balance of the shortfall over seven years without interest. B) (Assignment of Real Property Interests of Warehouses): The Settlement Agreement contemplates that, effective January 1, 1999, the Company will receive all real property interests in the various warehouses serving the business along with the leasehold interests subject to mortgages and other security agreements. Such mortgage obligations will not exceed $2,850 at December 31, 1998. To the extent that the aggregate of all such mortgages is less than this amount as of that date, the Company will pay the Private Company the difference between $2,850 and the actual amount of such mortgages by way of set-off against the Private Company's obligation to the Company for warehousing services. C) (Warehouse Services to the Private Company): Commencing January 1, 1999, the Company will provide the Private Company all warehousing services for 2% of the Private Company's delivered retail selling prices, plus a fee for "fabric protection" services. D) (Freight Charges): The Company will continue to pay all freight charges (for inventory delivered to warehouses) through December 31, 1998, based upon an agreed schedule with the Private Company. E) (Assignment of Interest in Certain Limited Partnerships and Other Corporate Licensee): The Private Company will purchase the interests of the limited partnerships known as LP III, LP IV, LP V, LP VI, LP VII and LP VIII and the equity interest of the shareholders of S.F.H.C. and assign these interests to the Company. The Company, in turn, will release the limited partners and the shareholders, officers and directors of S.F.H.C. from all claims and/or obligations owed to the Company. F28 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) Although it is not reflected in the Settlement Agreement, it is currently contemplated that the limited partners of the Partnerships will receive new ten year warrants to purchase an aggregate of 180,000 shares of Common Stock at $7.00 per share. It is also contemplated that the limited partners will also retain the Original Warrants. There is no signed agreement with the limited partners as to the transfer of the Partnerships and S.F.H.C. described above and there can be no assurance that the Private Company will be able to obtain such agreements. If the Private Company is unable to obtain such agreements and to make the transfer, the settlement will not be consummated on the various terms outlined herein or possibly, at all. F) (Inter-Company Accounts): The Private Company will pay the Company under the offset agreement (described in J, below) $1,400 in resolution of certain inter-company account balances as of August 26, 1995 at $17 per month to be applied toward principal and interest at 6%, until repaid. G) (License of Computer Programs): Commencing January 1, 1999, the Private Company will license the Company to use and change the Private Company's computer programs without fee. The Company will also assume the obligations and personnel of the Computer Department, presently maintained by the Private Company. H) (Warranty and Fabric Protection): Upon execution of the Settlement Agreement, the Company will be responsible for any claims for breach of warranty relating to "fabric protection" in connection with sales by both the Company and the Private Company. I) (Amounts Due From Officers of S.F.H.C. of $1,200): The Private Company will assume and pay $1,200 of the debt of the officers of S.F.H.C. owed to S.F.H.C. This amount will be paid to the Company in 84 equal monthly installments, without interest, beginning January 1, 1999. J) (Offset Agreements): On November 1, 1995 and March 1, 1996, the Company and the Private Company entered into offset agreements. Such offset agreements permit the two companies to offset their current obligations to each other for merchandise purchases, warehouses fees, fabric protection fees and freight. The agreement contemplates that amounts owing in excess of $1,000 at any time will be paid in cash. As part of the offset agreement, the Private Company agreed to assume certain liabilities owed to the Company by the Unconsolidated Licensees. K) (Royalties): The Unconsolidated Licensees will pay to the Company any royalties owed under the offset agreement. The Private Company will pay royalties owed of $100 for stores that the Unconsolidated Licensees have closed commencing January 1, 1999 in 84 equal monthly installments without interest. F29 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) Credit and Security Agreement with Klaussner: ---------------------------------------------- On March 5, 1996, the Company and Klaussner executed a Credit and Security Agreement that provides the following: A) Klaussner effectively extended the payment terms for merchandise shipped from 60 days to 81 days and was provided with the following: 1) A security interest in all the Company's assets including accounts receivable, inventory, store fixtures and equipment, as well as the assignment of leaseholds, trademarks and a licensee agreement to operate the Company's business in the event of default and non-payment of the Company's guaranty. 2) The common stock holdings of Harley Greenfield, Edward Seidner and Fred Love, President of the Private Company have been pledged along with the pledge of the Private Company's stock interest in the Company. B) In addition, Klaussner agreed to lend $1,440 to the Private Company. The $1,440 was used to pay down the mortgage obligation of the warehouse corporation. In this connection, the Company's guarantee to the mortgagor was reduced to the lesser of 60% of the mortgage or $1,440 and the Company's bank revolving credit agreement was terminated. The mortgage obligation has a new maturity date of June 30, 1996. The $1,440 is in addition to $3,500 due from the Private Company to Klaussner outstanding at August 26, 1995, which liability was incurred by the Private Company prior to January 1, 1994. Agreement of Sale of Inwood, New York Warehouse: ------------------------------------------------ On March 7, 1996, the Private Company entered into an agreement ("Agreement") of sale for the Inwood, New York warehouse which has been the principal warehouse in the distribution system. The Agreement contemplates that, if consummated, the Company will receive from the Private Company payments of $25 per month for 84 months commencing January 1, 1999. The Agreement also contemplates that, effective December 1, 1996, the warehouse fee will be reduced to 7.2% of the retail sales prices and fabric protection revenue collected from customers. The Company's guarantee will be extinguished upon full payment of the related mortgage. On June 30, 1996, the Private Company completed the sale of the Inwood, New York warehouse and the Company's guarantee was terminated. Partnership Restructuring Agreements ------------------------------------ On September 26, 1996, a Partnership Restructuring Agreement ("PRA") was signed which had an effective date of November 1994. This PRA eliminated the Agreements for LP's VI, VII and VIII and took $50 of the original capital contributions for these LP's (total $150) and applied such funds as a payment towards the original Warrants received by the limited partners in connection with LP's III, IV and V. This transaction has been reflected in the financial statements at August 27, 1994 and August 26, 1995. In addition, the warrant notes aggregating $300 for the remaining 180,000 original Warrants have been extended for ten years (with 10% of principal due annually) and will bear interest at 7.12% per annum. For each annual principal payment which is not made, 10,564 of the outstanding original Warrants shall be cancelled. F30 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 27, 1994, August 31, 1993 and 1992 (In thousands except for share amounts) Subordination of Private Company Indebtedness to Harley Greenfield and ---------------------------------------------------------------------- Edward Seidner -------------- Subject to court approval of the Settlement Agreement, Messrs. Greenfield and Seidner have agreed to subordinate, until January 1, 1999 their right to receive payments in respect of the $10,273 owed to them by the Private Company, if the Private Company is in default in the payment of any cash obligation to the Company arising after August 7, 1996 after giving effect to any offsets as between Messrs. Greenfield and Seidner and the Private Company. Such subordination does not apply to any distribution in respect of a disposition of substantially all of the assets of the Private Company. F31 EX-3.2 2 BY LAWS OF THE COMPANY JENNIFER CONVERTIBLES, INC. A Delaware Corporation BY-LAWS Amended and Restated and October 28, 1996 ARTICLE I STOCKHOLDERS Section 1.1 Annual Meeting. An annual meeting of stockholders for the purpose of electing directors and of transacting such other business as may come before it shall be held each year at such date, time, and place, either within or without the State of Delaware, as may be specified by the Board of Directors. Section 1.2 Special Meetings. Special meetings of stockholders for any purpose or purposes may be held at any time upon call of the Chairman of the Board, if any, the President, the Secretary, or a majority of the Board of Directors, at such time and place either within or without the State of Delaware as may be stated in the notice. A special meeting of stockholders shall be called by the President or the Secretary upon the written request, stating time, place, and the purpose or purposes of the meeting, of stockholders who together own of record a majority of the outstanding stock of all classes entitled to vote at such meeting. Section 1.3 Notice of Meetings. Written notice of stockholders meetings, stating the place, date, and hour thereof, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given by the Chairman of the Board, if any, the President, any Vice President, the Secretary, or an Assistant Secretary, to each stockholder entitled to vote thereat at least ten days but not more than sixty days before the date of the meeting, unless a different period is prescribed by law. Section 1.4 Quorum. Except as otherwise provided by law or in the Certificate of Incorporation or these By-Laws, at any meeting of stockholders, the holders of a majority of the outstanding shares of each class of stock entitled to vote at the meeting shall be present or represented by proxy in order to constitute a quorum for the transaction of any business. In the absence of a quorum, a majority in interest of the stockholders present or the chairman of the meeting may adjourn the meeting from time to time in the manner provided in Section 1.5 of these By-Laws until a quorum shall attend. Section 1.5 Adjournment. Any meeting of stockholders, annual or special, may adjourn from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 1.6 Organization. The Chairman of the Board, if any, or in his absence the President, or in their absence any Vice President, shall call to order meetings of stockholders and shall act as chairman of such meetings. The Board of Directors or, if the Board fails to act, the stockholders may appoint any stockholder, director, or - 2 - officer of the Corporation to act as chairman of any meeting in the absence of the Chairman of the Board, the President, and all Vice Presidents. The Secretary of the Corporation shall act as secretary of all meetings of stockholders, but, in the absence of the Secretary, the chairman of the meeting may appoint any other person to act as secretary of the meeting. Section 1.7 Voting. Except as otherwise provided by law or in the Certificate of Incorporation or these By-Laws and except for the election of directors, at any meeting duly called and held at which a quorum is present, a majority of the votes cast at such meeting upon a given question by the holders of outstanding shares of stock of all classes of stock of the Corporation entitled to vote thereon who are present in person or by proxy shall decide such question. At any meeting duly called and held for the election of directors at which a quorum is present, directors shall be elected by a plurality of the votes cast by the holders (acting as such) of shares of stock of the Corporation entitled to elect such directors. Any action required to be taken or which may be taken at any annual or special meeting of the stockholders, may not be taken by any consent in writing of stockholders, without a meeting. Section 1.8 Advance Notice of Stockholder Nominations of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation except as may be otherwise provided in the Certificate of Incorporation of the Corporation with respect to the right of holders of preferred shares of the Corporation to nominate and elect a specified number of directors in certain circumstances. Nominations of persons for election to the Board may be made at any annual meeting of stockholders (a) by or at the direction of the Board (or any duly authorized committee thereof) or (b) by any stockholder of the Corporation (i) who is a - 3 - stockholder of record on the date of the giving of a notice provided for in this Section 1.8 and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 1.8 In addition to any other applicable requirements, for a nomination to be made by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs. To be in proper written form, a stockholder's notice to the Secretary must be set forth (a) as to each person whom the stockholder proposes to nominate for election as a director (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by the person and (iv) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of Directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules - 4 - and regulations promulgated thereunder; and (b) as to the stockholder giving the notice (i) the name and record address of such stockholder, (ii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder, (iii) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder, (iv) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to nominate the person named in its notice and (v) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a Director if elected. No person shall be eligible for election as a Director of the Corporation unless nominated in accordance with the procedures set forth in this Section 1.8. If the Chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. Section 1.9. Advance Notice by Stockholder of Proposed Business at Annual Meetings. No business may be transacted at an annual meeting of stockholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the Board (or any duly authorized committee - 5 - thereof) or (c) otherwise properly brought before the annual meeting by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 1.9 and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 1.9. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs. To be in proper written form, a stockholder's notice to the Secretary must set forth as to each matter such stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such stockholder, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder, (iv) a description of all - 6 - arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business and (v) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. No business shall be conducted at the annual meeting of stockholders except business brought before the annual meeting in accordance with the procedures set forth in this Section 1.9, provided, however, that, once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section 1.9 shall be deemed to preclude discussion by any stockholder of any such business. If the Chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted. ARTICLE II BOARD OF DIRECTORS Section 2.1 Number and Term of Office. The business, property, and affairs of the Corporation shall be managed by or under the direction of a Board of no less than three and no more than ten directors. The directors shall be elected by the holders of shares entitled to vote thereon at the annual meeting of stockholders, and each shall serve (subject to the provisions of Article IV) until the next succeeding annual meeting of stockholders and until his respective successor has been elected and qualified. - 7 - Section 2.2 Chairman of the Board. The directors may elect one of their members to be Chairman of the Board of Directors. The Chairman shall be subject to the control of and may be removed by the Board of Directors. He shall perform such duties as may from time to time be assigned to him by the Board. Section 2.3 Meetings. The annual meeting of the Board of Directors, for the election of officers and the transaction of such other business as may come before the meeting, shall be held without notice at the same place as, and immediately following, the annual meeting of the stockholders. Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board. Special meetings of the Board of Directors shall be held at such time and place as shall be designated in the notice of the meeting whenever called by the Chairman of the Board, if any, the President, or by one-third of the directors then in office. Section 2.4 Notice of Special Meetings. The Secretary, or in his absence any other officer of the Corporation, shall give each director notice of the time and place of holding of special meetings of the Board of Directors by mail at least five days before the meeting or by telegram, cable, radiogram, or personal service at least two days before the meeting. Unless otherwise stated in the notice thereof, any and all business may be transacted at any meeting without specification of such business in the notice. Section 2.5 Quorum and Organization of Meetings. A majority of the total number of members of the Board of Directors as constituted from time to time shall constitute a quorum for the transaction of - 8 - business, but, if at any meeting of the Board of Directors (whether or not adjourned from a previous meeting) there shall be less than a quorum present, a majority of those present may adjourn the meeting to another time and place, and the meeting may be held as adjourned without further notice or waiver. Except as otherwise provided by law or in the Certificate of Incorporation or these By-Laws, a majority of the directors present at any meeting at which a quorum is present may decide any question brought before such meeting. Meetings shall be presided over by the Chairman of the Board, if any, or in his absence by the President, or in the absence of both by such other person as the directors may select. The Secretary of the Corporation shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 2.6 Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business, property, and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have power or - 9 - authority in reference to amending the Certificate of Incorporation of the Corporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors pursuant to authority expressly granted to the Board of Directors by the Corporation's Certificate of Incorporation, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation, or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation), adopting an agreement of merger or consolidation under Section 251 or 252 of the General Corporation Law of the State of Delaware, recommending to the stockholders the sale, lease, or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of dissolution, or amending these By-Laws; and, unless the resolution expressly so provided, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of the State of Delaware. Each committee which may be established by the Board of Directors pursuant to these By-Laws may fix its own rules and procedures. Notice of meetings of committees, other than of regular meetings provided for by the rules, shall be given to committee members. All action taken by committees shall be recorded in minutes of the meetings. Section 2.7 Action Without Meeting. Nothing contained in these By-Laws shall be deemed to restrict the power of members of the Board of Directors or any committee designated by the Board to take any action required or permitted to be taken by them without a meeting. - 10 - Section 2.8 Telephone Meetings. Nothing contained in these By-Laws shall be deemed to restrict the power of members of the Board of Directors, or any committee designated by the Board, to participate in a meeting of the Board, or committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. ARTICLE III OFFICERS Section 3.1 Executive Officers. The executive officers of the Corporation shall be a President, one or more Vice Presidents, a Treasurer, and a Secretary, each of whom shall be elected by the Board of Directors. The Board of Directors may elect or appoint such, other officers (including a Controller and one or more Assistant Treasurers and Assistant Secretaries) as it may deem necessary or desirable. Each officer shall hold office for such term as may be prescribed by the Board of Directors from time to time. Any person may hold at one time two or more offices. Section 3.2 Powers and Duties. The Chairman of the Board, if any, or, in his absence, the President, shall preside at all meetings of the stockholders and of the Board of Directors. The President shall be the chief executive officer of the Corporation. In the absence of the President, a Vice President appointed by the President or, if the President fails to make such appointment, by the Board, shall perform all the duties of the President. The officers and agents of the Corporation shall each have such powers and authority and shall perform such duties in the management of the business, property, and affairs of the Corporation as generally pertain - 11 - to their respective offices, as well as such powers and authorities and such duties as from time to time may be prescribed by the Board of Directors. ARTICLE IV RESIGNATIONS, REMOVALS, AND VACANCIES Section 4.1 Resignations. Any director or officer of the Corporation, or any member of any committee, may resign at any time by giving written notice to the Board of Directors, the President, or the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein or, if the time be not specified therein, then upon receipt thereof. The acceptance of such resignation shall not be necessary to make it effective. Section 4.2 Removals. The Board of Directors, by a vote of not less than a majority of the entire Board, at any meeting thereof, or by written consent, at any time, may, to the extent permitted by law, remove with or without cause from office or terminate the employment of any officer or member of any committee and may, with or without cause, disband any committee. Any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares entitled at the time to vote at an election of directors. Section 4.3 Vacancies. Any vacancy in the office of any director or officer through death, resignation, removal, disqualification, or other cause, and any additional directorship resulting from increase in the number of directors, may be filled at any time by a majority of the directors then in office (even though less than a quorum remains) or, in the case of any vacancy in the office of any director, - 12 - by the stockholders, and, subject to the provisions of this Article IV, the person so chosen shall hold office until his successor shall have been elected and qualified; or, if the person so chosen is a director elected to fill a vacancy, he shall (subject to the provisions of this Article IV) hold office for the unexpired term of his predecessor. ARTICLE V CAPITAL STOCK Section 5.1 Stock Certificates. The certificates for shares of the capital stock of the Corporation shall be in such form as shall be prescribed by law and approved, from time to time, by the Board of Directors. Section 5.2 Transfer of Shares. Shares of the capital stock of the Corporation may be transferred on the books of the Corporation only by the holder of such shares or by his duly authorized attorney, upon the surrender to the Corporation or its transfer agent of the certificate representing such stock properly endorsed. Section 5.3 Fixing Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which, unless otherwise provided by law, shall not be more than sixty nor less than ten days - 13 - before the date of such meeting, nor more than sixty days prior to any other action. Section 5.4 Lost Certificates. The Board of Directors or any transfer agent of the Corporation may direct a new certificate or certificates representing stock of the Corporation to be issued in place of any certificate or certificates theretofore issued by the Corporation, alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen, or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors (or any transfer agent of the Corporation authorized to do so by a resolution of the Board of Directors) may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to give the Corporation a bond in such sum as the Board of Directors (or any transfer agent so authorized) shall direct to indemnify the Corporation against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen, or destroyed or the issuance of such new certificates, and such requirement may be general or confined to specific instances. Section 5.5 Regulations. The Board of Directors shall have power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, registration, cancellation, and replacement of certificates representing stock of the Corporation. - 14 - ARTICLE VI MISCELLANEOUS Section 6.1 Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization, and the words "Corporate Seal" and "Delaware". Section 6.2 Fiscal Year. The fiscal year of the Corporation shall begin on the 1st day of September in each year and terminate on the last day of August in each succeeding year. Section 6.3 Notices and Waivers Thereof. Whenever any notice whatever is required by law, the Certificate of Incorporation, or these By-Laws to be given to any stockholder, director, or officer, such notice, except as otherwise provided by law, may be given personally, or by mail, or, in the case of directors or officers, by telegram, cable, or radiogram, addressed to such address as appears on the books of the Corporation. Any notice given by telegram, cable, or radiogram shall be deemed to have been given when it shall have been delivered for transmission and any notice given by mail shall be deemed to have been given when it shall have been deposited in the United States mail with postage thereon prepaid. Whenever any notice is required to be given by law, the Certificate of Incorporation, or these By-Laws, a written waiver thereof, signed by the person entitled to such notice, whether before or after the meeting or the time stated therein, shall be deemed equivalent in all respects to such notice to the full extent permitted by law. - 15 - Section 6.4 Stock of Other Corporations or Other Interests. Unless otherwise ordered by the Board of Directors, the President, the Secretary, and such attorneys or agents of the Corporation as may be from time to time authorized by the Board of Directors or the President, shall have full power and authority on behalf of this Corporation to attend and to act and vote in person or by proxy at any meeting of the holders of securities of any corporation or other entity in which this Corporation may own or hold shares or other securities, and at such meetings shall possess and may exercise all the rights and powers incident to the ownership of such shares or other securities which this Corporation, as the owner or holder thereof, might have possessed and exercised if present. The President, the Secretary, or such attorneys or agents, may also execute and deliver on behalf of this Corporation powers of attorney, proxies, consents, waivers, and other instruments relating to the shares or securities owned or held by this Corporation. ARTICLE VII AMENDMENTS The holders of shares entitled at the time to vote for the election of directors shall have power to adopt, amend, or repeal the By-Laws of the Corporation by vote of not less than a majority of such shares, and except as otherwise provided by law, the Board of Directors shall have power equal in all respects to that of the stockholders to adopt, amend, or repeal the By-Laws by vote of not less than a majority of the entire Board. However, any By-Law adopted by the Board may be amended or repealed by vote of the holders of a majority of the shares entitled at the time to vote for the election of directors. - 16 - EX-10.27 3 CURRENT REPORT ON FORM 8-K FEB. 18, 1993 - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): February 18, 1993 JENNIFER CONVERTIBLES, INC. --------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 1-9681 11-2824646 ---------------- ---------------- ---------------- (State or other (Commission File (IRS Employer jurisdiction of Number) Identification incorporation) No.) 331 Route 4 West Paramus, New Jersey 07652 ------------------------------------------------------------ (Address of principal executive offices) Registrant's Telephone Number, including area code: (201) 343-1610 ------------------------------------------------------------ (Former Address, if changed since last report) - ------------------------------------------------------------------------------- Items 1-3: Inapplicable. Item 4: Changes in Registrant's Certifying Accountants On February 18, 1993, Registrant dismissed KPMG Peat Marwick ("Peat") as the Registrant's independent auditors. The Registrant's decision to dismiss Peat was recommended by the audit committee of Registrant's Board of Directors and by its full Board of Directors. Registrant's Board of Directors has decided to engage BDO Seidman ("BDO") as Registrant's principal accountant to audit Registrant's financial statements for the fiscal year ending August 31, 1993. Registrant and Peat have not had any disagreements during the past two fiscal years or any subsequent interim period with respect to matters of accounting principles or practices, financial statement disclosure or auditing scope, or procedure which, if not resolved to Peat's satisfaction, would have caused it to make reference to the subject matter of such disagreement in its reports. Peat's report on the financial statements for the past two years did not, in either year, contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the past two fiscal years and during the subsequent interim period preceding the dismissal of Peat, Peat did not advise the Registrant that: (i) the internal controls necessary for the Registrant to develop reliable financial statements did not exist; (ii) information had come to Peat's attention that led it to no longer be able to rely on management's representations or that made it unwilling to be associated with the financial statements prepared by management; (iii) there was a need to expand significantly the scope of its audit, or that information had come to the attention of Peat that if further investigated might (A) materially impact the fairness or reliability of either a previously issued audit report or the underlying financial statements, or the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (including information that might prevent it from rendering an unqualified report on those financial statements), or (B) cause Peat to be unwilling to rely on management's representations or be associated with the Registrant's financial statements, and due to the dismissal of Peat or for any other reason, Peat did not so expand the scope of its audit or conduct such further investigation; or (iv) information had come to the attention of Peat that it had concluded materially impacted the fairness or reliability of either (A) a previously issued audit report or the underlying financial statements, or (B) the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (including information that, unless resolved to the satisfaction of Peat, would have prevented it from rendering an unqualified audit report on those financial statements), and due to the dismissal of Peat, or for any other reason, the issue had not been resolved to the satisfaction of Peat prior to its dismissal. - 2 - During the past two fiscal years and the subsequent interim period prior to the engagement of BDO, the Registrant did not consult (nor did anyone on the Registrant's behalf consult) BDO with respect to either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Registrant's financial statements, and either a written report was provided to the Registrant or oral advice was provided that BDO concluded was an important factor considered by the Registrant in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was the subject of a disagreement between the Registrant and Peat or a reportable event described in the preceding paragraph. The Registrant has provided Peat with a copy of the disclosure set forth herein and has requested that Peat furnish it with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the statements made by the Registrant herein and, if not, stating the respects in which it does not agree. A copy of Peat's letter is filed as an Exhibit hereto. Items 5-6: Inapplicable. Item 7: Financial Statements, Pro Forma Financial Information and Exhibits Exhibit No. Description ----------- ----------- 1 Peat Letter, dated February 25, 1993, addressed to the Securities and Exchange Commission. - 3 - 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 hereunto duly authorized. February 25, 1993 JENNIFER CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------- Harley J. Greenfield, President - 4 - EX-10.28 4 CURRENT REPORT ON FORM 8-K SEPTEMBER 20, 1994 - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): September 20, 1994 JENNIFER CONVERTIBLES, INC. --------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 1-9681 11-2824646 ---------------- ---------------- ---------------- (State or other (Commission File (IRS Employer jurisdiction of Number) Identification incorporation) No.) 419 Crossways Park Drive Woodbury, New York 11797 ------------------------------------------------------------ (Address of principal executive offices) Registrant's Telephone Number, including area code: (516) 496-1900 ------------------------------------------------------------ (Former Address, if changed since last report) - ------------------------------------------------------------------------------- 75016.1 Items 1-3: Inapplicable. Item 4: Changes in Registrant's Certifying Accountants On September 19, 1994, Registrant's Board of Directors authorized the Chief Executive Officer (the "CEO") to change from BDO Seidman ("BDO") to KPMG Peat Marwick ("Peat") as the Registrant's independent auditors. On September 19, 1994, the CEO contacted BDO and advised BDO that Registrant was contemplating switching auditors. On September 20, 1994, BDO submitted its resignation. Registrant's Board of Directors has decided to engage Peat as Registrant's principal accountant to audit Registrant's financial statements for the fiscal year ended August 27, 1994. Peat was the Company's independent auditor during each of the fiscal years from the Company's inception in 1986 until and including the fiscal year ended August 31, 1992. BDO was the Company's independent auditor for the fiscal year ended August 31, 1993. Registrant and BDO have not had any disagreements during such fiscal year or any subsequent interim period with respect to matters of accounting principles or practices, financial statement disclosure or auditing scope, or procedure which, if not resolved to BDO's satisfaction, would have caused it to make reference to the subject matter of such disagreement in its reports. BDO's report on the financial statements for the fiscal year ended August 31, 1993 did not, in such year, contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the fiscal year ended August 31, 1993 and during the subsequent interim period preceding the resignation of BDO, BDO did not advise the Registrant that: (i) the internal controls necessary for the Registrant to develop reliable financial statements did not exist; (ii) information had come to BDO's attention that led it to no longer be able to rely on management's representations or that made it unwilling to be associated with the financial statements prepared by management; (iii) there was a need to expand significantly the scope of its audit, or that information had come to the attention of BDO that if further investigated might (A) materially impact the fairness or reliability of either a previously issued audit report or the underlying financial statements, or the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (including information that might prevent it from rendering an unqualified report on those financial statements), or (B) cause BDO to be unwilling to rely on management's representations or be associated with the Registrant's financial statements, and due to the resignation of BDO or for any other reason, BDO did not so expand the scope of its audit or conduct such further investigation; or (iv) information had come to the attention of BDO that it had concluded materially impacted the fairness or reliability of either (A) a previously issued audit report or the underlying financial statements, or (B) the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (including information that, unless resolved to the satisfaction of BDO, would have prevented it from - 2 - rendering an unqualified audit report on those financial statements), and due to the resignation of BDO, or for any other reason, the issue had not been resolved to the satisfaction of BDO prior to its resignation, except that, with respect to the audit to be conducted with respect to the fiscal year ended August 27, 1994, BDO advised Registrant that Registrant might need to consider changing its method of recognizing revenues from certain licensees and consider taking a reserve against such receivables unless payments from such licensees were guaranteed by a financially responsible third party. Registrant has received the oral agreement, subject to definitive agreements, of the affiliated private company (together with related entities, the "Private Company") to guarantee such payments. BDO has advised Registrant that it desired increased access to the books and records of the Private Company. The Private Company has indicated that it will provide Peat such access. The Registrant has authorized BDO to respond fully to the inquiries of Peat. During the fiscal year ended August 31, 1993 and the subsequent interim period prior to the engagement of Peat, Registrant did not consult (nor did anyone on the Registrant's behalf consult) Peat with respect to either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Registrant's financial statements, and either a written report was provided to the Registrant or oral advice was provided that Peat concluded was an important factor considered by the Registrant in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was the subject of a disagreement between the Registrant and BDO or a reportable event described in the preceding paragraph. The Registrant has provided BDO with a copy of the disclosure set forth herein and has requested that BDO furnish it with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the statements made by the Registrant herein and, if not, stating the respects in which it does not agree. A copy of BDO's letter is filed as an Exhibit hereto. Items 5-6: Inapplicable. Item 7: Financial Statements, Pro Forma Financial Information and Exhibits Exhibit No. Description ----------- ----------- 1 BDO Letter, dated September , 1994, addressed to the Securities and Exchange Commission. - 3 - 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 hereunto duly authorized. September , 1994 JENNIFER CONVERTIBLES, INC. By: -------------------------------- Harley J. Greenfield, President - 4 - EX-10.29 5 CURRENT REPORT ON FORM 8-K MAY 5, 1995 - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): May 5, 1995 JENNIFER CONVERTIBLES, INC. ---------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 1-9681 11-2824646 ---------------- ---------------- ---------------- (State or other (Commission File (IRS Employer jurisdiction of Number) Identification incorporation) No.) 419 Crossways Park Drive Woodbury, New York 11797 ------------------------------------------------------------ (Address of principal executive offices) Registrant's Telephone Number, including area code: (516) 496-1900 ------------------------------------------------------------ (Former Address, if changed since last report) - ------------------------------------------------------------------------------- Items 1-4: Inapplicable. Item 5: Other Events On May 5, 1995, the Registrant issued a press release with respect to the withdrawal by BDO Seidman of its report on the Registrant's fiscal 1993 financial statements. Items 6: Inapplicable. Item 7: Financial Statements, Pro Forma Financial Information and Exhibits Exhibit No. Description ----------- ----------- 1 Press Release, dated May 5, 1995. 2 Letter from BDO Seidman, dated May 2, 1995. - 2 - 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 hereunto duly authorized. Dated: May 5, 1995 JENNIFER CONVERTIBLES, INC. By: /s/ Harley J. Greenfield ------------------------------- Harley J. Greenfield, President - 3 - EX-10.30 6 CREDIT AGREEMENT CREDIT AGREEMENT by and between JENNIFER CONVERTIBLES, INC. AND IBJ SCHRODER BANK & TRUST COMPANY $2,000,000 Dated as of August 31, 1993 TABLE OF CONTENTS 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION 1 1.1. Definitions 1 1.2. Principles of Construction 11 2. AMOUNT AND TERMS OF LOANS 12 2.1. Loans 12 2.2. Note 12 2.3. Procedure for Borrowing 13 2.4. Termination or Reduction of Commitment 13 2.5. Prepaymnts of the Loans 13 2.6. Interest Rate and Payment Dates 14 2.7. Taxes; Net Payments 15 2.8. Use of Proceeds 16 2.9. Capital Adequacy 16 2.10. Bank's Records 17 3. FEES; PAYMENTS 17 3.1. Commitment Fee 17 3.2. Advisory Fee 17 3.3. Fees of Special Counsel 17 3.4. Treatment and Application of Payments 18 4. REPRESENTATIONS AND WARRANTIES 18 4.1. Subsidiaries; Capitalization 18 4.2. Existence and Power 19 4.3. Authority 19 4.4. Binding Agreement 19 4.5. Litigation 19 4.6. Required Consents 20 4.7. No Conflicting Agreements 20 4.8. Compliance with Applicable Laws 20 4.9. Taxes 20 4.10. Governmental Regulations 21 4.11. Federal Reserve Regulations; Use of Proceeds 21 4.12. Plans; Multiemployer Plans 21 4.13. Financial Statements 22 4.14. Property 22 4.15. Franchises, Intellectual Property, Etc. 22 4.16. Security Interests 23 4.17. Environmental Matters 23 4.18. Labor Relations 24 4.19. Burdensome Obligations 24 4.20. No Misrepresentation 25 5. CONDITIONS TO FIRST LOAN 25 5.1. Evidence of Action 25 5.2. This Agreement 25 5.3. Note 26 5.4. Approvals 26 5.5. Opinion of Counsel to the Borrower 26 5.6. Security Agreement 26 5.7. Search Reports and Related Documents 26 5.8. Warehousing Agreement 27 5.9. Cash Management Services Agreement, ACH Cash Concentration Service Agreement 27 5.10. Property, Public Liability and Other Insurance 27 5.11. Reserved 27 5.12. Fees of Special Counsel 27 5.13. Solvency Certificate 27 5.14. Business Plan 27 5.15. Compliance Certificate 28 5.16. Greenfield Employment Agreement 28 5.17. Audit of Inventory 28 5.18. No Material Adverse Change 28 6. CONDITIONS OF LENDING - ALL LOANS 28 6.1. Compliance 28 6.2. Loan Closings 29 6.3. Borrowing Request 29 6.4. Borrowing Base Certificate 29 6.5. Documentation and Proceedings 29 6.6. Required Acts and Conditions 29 6.7. Approval of Special Counsel 30 6.8. Supplemental Opinions 30 6.9. Other Documents 30 7. AFFIRMATIVE AND FINANCIAL COVENANTS 30 7.1. Financial Statements 30 7.2. Certificates; Other Information 31 7.3. Legal Existence 33 7.4. Taxes 33 7.5. Insurance 33 7.6. Payment of Indebtedness and Performance of Obligations 35 7.7. Condition of Property 35 7.8. Observance of Legal Requirements 35 7.9. Inspection of Property; Books and Records; Discussions 36 7.10. Licenses, Intellectual Property 36 7.11. Assignment of Trademark 36 7.12. Minimum Consolidated Tangible Net Worth 37 7.13. Current Ratio 37 7.14. Interest Coverage Ratio 37 7.15. Maintenance of Certain Agreements 37 8. NEGATIVE COVENANTS 38 8.1. Indebtedness 38 8.2. Liens 38 8.3. Merger, Consolidation and Certain Dispositions of Property 39 8.4. Contingent Obligations 39 8.5. Dividends and Purchase of Stock 39 8.6. Investments, Loans, Etc. 39 8.7. Business and Name Changes 40 8.8. Sale of Property 41 8.9. Subsidiaries 41 8.10. Certificate of Incorporation and By-laws 41 8.11. ERISA 41 8.12. Prepayments of Indebtedness 41 8.13. Sale and Leaseback 41 8.14. Fiscal Year 41 8.15. Amendments, Etc. of Certain Agreements 42 8.16. Transactions with Affiliates 42 8.17. Maintenance of Cash and Cash Equivalents 42 9. DEFAULT 42 9.1. Events of Default 42 10. OTHER PROVISIONS 46 10.1. Amendments and Waivers 46 10.2. Notices 46 10.3. No Waiver; Cumulative Remedies 47 10.4. Survival of Representations and Warranties 47 10.5. Payment of Expenses and Taxes 48 10.6. Successors and Assigns 49 10.7. Counterparts 50 10.8. Set-off 50 10.9. Indemnity 51 10.10. Governing Law 52 10.11. Headings Descriptive 52 10.12. Severability 52 10.13. Integration 52 10.14. Consent to Jurisdiction 52 10.15. Service of Process 53 10.16. No Limitation on Service or Suit 53 10.17. WAIVER OF TRIAL BY JURY 53 10.18. Concerning Inventory Owned by Subsidiaries 53 EXHIBITS Exhibit A Form of Note Exhibit B Form of Borrowing Request Exhibit C Form of Compliance Certificate Exhibit D Form of Opinion of Counsel to the Borrower Exhibit E Form of Security Agreement Exhibit F Form of Borrowing Base Certificate Exhibit G Form of Solvency Certificate SCHEDULES Schedule 4.1 List of Subsidiaries Schedule 8.1 List of Existing Indebtedness Schedule 8.2 List of Existing Liens Schedule 8.4 List of Existing Contingent Obligations Schedule 8.6 List of Existing Investments CREDIT AGREEMENT, dated as of August 31, 1993, by and be- tween JENNIFER CONVERTIBLES, INC., a Delaware corporation (the "Borrower") and IBJ SCHRODER BANK & TRUST COMPANY (the "Bank"). 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION 1.1. Definitions As used in this Agreement, terms defined in the pre- amble have the meanings indicated therein, and the following terms have the following meanings: "Accountants": BDO Seidman (or any successor thereto), or such other firm of certified public accountants of recognized national standing selected by the Borrower and in all respects reasonably satisfactory to the Bank. "ACM Cash Concentration Service Agreement": the ACH Cash Concentration Service Agreement, dated as of August 31, 1993, by and between the Borrower and the Bank, as the same may be amended, supplemented or otherwise modified from time to time. "Advisory Fee": as defined in Section 3.2. "Affiliate": as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For pur- poses of this definition, control of a Person shall mean the power, direct or indirect, (i) to vote 5% or more of the secu- rities having ordinary voting power for the election of direc- tors of such Person or (ii) to direct or cause the direction of the management and policies of such Person, whether by con- tract or otherwise. "Agreement": this Credit Agreement, as the same may be amended, supplemented or otherwise modified from time. "Alternate Base Rate": at any date of determination, a rate of interest per annum equal to the higher of (i) the Federal Funds Rate in effect on such date plus 1/2 of 1% or (ii) the Prime Rate in effect on such date. "Authorized Signatory": in respect of any Person that is a corporation, the president, any vice president or the chief financial officer of such Person (or such other of- ficer as shall be acceptable to the Bank). "Borrowing Base": at any date of determination, an amount equal to 50% of Eligible Inventory. "Borrowing Base Certificate": a certificate of the Borrower in the form of Exhibit F. "Borrowing Date": any Business Day specified in a Borrowing Request as a date on which the Borrower intends to borrow Loans under this Agreement. "Borrowing Request": a request for Loans in the form of Exhibit B. "Business Day": any day other than a Saturday, Sun- day or other day on which commercial banks located in New York City are authorized or required by law or other governmental action to close or remain closed. "Capital Leases": leases which have been, or under GAAP are required to be, capitalized. "Cash Management Services Agreement": the Cash Man- agement Services Agreement, dated as of August 31, 1993, by and between the Borrower and the Bank, as the same may be amended, supplemented or otherwise modified from time to time "Code": the Internal Revenue Code of 1986, as the same may be amended from time to time, and the rules and regu- lations issued thereunder, as from time to time in effect. "Collateral": the collateral under and as defined in the Security Agreement. "Commitment": the Bank's undertaking during the Com- mitment Period to make Loans to the Borrower, subject to the terms and conditions hereof, in an aggregate outstanding prin- cipal amount not exceeding the Commitment Amount. "Commitment Amount": at any date of determination, $2,000,000 or such lesser amount, as such amount may be re- duced under Section 2.4. "Commitment Fee": as defined in Section 3.1. "Commitment Period": the period from, and including, the Effective Date through, and including, the Expiration Date. "Compliance Certificate": a certificate of the Vice President-Finance and Treasurer of the Borrower (or such other -2- officer as shall be acceptable to the Bank) in the form of Exhibit C. "Consolidated": the Borrower and its Subsidiaries which are consolidated for financial reporting purposes. "Consolidated Cash Interest Expense": for any pe- riod, interest expense of the Borrower and its Subsidiaries determined on a Consolidated basis in accordance with GAAP (adjusted to give effect to all interest rate swap, cap or other interest rate hedging arrangements and fees and expenses paid in connection with the same, all as determined in ac- cordance with GAAP) to the extent paid or payable in cash dur- ing such period. "Consolidated Current Assets": at any date of de- termination, current assets of the Borrower and its Subsidiar- ies determined on a Consolidated basis in accordance with GAAP. "Consolidated Current Liabilities": at any date of determination, current liabilities of the Borrower and its Subsidiaries determined on a Consolidated basis in accordance with GAAP, including the current portion of long-term Indebt- edness and excluding Indebtedness in respect of the Loans. "Consolidated EBIT": for any period, Consolidated Net Income (or loss) for such period plus the sum of, without duplication, (i) Taxes paid by the Borrower and its Subsidiar- ies during such period and (ii) Consolidated Cash Interest Expense, all to the extent deducted in determining such Con- solidated Net Income (or loss) for such period. "Consolidated Net Income": net income of the Bor- rower and its Subsidiaries determined on a Consolidated basis in accordance with GAAP. "Consolidated Tangible Net Worth": at any date of determination, the sum of all amounts which would be included as shareholders' equity on a Consolidated balance sheet of the Borrower prepared in accordance with GAAP as at such date, less all assets that would be classified as intangible assets on a Consolidated balance sheet of the Borrower prepared in accordance with GAAP, including, without limitation, unamor- tized debt discount and expense, unamortized organization and reorganization expense, patents, trade or servicemarks, fran- chises, trade names and goodwill. "Contingent Obligation": as to any Person, any obli- gation of such Person guaranteeing or in effect guaranteeing -3- any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary ob- ligor") in any manner, whether directly or indirectly, and whether arising from partnership or keep-well agreements, in- cluding, without limitation, any obligation of such Person, whether contingent (a) to purchase such primary obligation or any Property constituting direct or indirect security there- for, (b) to advance or supply funds (i) for the purchase or payment of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain net worth, solvency or other financial statement condition of the primary obligor, (c) to purchase Property, securities or services primarily for the purpose of assuring the beneficiary of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (d) otherwise to assure, protect from loss or hold harmless the beneficiary of such primary obligation in respect thereof; provided, however, that the term Contingent Obligation shall not include the indorsement of instruments for deposit or collection in the ordinary course of business. The term Contingent Obligation shall also include the li- ability of a general partner in respect of the liabilities of the partnership in which it is a general partner. The amount of any Contingent Obligation of a Person shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obliga- tion is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as deter- mined by such Person in good faith. "Current Ratio": at any date of determination, the ratio of Consolidated Current Assets to Consolidated Current Liabilities on such date. "Default": any event or condition which constitutes an Event of Default or which, with the giving of notice, the lapse of time, or both, or any other condition, would, unless cured or waived, become an Event of Default. "Dollars" and "$": lawful currency of the United States of America. "Effective Date": August 31, 1993. "Eligible Inventory": at any date of determination, inventory consisting of first quality, currently finished products held for sale to customers in the ordinary course of business, valued at the lower of cost or market value, deter- mined on a first-in, first-out basis, as to which the follow- ing requirements have been fulfilled in all respects to the -4- satisfaction of the Bank: (i) such inventory is owned by the Borrower, (ii) such inventory conforms to the representations and warranties contained herein and in the Security Agreement, (iii) such inventory is subject to a fully perfected first priority security interest in favor of the Bank pursuant to the Security Agreement, (iv) such inventory does not consist of Special Order Goods and (v) such inventory is not slow-moving, obsolete, used, damaged or otherwise unmerchant- able; provided, however, that the Bank may, in its sole dis- cretion, exclude from "Eligible Inventory" all or a portion of any such inventory which otherwise satisfies the requirements set forth in (i) through (v) above. "Environmental Laws": any and all federal, state and local laws relating to the environment, the use, storage, transporting, manufacturing, handling, discharge, disposal or recycling of hazardous substances, materials or pollutants or industrial hygiene and including, without limitation, (i) the Comprehensive Environmental Response, Compensation and Li- ability Act, as amended, 42 USCA ss.9601 et seq.; (ii) the Re- source Conservation and Recovery Act of 1976, as amended, 42 USCA ss.6901 et seq.; (iii) the Toxic Substance Control Act, as amended, 15 USCA ss.2601 et seq.; (iv) the Water Pollution Con- trol Act, as amended, 33 USCA ss.1251 et seq.; (v) the Clean Air Act, as amended, 42 USCA ss.7401 et seq.; (vi) the Hazardous Material Transportation Act, as amended, 49 USCA ss.1801 et seq. and (viii) all rules, regulations, judgments, decrees, injunc- tions and restrictions thereunder and any analogous state law. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regu- lations issued thereunder, as from time to time in effect. "ERISA Affiliate": any Person which is a member of any group of organizations (i) described in Section 414(b) or (c) of the Code of which the Borrower or any of its Subsidiar- ies is a member, or (ii) solely for purposes of potential li- ability under Section 302 (c) (11) of ERISA and Section 412(c) (11) of the Code and the Lien created under Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of which the Borrower or any of its Subsidiaries is a member. "ERISA Liabilities": without duplication, the ag- gregate of all unfunded vested benefits under all Plans and all potential withdrawal liabilities under all Multiemployer Plans. -5- "Event of Default": any of the events specified in Section 9, provided that any requirement for the giving of no- tice, the lapse of time, or both, or any other condition has been satisfied. "Expiration Date": the day immediately preceding the Maturity Date. "Federal Funds Rate": for any day, a rate per annum (expressed as a decimal, rounded upwards, if necessary, to the next higher 1/100 of 1%), equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (i) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Busi- ness Day as so published on the next succeeding Business Day, and (ii) if such rate is not so published for any day, the Federal Funds Rate for such day shall be the average of the quotations for such day on such transactions received by the Bank as determined by the Bank. "Financial Statements": as defined in Section 4.13. "GAAP": generally accepted accounting principles set forth in the opinions, statements and pronouncements of the Accounting Principles Board and the American Institute of Cer- tified Public Accountants and the opinions, statements and pronouncements of the Financial Accounting Standards Board or in such other opinion, statement or pronouncement by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circum- stances as of the date of determination, consistently applied. "Governmental Authority": any nation or government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any court or arbitrator. "Greenfield": Harley J. Greenfield, an individual. "Greenfield Employment Agreement": Employment Agree- ment, dated as of April 6, 1992, by and between Greenfield and the Borrower, as the same may be amended, supplemented or oth- erwise modified from time to time. -6- "Hazardous Substance": any hazardous or toxic sub- stance, material or waste, including, but not limited to, (i) those substances, materials, and wastes listed in the United States Department of Transportation Hazardous Materials Table (49 CFR 172.101) or by the Environmental Protection Agency as hazardous substances (40 CFR Part 302) and amendments thereto and replacements therefor and (ii) any substance, pollutant or material defined as, or designated in, any Environmental Law as a "hazardous substance," "toxic substance," "hazardous ma- terial," "hazardous waste," "restricted hazardous waste," "pollutant," "toxic pollutant" or words of similar import. "Highest Lawful Rate": the maximum rate of interest, if any, that at any time or from time to time may be con- tracted for, taken, charged or received on the Note or which may be owing to the Bank pursuant to this Agreement under the laws applicable to the Bank and this transaction. "Indebtedness": as to any Person, at any date of determination, all items which constitute, without duplica- tion, (a) indebtedness for borrowed money or the deferred pur- chase price of Property (other than trade payables incurred in the ordinary course of business), (b) indebtedness evidenced by notes, bonds, debentures or similar instruments, (c) obli- gations with respect to any conditional sale or title reten- tion agreement, (d) indebtedness arising under acceptance fa- cilities and the amount available to be drawn under all let- ters of credit issued for the account of such Person and, without duplication, all drafts drawn thereunder to the extent such Person shall not have reimbursed the issuer in respect of the issuer's payment of such drafts, (e) all liabilities se- cured by any Lien on any Property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof (other than carriers', warehousemen's, mechanics', repairmen's or other like non-consensual statutory Liens arising in the ordinary course of business), (f) obliga- tions under Capital Leases, (g) Contingent Obligations and (h) ERISA Liabilities. "Indemnified Liabilities": as defined in Section 10.5. "Indemnified Person": as defined in Section 10.9. "Intellectual Property": all copyrights, trademarks, patents, trade names, trade styles, service names and like Property. -7- "Interest Coverage Ratio": at any date of determina- tion, the ratio of Consolidated EBIT for the immediately pre- ceding four fiscal quarters to Consolidated Cash Interest Ex- pense for such period. "Interest Payment Date": in respect of any Loan, the last day of each month commencing on the first of such days to occur after such Loan is made. "Investments": as defined in Section 8.6. "Inwood Development": Inwood Development Corp., a New York corporation. "Inwood Warehouse": the warehouse owned by the Ware- house Partnership located at Rogers Avenue, Inwood, New York (Nassau County). "Jennifer Guaranty": the Guaranty, dated as of Au- gust 31, 1993, made by the Borrower to the Bank pursuant to the Warehousing Loan Agreement. "Jennifer Outlet Store": any retail outlet store which operates under the Trademark. "Jennifer Warehousing": Jennifer Warehousing, Inc., a New York corporation. "JCI Development": JCI Development Corp., a New York corporation. "Lien": any mortgage, pledge, hypothecation, assign- ment, deposit or preferential arrangement, encumbrance, lien (statutory or other), or other security interest of any kind or nature whatsoever, including, without limitation, any con- ditional sale or other title retention agreement and any capi- tal or financing lease having substantially the same economic effect as any of the foregoing. "Loan" and "Loans": as defined in Section 2.1. "Loan Documents": collectively, this Agreement, the Note, the Security Agreeent, the Cash Management Services Agreement and the ACM Cash Concentration Service Agreement. "Love": Fred J. Love, an individual. -8- "Margin Stock": any "margin stock", as said term is defined in Regulation U of the Board of Governors of the Fed- eral Reserve System, as the same may be amended from time to time. "Material Adverse Change": a material adverse change in (i) the financial condition, operations, business, pros- pects or Property of (x) the Borrower, or (y) the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the Borrower to perform its obligations under the Loan Documents or (iii) the ability of the Bank to enforce the Loan Docu- ments. "Material Adverse Effect": a material adverse effect on (i) the financial condition, operations, business, pros- pects or Property of (x) the Borrower or (y) the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the Borrower to perform its obligations under the Loan Documents or (iii) the ability of the Bank to enforce the Loan Docu- ments. "Maturity Date": August 30, 1996, or such earlier date on which the Note shall become due and payable, whether by acceleration or otherwise. "Multiemployer Plan": a plan defined as such in Sec- tion 3(37) of ERISA to which contributions have been made by the Borrower or any ERISA Affiliate and which is covered by Title IV of ERISA. "Note": as defined in Section 2.2. "Permitted Liens": Liens permitted to exist under Section 8.2. "Person": an individual, a partnership, a corpora- tion, a business trust, a joint stock company, a trust, an unincorporated association, a joint venture, a Governmental Authority or any other entity of whatever nature. "Plan": any employee benefit or other plan estab- lished or maintained by the Borrower or any ERISA Affiliate and which is covered by or subject to the minimum funding standards of Title IV of ERISA, other than a Multiemployer Plan. "Pledged Collateral": the Pledged Collateral under and as defined in the Security Agreement. -9- "Prime Rate": a rate of interest per annum equal to the rate of interest publicly announced in New York City by the Bank from time to time as its prime commercial lending rate, such rate to be adjusted automatically (without notice) on the effective date of any change in such publicly announced rate. "Property": in respect of any Person, all types of real, personal, tangible, intangible or mixed property, in- cluding, without limitation, Intellectual Property, owned or leased by such Person. "Real Property": real Property owned or leased by the Borrower or any of its Subsidiaries. "Security Agreement": the Security Agreement, made by the Borrower in favor of the Bank, in the form of Exhibit E, as the same may be amended, supplemented or otherwise modi- fied from time to time. "SEC": the Securities and Exchange Commission or any Governmental Authority succeeding to the functions thereof. "Seidner": Edward B. Seidner, an individual. "Solvency Certificate": a certificate of the Vice President-Finance and Treasurer of the Borrower (or such other officer as shall be acceptable to the Bank) in the form of Exhibit G. "Secial Counsel": Emmet, Marvin & Martin. "Special Order Goods": sofabeds, sofabed loveseat combinations and related articles purchased specifically to fill special orders by customers of the Borrower. "Stock": any and all shares, rights, interests, par- ticipations, warrants or other equivalents (however desig- nated) of corporate stock, including, without limitation, so- called "phantom stock". "Subsidiary": as to any Person, any corporation, association, partnership, joint venture or other business en- tity of which such Person or any Subsidiary of such Person, directly or indirectly, either (i) in respect of a corpora- tion, owns or controls more than 50% of the outstanding Stock having ordinary voting power to elect a majority of the board of directors or similar managing body, irrespective of whether a class or classes shall or might have voting power by reason of the happening of any contingency or (ii) in respect of an - 10 - association, partnership, joint venture or other business en- tity, is entitled to share in more than 50% of the profits and losses, however determined. "Taxes": any present or future income, stamp or other taxes, levies, imposts, duties, fees, assessments, de- ductions, withholdings, or other charges of whatever nature, now or hereafter imposed, levied, collected, withheld, or as- sessed by any Governmental Authority. "Trademark": the trademark, "Jennifer Convert- ibles"(TM), together with all right, title and interest therein and thereto, and all applications, registrations and record- ings thereof, including, without limitation, applications, registrations and recordings in the United States Patent and Trademark Office or in any similar office or agency of the United States or any State thereof and all reissues, exten- sions or renewals thereof and all licenses thereof. "Warehouse Partnership": Inwood Development and JCI Development, as tenants-in-common. "Warehousing Agreement": the Warehousing Agreement, dated as of November 3, 1986, by and between the Borrower and Jennifer Warehousing, as the same may be amended, supplemented or otherwise modified from time to time. "Warehousing Loan Agreement": the Term Loan Agree- ment, dated as of August 31, 1993, by and between Jennifer Warehousing and the Bank, as the same may be amended, supple- mented or otherwise modified from time to time. 1.2. Princiles of Construction. (a) All terms defined in this Agreement shall have the meanings given to such terms herein when used in the Loan Documents or any certificate, opinion or other document made or delivered pursuant hereto or thereto, unless otherwise de- fined therein. (b) As used in the Loan Documents and in any cer- tificate, opinion or other document made or delivered pursuant thereto, accounting terms not defined in Section 1.1, and ac- counting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof", "herein", "hereto" and "hereunder" and similar words when used in any Loan Document shall refer to such Loan Document as a whole and not to any - 11 - particular provision thereof, and Section, schedule and ex- hibit references contained therein shall refer to Sections thereof or schedules or exhibits thereto unless otherwise ex- pressly provided therein. (d) The word "or" shall not be exclusive; the words "may not" are prohibitive and not permissive. (e) Unless the context otherwise requires, words in the singular number include the plural, and words in the plu- ral include the singular. (f) Unless specifically provided in a Loan Document to the contrary, references to time shall refer to New York City time. 2. AMOUNT AND TERMS OF LOANS. 2.1. Loans. Subject to the terms and conditions hereof, the Bank agrees to make revolving credit loans (each a "Loan" and, col- lectively, the "Loans") to the Borrower from time to time dur- ing the Commitment Period, in an aggregate principal amount at any one time outstanding not to exceed the lesser of the Com- mitment Amount and the Borrowing Base then in effect. During the Commitment Period, the Borrower may borrow, prepay in whole or in part and reborrow under the Commitment, all in ac- cordance with the terms and conditions of this Agreement. 2.2. Note. The Loans made by the Bank shall be evidenced by a promissory note of the Borrower, in the form of Exhibit A, with appropriate insertions therein as to date and principal amount (as indorsed, amended, supplemented or otherwise modi- fied from time to time, the "Note"), payable to the order of the Bank and representing the obligation of the Borrower to pay the lesser of (a) the Commitment Amount as of the Effec- tive Date and (b) the aggregate unpaid principal balance of the Loans, with interest thereon as prescribed in Section 2.6. The Note shall (i) be dated the first Borrowing Date, (ii) be stated to mature on the Maturity Date and (iii) bear interest from the date thereof on the unpaid principal balance thereof payable on the dates and at the applicable intrest rate or rates per annum determined as provided in Section 2.6. The Bank is hereby authorized to record and, prior to any transfer of the Note, shall indorse (i) the date and amount of each Loan and (ii) each payment and prepayment of the principal - 12 - thereof on the schedule (and any continuation thereof) annexed to and constituting a part of the Note. No failure to so record or indorse or any error in so recording or indorsing shall affect the obligation of the Borrower to make payment when due of any amount owing under the Loan Documents. 2.3. Procedure for Borrowing. (a) The Borrower may borrow under the Commitment on any Business Day during the Commitment Period, provided, how- ever, that the Borrower shall notify the Bank (by telephone or telecopy) no later than 11:00 A.M., one Business Day prior to the requested Borrowing Date, specifying (A) the amount to be borrowed and (B) the requested Borrowing Date. Each such no- tice shall be irrevocable and confirmed immediately by de- livery to the Bank of a Borrowing Request duly executed by an Authorized Signatory of the Borrower. Each borrowing shall be in an aggregate principal amount equal to $100,000 or such amount plus a whole multiple of $25,000 in excess thereof, or, if less, the unused amount of the Commitment then in effect. Subject to the satisfaction of the terms and conditions of this Agreement as determined by the Bank, the amount of each such borrowing will be made available to the Borrower on the applicable Borrowing Date either by crediting the general de- posit account of the Borrower maintained with the Bank or by wiring such amount as instructed by the Borrower in writing. 2.4. Termination or Reduction of Commitment. (a) Voluntary Reductions. The Borrower shall have the right, upon at least three Business Days' prior written notice to the Bank, at any time to terminate the Commitment or from time to time to permanently reduce the Commitment Amount then in effect, provided, however, that any such reduction shall be in the amount of $100,000 or such amount plus a whole multiple of $25,000 in excess thereof. (b) In General. Simultaneously with each reduction of the Commitment Amount under this Section, the Borrower shall pay the Commitment Fee accrued on the amount by which the Commitment has been reduced and prepay the Loans by the amount, if any, by which the aggregate unpaid principal bal- ance of the Loans exceeds the amount of the Commitment as so reduced. 2.5. Prenayments of the Loans. (a) Voluntary Prepayments. The Borrower may, at its option, prepay the Loans, in whole or in part, without premium or penalty, at any time and from time to time by notifying the - 13 - Bank in writing at least two Business Days prior to the pro- posed prepayment date, specifying the amount to be prepaid and the date of prepayment. Such notice shall be irrevocable and the amount specified in such notice shall be due and payable on the date specified, together with accrued interest to the date of such payment on the amount so prepaid. Partial pre- payments of the Loans shall be in an aggregate principal amount of $100,000 or such amount plus a whole multiple of $25,000 in excess thereof, or, if less, the outstanding prin- cipal balance of the Loans. (b) Mandatory Borrowing Base Prepayment of the Loans. If on any day prior to the Maturity Date the aggregate unpaid principal balance of the Loans shall exceed the Borrow- ing Base, the Borrower shall, within one Business Day of such day, prepay the Loans by an amount equal to such excess. Un- til such excess has been prepaid the Borrower shall not be entitled to borrow additional Loans. (c) Mandatory Annual Clean-up of the Loans. The Borrower shall fully repay and/or maintain a zero balance on the Note for a period of at least 45 consecutive days during each fiscal year of the Borrower in the Commitment Period. 2.6. Interest Rate and Payment Dates. (a) Prior to Maturity. Except as otherwise provided in Section 2.6(b), prior to maturity, the Loans shall bear interest on the outstanding principal balance thereof at the Alternate Base Rate plus 1%. (b) Event of Default. After the occurrence and dur- ing the continuance of any Event of Default, the outstanding principal balance of the Loans and any overdue interest or other amount payable under the Loan Documents shall bear in- terest at a rate per annum equal to the Alternate Base Rate plus 3%. All such interest shall be payable on demand. (c) General. Interest on the Loans shall be calcu- lated on the basis of a 360-day year for the actual number of days elapsed, including the first day but excluding the last. Except as otherwise provided in Section 2.6(b), interest shall be payable in arrears in each Interest Payment Date and upon payment (including prepayment) of the Loans. Any change in the interest rate on the Loans resulting from a change in the Alternate Base Rate shall become effective as of the opening of business on the day on which such change shall become ef- fective. The Bank shall, as soon as practicable, notify the Borrower of such effective date and the amount of each such - 14 - change in the Alternate Base Rate, but any failure to so no- tify shall not in any manner affect the obligation of the Bor- rower to pay interest on the Loans in the amounts and on the dates required. Each determination of the Alternate Base Rate by the Bank shall be conclusive and binding on the Borrower absent manifest error. At no time shall the interest rate payable on the Loans, together with the Commitment Fee, the Advisory Fee and all other amounts payable under the Loan Documents, to the extent the same are construed to constitute interest, exceed the Highest Lawful Rate. If interest payable to the Bank on any date would exceed the maximum amount per- mitted by the Highest Lawful Rate, such interest payment shall automatically be reduced to such maximum permitted amount, and interest for any subsequent period, to the extent less than the maximum amount permitted for such period by the Highest Lawful Rate, shall be increased by the unpaid amount of such reduction. Any interest actually received for any period in excess of such maximum allowable amount for such period shall be deemed to have been applied as a prepayment of the Loans. The Borrower acknowledges that to the extent interest payable on the Loans is based on the Prime Rate, such rate is only one of the bases for computing interest on loans made by the Bank, and by basing interest payable on the Loans on the Prime Rate, the Bank has not committed to charge, and the Borrower has not in any way bargained for, interest based on a lower or the lowest rate at which the Bank may now or in the future make loans to other borrowers. 2.7. Taxes; Net Pavments. All payments made by the Borrower under the Loan Documents shall be made free and clear of, and without reduc- tion for or on account of, any Taxes required by law to be withheld from any amounts payable under the Loan Documents. In the event that the Borrower is prohibited by law from mak- ing payments under the Loan Documents free of any such reduc- tion or withholding, the Borrower shall pay such additional amounts to the Bank as may be necessary in order that the ac- tual amounts received by the Bank in respect of interest and any other amounts payable under the Loan Documents after such reduction or withholding (and after payment of any additional Taxes or other charges due as a consequence of the payment of such additional amounts) shall equal the amount which would have been received if such reduction or withholding were not required. If the Borrower shall make any payments under this Section or shall make any such reduction or withholding, the Borrower shall forthwith forward to the Bank original or cer- tified copies of official receipts or other evidence accept- able to the Bank establishing such payment. 2.8. Use of Proceeds. The proceeds of the Loans shall be used exclusively to purchase inventory consisting of first quality current fin- ished products to be held for sale by the Borrower to custom- ers in the ordinary course of its business. All Loans and the use to which the proceeds thereof are put shall conform with the provisions of Section 4.11. 2.9. Capital Adequacy. If (i) the enactment or promulgation of, or any change or phasing in of, any United States or foreign law or regulation or in the interpretation thereof by any Governmen- tal Authority charged with the administration thereof, (ii) compliance with any directive or guideline from any central bank or United States or foreign Governmental Authority (whether having the force of law) promulgated or made after the date hereof, or (iii) compliance with the Risk-Based Capi- tal Guidelines of the Board of Governors of the Federal Re- serve System as set forth in 12 CFR Parts 208 and 225, or of the Comptroller of the Currency, Department of the Treasury, as set forth in 12 CFR Part 3, or similar legislation, rules, guidelines, directives or regulations under any applicable United States or foreign Governmental Authority affects or would affect the amount of capital required to be maintained by the Bank (or any lending office of the Bank) or any corpo- ration directly or indirectly owning or controlling the Bank or imposes any restriction on or otherwise adversely affects the Bank (or any lending office of the Bank) or any corpora- tion directly or indirectly owning or controlling the Bank and the Bank shall have determined that such enactment, promulga- tion, change or phasing in or compliance has the effect of reducing the rate of return on the Bank's or such corporation's capital or the asset value to the Bank or such corporation of any Loan as a consequence, directly or indi- rectly, of its obligations to make and maintain the funding of the Loans at a level below that which the Bank or such corpo- ration could have achieved but for such enactment, promulga- tion, change or phasing in or compliance (after taking into account the Bank's or such corporation's policies regarding capital adequacy) by an amount deemed by the Bank to be mate- rial, then, upon demand by the Bank, the Borrower shall promptly pay to the Bank such additional amount or amounts as shall be sufficient to compensate the Bank or such corporation for such reduction in such rate of return or asset value. A certificate in reasonable detail as to such amounts submitted to the Borrower setting forth the determination of such amount or amounts that will compensate the Bank or such corporation - 16 - for such reductions shall be presumed correct absent manifest error. 2.10. Bank's Records. The Bank's records with respect to the Loans, the interest rates applicable thereto, each payment by the Bor- rower of principal and interest on the Loans and fees, ex- penses and any other amounts due and payable in connection with the Loan Documents shall be presumed correct absent mani- fest error as to the amount of the Loans and as to the amount of principal and interest paid by the Borrower in respect of such Loans and as to the other information relating to the Loans and amounts paid and payable by the Borrower under the Loan Documents. 3. FEES; PAYMENTS 3.1. Commitment Fee. The Borrower agrees to pay to the Bank a fee (the "Commitment Fee"), during the Commitment Period, equal to 1/2 of 1% per annum on the average daily excess of (a) the Commitment Amount over (b) the aggregate outstanding principal balance of the Loans, provided, however, that no Commitment Fee shall accrue with respect to any period during which the Borrower may not borrow Loans under Section 2.5(c). The Commitment Fee shall be payable monthly in arrears on the last day of each month, commencing on the first such day to occur following the Effective Date, and on the Expiration Date. The Commitment Fee shall be calculated on the basis of a 360-day year for the actual number of days elapsed. 3.2. Advisorv Fee. The Borrower agrees to pay to the Bank a fee (the "Advisory Fee"), payable on the Effective Date, equal to $20,000. 3.3. Fees of Special Counsel. The Borrower agrees to pay on the Effective Date the fees and expenses of Special Counsel billed through a date on or before the Effective Date, in connection with the negotia- tion and closing of this Agreement. In addition, the Borrower agrees to pay to Special Counsel any additional fees and ex- penses incurred subsequent to the bill referred to in the first sentence hereof, such payment to be made within a rea- sonable time after the presentation of a bill therefor. - 17 - 3.4. Treatment and Application of Payments. Each payment, including each prepayment, of princi- pal and interest on the Loans and of the Commitment Fee shall be made by the Borrower to the Bank at its office set forth in Section 10.2 in funds immediately available to the Bank at such office by 12:00 noon on the due date for such payment. The failure of the Borrower to make any such payment by such time shall not constitute a default hereunder, provided that such payment is made on such due date, but any such payment made after 12:00 noon on such due date shall be deemed to have been made on the next Business Day for the purpose of calcu- lating interest on amounts outstanding on the Loans. If any payment hereunder or under the Note shall be due and payable on a day which is not a Business Day, the due date thereof shall be extended to the next Business Day and (except with respect to payments in respect of the Commitment Fee) interest shall be payable at the applicable rate specified herein dur- ing such extension. 4. REPRESENTATIONS AND WARRANTIES In order to induce the Bank to enter into this Agreement and to make the Loans, the Borrower makes the following repre- sentations and warranties to the Bank: 4.1. Subsidiaries; Capitalization. The Borrower has only the Subsidiaries set forth on Schedule 4.1. Each such Subsidiary is wholly-owned by the Borrower except as indicated thereon. The shares of each corporate Subsidiary of the Borrower are duly authorized, validly issued, fully paid and nonassessable and are owned free and clear of any Liens. The interest of the Borrower in each of its non-corporate Subsidiaries is owned free and clear of any Liens. No Subsidiary of the Borrower has issued any securities convertible into Stock (or other equity interest) of such Subsidiary and there are no outstanding options or warrants to purchase Stock (or other equity interest) of such Subsidiary of any class or kind, and there are no agreements or understandings with respect thereto or affecting in any manner the sale, pledge, assignment or other disposition thereof, including, without limitation, any right of first refusal, option, redemption, voting trust, call or other rights with respect thereto, whether similar or dissimilar to any of the foregoing. - 18 - 4.2. Existence and Power. Each of the Borrower and its Subsidiaries is duly organized or formed and validly existing in good standing un- der the laws of the jurisdiction of its incorporation or for- mation, has all requisite power and authority to own its Prop- erty and to carry on its business as now conducted, and each is in good standing and authorized to do business in each ju- risdiction in which the nature of the business conducted therein or the Property owned therein makes such qualification necessary, except where such failure to qualify could not rea- sonably be expected to have a Material Adverse Effect. 4.3. Authority. The Borrower has full legal power and authority to enter into, execute, deliver and perform the terms of the Loan Documents and to make the borrowings contemplated hereby and by the Note, to execute, deliver and carry out the terms of the Note and to incur the obligations provided for herein and therein, all of which have been duly authorized by all proper and necessary corporate action and are in full compliance with its certificate of incorporation and by-laws. 4.4. Binding Agreement. Each of the Loan Documents (other than the Note), the Greenfield Employment Agreement and the Warehousing Agree- ment constitutes, and the Note, when issued and delivered pur- suant hereto for value received, will constitute, the valid and legally binding obligations of the Borrower, enforceable in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorgani- zation or other similar laws affecting the enforcement of creditors' rights generally. 4.5. Litigation. Except as set forth in the Form 10-K filed by the Borrower with the SEC with respect to its fiscal year ended August 31, 1992, and the Form 10-Q filed by the Borrower with the SEC with respect to its fiscal quarter ended May 31, 1993, there are no actions, suits, arbitration proceedings or claims (whether or not purportedly on behalf of the Borrower or any of its Subsidiaries) pending or, to the knowledge of the Bor- rower, threatened against the Borrower or any of its Subsid- iaries, or maintained by the Borrower or any of its Subsidiar- ies, at law or in equity, before any Governmental Authority which: (i) if adversely determined, could reasonably be ex- pected to have a Material Adverse Effect or (ii) call into - 19 - question the validity or enforceability of any of the Loan Documents. 4.6. Required Consents. No consent, authorization or approval of, filing with, notice to, or exemption by, stockholders, any Governmen- tal Authority or any other Person is required to authorize, or is required in connection with the execution, delivery and performance of the Loan Documents or is required as a condi- tion to the validity or enforceability of the Loan Documents. 4.7. No Conflicting Agreements. Neither the Borrower nor any of its Subsidiaries is in default under any mortgage, indenture, contract or agree- ment to which it is a party or by which it or any of its Prop- erty is bound, the effect of which default could reasonably be expected to have a Material Adverse Effect. The execution, delivery or carrying out of the terms of the Loan Documents will not constitute a default under, or result in the creation or imposition of, or obligation to create, any Lien upon any Property of the Borrower or any of its Subsidiaries pursuant to the terms of any such mortgage, indenture, contract or agreement. 4.8. Compliance with Applicable Laws. Neither the Borrower nor any of its Subsidiaries is in default with respect to any judgment, order, writ, injunc- tion, decree or decision of any Governmental Authority which default could reasonably be expected to have a Material Ad- verse Effect. Each of the Borrower and its Subsidiaries is complying in all material respects with all applicable sta- tutes, regulations, rules and orders of all Governmental Au- thorities, including, without limitation, Environmental Laws and ERISA, a violation of which could reasonably be expected to have a Material Adverse Effect. 4.9. Taxes. Each of the Borrower and its Subsidiaries has filed or caused to be filed all tax returns required to be filed and has paid, or has made adequate provision for the payment of, all taxes shown to be due and payable on said returns or in any assessments made against it (other than those being con- tested as required under Section 7.4) which would be material to the Borrower or any of its Subsidiaries, and no tax Liens have been filed with respect thereto. The charges, accruals - 20 - and reserves on the books of the Borrower and each of its Sub- sidiaries with respect to all federal, state, local and other taxes are, to the best knowledge of the Borrower, adequate for the payment of all such taxes, and the Borrower knows of no unpaid assessment which is due and payable against it or any of its Subsidiaries or any claims being asserted which could reasonably be expected to have a Material Adverse Effect, ex- cept such thereof as are being contested as required under Section 7.4, and for which adequate reserves have been set aside in accordance with GAAP. The federal income tax returns of the Borrower and each of its Subsidiaries consolidated in such returns have been examined by and settled with the Inter- nal Revenue Service or the statute of limitations with respect thereto have run, for all years through, and including, August 31, 1989. 4.10. Governmental Regulations. Neither the Borrower nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, as amended, the Federal Power Act or the Invest- ment Company Act of 1940, as amended, and neither the Borrower nor any of its Subsidiaries is subject to any statute or regu- lation which prohibits or restricts the incurrence of Indebt- edness under the Loan Documents, including, without limita- tion, statutes or regulations relative to common or contract carriers or to the sale of electricity, gas, steam, water, telephone, telegraph or other public utility services. 4.11. Federal Reserve Regulations; Use of Proceeds. Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. No part of the proceeds of the Loans will be used, directly or indirectly, for a purpose which violates any law, rule or regulation of any Governmental Authority, including, without limitation, the provisions of Regulations G, T, U or X of the Board of Governors of the Fed- eral Reserve System, as amended. No part of the proceeds of the Loans will be used, directly or indirectly, to purchase or carry Margin Stock or to extend credit to others for the pur- pose of purchasing or carrying Margin Stock. 4.12. Plans; Multiemployer Plans. Neither the Borrower nor any of its ERISA Affiliates maintains or makes contributions to any Plan or Multiemployer Plan. - 21 - 4.13. Financial Statements. The Borrower has heretofore delivered to the Bank copies of its Form 10-K for the fiscal year of the Borrower ended August 31, 1992, containing the audited Consolidated Balance Sheet of the Borrower and its Subsidiaries as of Au- gust 31, 1992 and August 31, 1991, and the related Consoli- dated Statements of Operations, Cash Flows and Shareholders' Equity for the periods then ended and, in addition, for the period ended August 31, 1990, and its Form 10-Q for the fiscal quarter ending May 31, 1993, containing the unaudited Consoli- dated Balance Sheet of the Borower and its Subsidiaries for such fiscal quarter, together with the related Statements of Operations, Cash Flows and Shareholders' Equity for the fiscal quarter then ended (with the related notes and schedules, the "Financial Statements"). The Financial Statements fairly pre- sent the Consolidated financial condition and results of the operations of the Borrower and its Subsidiaries as of the dates and for the periods indicated therein and have been pre- pared in conformity with GAAP. Except as reflected in the Financial Statements or in the footnotes thereto, neither the Borrower nor any of its Subsidiaries has any obligation or liability of any kind (whether fixed, accrued, contingent, un- matured or otherwise) which, in accordance with GAAP, should have been shown in the Financial Statements and was not. Since August 31, 1992, each of the Borrower and its Subsidiar- ies has conducted its business only in the ordinary course and there has been no Material Adverse Change. 4.14. Property. Each of the Borrower and its Subsidiaries has good and marketable title to all of its Property, title to which is material to it, subject to no Liens, except Liens in favor of the Bank pursuant to the Security Agreement and Permitted Liens. 4.15. Franchises, Intellectual Property. Etc. Each of the Borrower and its Subsidiaries possesses or has the right to use all franchises, Intellectual Property, licenses and other rights as are material and necessary for the conduct of its business, and with respect to which it is in compliance, with no known conflict with the valid rights of others which could reasonably be expected to have a Material Adverse Effect. No event has occurred which permits or, to the best knowledge of the Borrower, after notice or the lapse of time, or both, or any other condition, could reasonably be expected to permit, the revocation or termination of any such franchise, Intellectual Property, license or other right and - 22 - which revocation or termination could reasonably be expected to have a Material Adverse Effect. 4.16. Security Interests. Upon fulfillment of the conditions set forth in Sec- tion 5.7, and subject to the filing of appropriate UCC-1 Fi- nancing Statements at the filing offices described in Section 5.7 with respect to the Collateral (other than the Pledged Collateral) and the continuing possession by the Bank of the Pledged Collateral, the security interests granted under the Security Agreement will constitute valid, binding and continu- ing duly perfected first priority Liens in favor of the Bank in and to the Collateral. 4.17. Environmental Matters. (a) Each of the Borrower and its Subsidiaries is in compliance in all material respects with the requirements of all applicable Environmenal Laws. (b) No Hazardous Substances have been generated or manufactured on, transported to or from, treated at, stored at or discharged from any Real Property in violation of any Envi- ronmental Laws, which violation could reasonably be expected to have a Material Adverse Effect; no Hazardous Substances have been discharged into subsurface waters under any Real Property in violation of any Environmental Laws, which violation could reasonably be expected to have a Material Adverse Effect; no Hazardous Substances have been discharged from any Real Property on or into property or waters (including subsurface waters) adjacent to any Real Property in violation of any Environmental Laws, which violation could reasonably be expected to have a Material Adverse Effect; and there are not now, nor ever have been, on any Real Property, any underground or above ground storage tanks in violation of any Environmental Laws, which violation could reasonably be expected to have a Material Adverse Effect. (c) Neither the Borrower nor any of its Subsidiar- ies (i) has received notice (written or oral) or otherwise learned of any claim, demand, suit, action, proceeding, event, condition, report, directive, lien, violation, non-compliance or investigation indicating or concerning any potential or actual liability (including, without limitation, potential liability for enforcement, investigatory costs, cleanup costs, government response costs, removal costs, remedial costs, natural resources. damages, property damages, personal injuries or penalties) arising in connection with: (x) any non-compliance with or violation of the requirements of any - 23 - applicable Environmental Laws, or (y) the presence of any Haz- ardous Substance on any Real Property (or any real Property previously owned or leased by the Borrower or any of its Sub- sidiaries) or the release or threatened release of any Hazard- ous Substance into the environment for which the Borrower or any of its Subsidiaries is or may be liable, (ii) has any threatened or actual liability in connection with the presence of any Hazardous Substance on any Real Property (or any real Property previously owned or leased by the Borrower or any of its Subsidiaries) or the release or threatened release of any Hazardous Substance into the environment for which the Bor- rower or any of its Subsidiaries is or may be liable, (iii) has received notice of any federal or state investigation evaluating whether any remedial action is needed to respond to the presence of any Hazardous Substance on any Real Property (or any real Property previously owned or leased by the Bor- rower or any of its Subsidiaries) or a release or threatened release of any Hazardous Substance into the environment for which the Borrower or any of its Subsidiaries is or may be li- able, or (iv) has received notice that the Borrower or any of its Subsidiaries is or may be liable to any Person under any Environmental Law. (d) No Real Property is located in an area identi- fied by the Secretary of Housing and Urban Development as an area having special flood hazards. 4.18. Labor Relations. Neither the Borrower nor any of its Subsidiaries is a party to any collective bargaining agreement and, to the best knowledge of the Borrower, no petition has been filed or proceedings instituted by any employee or group of employees with any labor relations board seeking recognition of a bar- gaining representative with respect to the Borrower or any of its Subsidiaries. There are no material controversies pending between the Borrower or any of its Subsidiaries and any of their respective employees, which could reasonably be expected to have a Material Adverse Effect. 4.19. Burdensome Obligations. Neither the Borrower nor any of its Subsidiaries is a party to or bound by any franchise, agreement, deed, lease or other instrument, or subject to any corporate restriction which, in the opinion of its management, is so unusual or bur- densome, in the context of its business, as in the foreseeable future might materially and adversely affect or impair its revenue or cash flow or the ability of the Borrower to perform its obligations under the Loan Documents. The Borrower does - 24 - not presently anticipate that future expenditures by the Bor- rower or any of its Subsidiaries needed to meet the provisions of federal or state statutes, orders, rules or regulations will be so burdensome as to result in a Material Adverse Ef- fect. 4.20. No Misrepresentation. No representation or warranty contained in any Loan Document and no certificate or report furnished or to be fur- nished by the Borrower or any of its Subsidiaries in connec- tion with the transactions contemplated hereby, contains or will contain a misstatement of material fact or, to the best knowledge of the Borrower, omits or will omit to state a mate- rial fact required to be stated in order to make the state- ments herein or therein contained not misleading in the light of the circumstances under which made. 5. CONDITIONS TO FIRST LOAN In addition to the conditions precedent set forth in Section 6, the obligation of the Bank to make a Loan on the first Borrowing Date shall be subject to the fulfillment of the following conditions precedent: 5.1. Evidence of Action. The Bank shall have received from the Borrower, and be satisfied in all respects with, a certificate, dated the first Borrowing Date, of its Secretary or Assistant Secretary (i) attaching a true and complete copy of the resolutions of its Board of Directors and of all documents evidencing other necessary corporate action taken by it to authorize the Loan Documents and the transactions contemplated thereby, (ii) at- taching a true and complete copy of its certificate of incor- poration and by-laws, (iii) setting forth the incumbency of its officer or officers who may sign the Loan Documents, in- cluding therein a signature specimen of such officer or of- ficers and (iv) attaching a certificate of good standing of the Secretary of State of the State of Delaware and of each other jurisdiction in which it is qualified to do business. 5.2. This Agreement. The Bank shall have received a counterpart of this Agreement signed by a duly Authorized Signatory of the Bor- rower (or the Bank shall have received a facsimile signature page signed by a duly Authorized Signatory of the Borrower who - 25 - shall have agreed to promptly provide the Bank with an origi- nally executed counterpart hereof). 5.3. Note. The Bank shall have received and be in possession of the Note, duly executed by an Authorized Signatory of the Bor- rower. 5.4. Approvals. The Bank shall have received, and be satisfied in all respects with, evidence that all approvals and consents of all Persons required to be obtained in connection with the consummation of the transactions contemplated by the Loan Documents have been duly obtained and are in full force and effect. 5.5. Opinion of Counsel to the Borrower. The Bank shall have received and be satisfied in all respects with an opinion of Robinson Silverman Pearce Aronsohn & Berman, counsel to the Borrower, addressed to the Bank, dated the first Borrowing Date, in the form of Exhibit D, and covering such additional matters as the Bank may reasonably request. 5.6. Security Agreement. The Bank shall have received the Security Agreement, duly executed by an Authorized Signatory of the Borrower, to- gether with instruments representing the Pledged Collateral duly indorsed in blank by the Borrower. 5.7. Search Reports and Related Documents. The Bank shall have received and be satisfied in all respects with (i) UCC-1 Financing Statements with respect to the Collateral (other than Pledged Collateral), to be filed in each office as the Bank shall deem necessary to cause the se- curity interests granted under the Security Agreement to con- stitute valid, binding and continuing duly perfected first priority Liens in favor of the Bank in and to such Collateral, (ii) UCC, tax and judgment lien search reports with respect to each applicable public office where Liens are filed disclosing that there are no Liens of record in such official's office covering any Collateral or showing the Borrower as a debtor thereunder, (iii) a certificate signed by an Authorized Signa- tory of the Borrower, dated the first Borrowing Date, certify- ing that, upon the making of the first Loan there exist no - 26 - Liens on the Collateral and (iv) such other documents as the Bank shall request, including, without limitation, such agree- ments with Subsidiaries of the Borrower with respect to the Collateral. 5.8. Warehousing Agreement. The Bank shall have received a copy of, and be sat- isfied in all respects with the terms of, the Warehousing Agreement duly executed by an Authorized Signatory of the Bor- rower and by an Authorized Signatory of Jennifer Warehousing. 5.9. Cash Management Services Agreement; ACMH Cash Concen- tration Service Agreement. The Bank shall have received each of the Cash Man- agement Services Agreement and the ACH Cash Concentration Ser- vice Agreement, duly executed by an Authorized Signatory of the Borrower. 5.10. Property, Public Liability and Other Insurance. The Bank shall have received and be satisfied in all respects with (i) a descriptive list of all insurance main- tained by the Borrower and each of its Subsidiaries and (ii) appropriate certificates of insurance evidencing that the Bor- rower and each of its Subsidiaries has obtained the insurance coverage and endorsements required by Section 7.5. 5.11. Reserved. 5.12. Fees of Special Counsel. The unpaid fees and expenses of Special Counsel which shall have accrued through the first Borrowing Date shall have been paid. 5.13. Solvency Certificate. The Bank shall have received and be satisfied in all respects with a Solvency Certificate, dated the first Borrow- ing Date, duly executed by the Vice President-Finance and Treasurer of the Borrower (or such other officer as shall be acceptable to the Bank). 5.14. Business Plan. The Bank shall have received and be satisfied in all respects with a business and strategic plan, including, with- out limitation, annual projections for the first three fiscal - 27 - years of the Borrower following the Borrowing Date, in each case covering all segments of the Borrower's business. 5.15. Compliance Certificate. The Bank shall have received and be satisfied in all respects with a Compliance Certificate, dated the first Bor- rowing Date, certified by the Vice President-Finance and Trea- surer of the Borrower (or such other officer as shall be ac- ceptable to the Bank). 5.16. Greenfield Employment Agreement. The Bank shall have received a copy of, and be sat- isfied in all respects with the terms of, the Greenfield Em- ployment Agreement duly executed by Greenfield and an Autho- rized Signatory of the Borrower. 5.17. Audit of Inventory. The Bank shall have received and be satisfied in all respects with an audit and valuation of the Eligible Inventory and other assets and liabilities of the Borrower, as at a date not more than 90 days prior to the first Borrowing Date. 5.18.No Material Adverse Change. Since February 28, 1993, there shall have occurred no Material Adverse Change and the Bank shall have received and be satisfied in all respects with a certificate of the Vice President-Finance and Treasurer of the Borrower to such effect. 6. CONDITIONS OF LENDING - ALL LOANS The obligation of the Bank to make any Loan is subject to the satisfaction of the following conditions precedent: 6.1. Compliance. On each Borrowing Date and after giving effect to the Loans to be made thereon, (a) the Borrower shall be in full compliance with all of the terms, covenants and condi- tions of the Loan Documents, (b) there shall exist no Default or Event of Default, (c) the representations and warranties contained in the Loan Documents shall be true and correct with the same effect as though such representations and warranties had been made on such Borrowing Date and (d) the aggregate outstanding principal balance of the Loans shall not exceed - 28 - the lesser of the Commitment Amount and the Borrowing Base then in effect. The receipt by or for the account of the Bor- rower of the proceeds of each Loan shall constitute a cer- tification by the Borrower as of such Borrowing Date that each of the foregoing matters is true and correct in all respects. 6.2. Loan Closings. All documents required by the provisions of the Loan Documents to be executed or delivered to the Bank on or before the applicable Borrowing Date shall have been duly executed and shall have been delivered to the office of the Bank set forth in Section 10.2 on or before such Borrowing Date. 6.3. Borrowing Request. The Bank shall have received a Borrowing Request duly executed by an Authorized Signatory of the Borrower. 6.4. Borrowing Base Certificate. The Bank shall have received a Borrowing Base Cer- tificate, dated as of the applicable Borrowing Date, certified by the Vice President-Finance and Treasurer of the Borrower (or such other officer as shall be acceptable to the Bank). 6.5. Documentation and Proceedings. All corporate and legal proceedings and all docu- ments and papers in connection with the transactions contem- plated by the Loan Documents shall be satisfactory in all re- spects to the Bank, and the Bank shall have received and be satisfied in all respects with all information and copies of all documents which the Bank may reasonably have requested in connection therewith, such documents (where appropriate) to be certified by an Authorized Signatory of the Borrower or proper Governmental Authorities. 6.6. Required Acts and Conditions. All acts, conditions and things (including, without limitation, the obtaining of any necessary regulatory approv- als and the making of any filings, recordings or registra- tions) required to be done, performed and to have happened on or prior to the applicable Borrowing Date and which are neces- sary for the continued effectiveness of the Loan Documents, shall have been done and performed and shall have happened in due compliance with all applicable laws. - 29 - 6.7. Approval of Special Counsel. All legal matters in connection with the making of each Loan shall be reasonably satisfactory in all respects to Special Counsel. 6.8. Supplemental Opinions. If requested by the Bank with respect to the ap- plicable Borrowing Date, there shall have been delivered to the Bank favorable supplementary opinions of counsel to the Borrower, addressed to the Bank and dated as of such Borrowing Date, covering such matters incident to the transactions con- templated herein as the Bank may reasonably request. 6.9. Other Documents. The Bank shall have received and be satisfied in all respects with such other documents as the Bank shall reason- ably request. 7. AFFIRMATIVE AND FINANCIAL COVENANTS The Borrower covenants and agrees that, so long as this Agreement is in effect, any Loan remains outstanding and un- paid or any other amount is owing to the Bank under any Loan Document, the Borrower shall: 7.1. Financial Statements. Maintain a standard system of accounting in ac- cordance with GAAP, and furnish or cause to be furnished to the Bank: (a) As soon as available but in any event within 105 days after the end of each fiscal year of the Borrower, a copy of its annual report on Form 10-K in respect of such fis- cal year, together with the financial statements required to be attached thereto, provided, however, that the Borrower is required to file such annual report with the SEC and such fil- ing is actually made. (b) As soon as available but in any event within 55 days after the end of the first three fiscal quarters of each fiscal year of the Borrower a copy of its quarterly report on Form 10-Q in respect of such fiscal quarter, together with the financial statements required to be attached thereto, pro- vided, however, that the Borrower is required to file such - 30 - quarterly report with the SEC and such filing is actually made. (c) Within 55 days after the end of each of the first three fiscal quarters of each fiscal year of the Bor- rower, and within 105 days after the end of the last fiscal quarter of such fiscal year, a Compliance Certificate, dated as of the end of such fiscal quarter and certified by the Vice President-Finance and Treasurer (or such other officer as shall be acceptable to the Bank) of the Borrower. (d) Within 15 days after the end of each month if Loans are outstanding at such month end, a Borrowing Base Cer- tificate, dated as of the end of such month and certified by the Vice President-Finance and Treasurer of the Borrower (or such other officer as shall be acceptable to the Bank). (e) At the request of the Bank and at the expense of the Borrower, such on-going field examinations and audits of the Eligible Inventory, performed by a Person satisfactory to the Bank, as the Bank shall require. (f) Such other information as the Bank may reason- ably request from time to time including, without limitation, such annual and quarterly financial statements as the Bank customarily obtains from Borrowers having similar credit agreements with it, in the event that, at any time, the Bor- rower is not currently filing an annual Form 10-K and a quar- terly Form 10-Q with the SEC. 7.2. Certificates: Other Information. Furnish to the Bank: (a) Prompt written notice if: (i) any Indebt- edness of the Borrower or any of its Subsidiaries is declared or shall become due and payable prior to its stated maturity, or called and not paid when due, (ii) a default shall have oc- curred under any note (other than the Note) or the holder of any such note, or other evidence of Indebtedness, certificate or security evidencing any such Indebtedness or any obligee with respect to any other Indebtedness of the Borrower or any of its Subsidiaries has the right to declare any such Indebt- edness due and payable prior to its stated maturity, (iii) the Borrower shall have decided to change the method by which it shall authorize or continue to authorize the use of the Trade- mark in the operation of each Jennifer Outlet Store not owned by it by requiring that such use be authorized pursuant to a franchising or similar agreement between it and the owner of such Jennifer Outlet Store rather than pursuant to a licensing - 31 - agreement, (iv) Greenfield shall have died or become disabled or (v) there shall have occurred and be continuing a Default or an Event of Default; (b) Prompt written notice of: (i) any cita- tion, summons, subpoena, order to show cause or other document naming the Borrower or any of its Subsidiaries a party to any proceeding before any Governmental Authority which could rea- sonably be expected to have a Material Adverse Effect, and in- clude with such notice a copy of such citation, summons, sub- poena, order to show cause or other document, (ii) any lapse or other termination of any material Intellectual Property, license, permit, franchise or other authorization issued to the Borrower or any of its Subsidiaries by any Person or Gov- ernmental Authority, (iii) any refusal by any Person or Gov- ernmental Authority to renew or extend any such material In- tellectual Property, license, permit, franchise or other au- thorization, which lapse, termination, refusal or dispute could reasonably be expected to have a Material Adverse Effect and (iv) the termination of the business operation of any Jen- nifer Outlet Store not owned by the Borrower as a result of the change referred to in subsection (a) (iii) above; (c) Promptly upon becoming available, copies of all (i) regular, periodic or special reports, schedules and other material which the Borrower or any of its Subsidiaries may now or hereafter be required to file with or deliver to any securities exchange or the SEC and (ii) material news re- leases and annual reports relating to the Borrower or any of its Subsidiaries; (d) Prompt written notice of any order, no- tice, claim or proceeding received by, or brought against, the Borrower or any of its Subsidiaries, or with respect to any of the Real Property, under any Environmental Law; (e) In the event that the Bank shall have a reasonable basis for believing that Hazardous Substances may be on, at, under or around any Real Property in violation of any applicable Environmental Law, conduct and complete (at the Borrower's expense) all investigations, studies, samplings and testings relative to such Hazardous Substances as the Bank may reasonably request; (f) Such other information as the Bank shall rea- sonably request from time to time. - 32 - 7.3. Legal Existence. Maintain, and cause each of its Subsidiaries so to maintain, the corporate or partnership existence of the Bor- rower or such Subsidiary, as the case may be, in good standing in the jurisdiction of its incorporation or formation, as the case may be, and in each other jurisdiction in which the fail- ure so to do could reasonably be expected to have a Material Adverse Effect, provided that a Subsidiary need not maintain its corporate or partnership existence in the jurisdiction of its incorporation or formation if the failure so to do could not reasonably be expected to have a Material Adverse Effect. 7.4. Taxes. Pay and discharge when due, and cause each of its Subsidiaries so to do, all Taxes, assessments and governmental charges, license fees and levies upon, or with respect to, the Borrower or such Subsidiary, as the case may be, and all Taxes upon the income, profits and Property of the Borrower and its Subsidiaries, which if unpaid, could reasonably be expected to have a Material Adverse Effect or become a Lien on the Prop- erty of the Borrower or such Subsidiary, as the case may be (other than a Permitted Lien), unless and to the extent only that such Taxes, assessments, charges, license fees and levies shall be contested in good faith and by appropriate proceed- ings diligently conducted by the Borrower or such Subsidiary, as the case may be, and provided that any such contested Tax, assessment, charge, license fee or levy shall not constitute, or create, a Lien on any Property of the Borrower or such Sub- sidiary, as the case may be, senior or equal to the Liens granted to the Bank by the Security Agreement on such Prop- erty, and, provided further, that the Borrower shall give the Bank prompt notice of such contest and that such reserve or other appropriate provision as shall be required by the Ac- countants in accordance with GAAP shall have been made there- for. 7.5. Insurance. (a) Maintain, and cause each of its Subsidiaries so to maintain, insurance with financially sound insurance carri- ers on such of its Property or such Subsidiary's Property, as the case may be, against at least such risks, and in at least such amounts, as are usually insured against by similar busi- nesses and which, in the case of property insurance, shall be in amounts sufficient to prevent the Borrower or such Subsid- iary, as the case may be, from becoming a co-insurer, includ- ing, without limitation, public liability (bodily injury and property damage), fidelity, and workers' compensation with - 33 - deductibles not exceeding $5,000 per occurrence, and file with the Bank within 10 days after request therefor a detailed list of such insurance then in effect, stating the names of the carriers thereof, the policy numbers, the insureds thereunder, the amounts of insurance, dates of expiration thereof, and the Property and risks covered thereby, together with a certifi- cate of the Vice President-Finance and Treasurer (or such other officer as shall be acceptable to the Bank) of the Bor- rower certifying that in the opinion of such officer, such insurance complies with the obligations of the Borrower under this Section, and is in full force and effect. (b) Insurance Covering Collateral. At all times insure all of the tangible Collateral against all risks as are customarily insured against by companies engaged in similar businesses, and maintain at all times general public liability insurance with respect to all of the tangible Collateral against damage resulting from bodily injury, including death or damage to Property of others, all such insurance being in amounts equal to no less than that customarily carried by com- panies engaged in similar businesses, with deductibles not exceeding $5,000 per occurrence. Promptly upon request there- for, the Borrower will deliver or cause to be delivered to the Bank originals or duplicate originals of all such policies of insurance. All such insurance policies shall be endorsed to provide that, in respect of the interests of the Bank: (i) the Bank shall be an additional insured, (i) twenty days' prior written notice of any cancellation, reduction of amounts pay- able, or any changes and amendments shall be given to the Bank, and (iii) the Bank shall have the right, but not the obligation, to pay any premiums due or to acquire other such insurance upon the failure of the Borrower to pay the same or to so insure. All property insurance policies shall name the Bank as sole loss payee in respect of each claim relating to the tangible Collateral and resulting in a payment under any such insurance policy exceeding $100,000. Provided that no Default or Event of Default shall exist, the Bank agrees, promptly upon its receipt thereof, to pay over to the Borrower the proceeds of such payment to enable the Borrower to repair, restore or replace the Property subject to such claim. If a Default or Event of Default shall exist, the Bank shall (i) hold the proceeds of such payment as Collateral until such Default or Event of Default shall no longer exist and then pay over the same to the Borrower to enable the Borrower to re- pair, restore or replace or cause to be repaired, restored or replaced the Property subject to the claim which resulted in such payment or (ii) hold such proceeds as Collateral and ap- ply the same to the obligations of the Borrower under the Loan Documents in such order, in such amounts and at such times as the Bank shall decide. - 34 - (c) Concurrent Insurance. The Borrower shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained pur- suant to Section 7.5(b) unless the Bank has approved the car- rier and the form and content of the insurance policy, includ- ing, without limitation, naming the Bank as an additional in- sured and sole loss payee thereunder. 7.6. Payment of Indebtedness and Performance of Oblia- tions. Pay and discharge when due, and cause each of its Subsidiaries so to pay and discharge when due, all lawful In- debtedness, obligations and claims for labor, materials and supplies or otherwise which, if unpaid, might (i) have a Mate- rial Adverse Effect, or (ii) become a Lien upon Property of the Borrower or such Subsidiary, as the case may be, other than a Permitted Lien, unless and to the extent only that the validity of such Indebtedness, obligation or claim shall be contested in good faith and by appropriate proceedings dili- gently conducted by it or such Subsidiary, as the case may be, and that any such contested Indebtedness, obligations or claims shall not constitute, or create, a Lien on any Property of the Borrower or such Subsidiary, as the case may be, senior or equal to the Lien granted to the Bank under the Security Agreement on such Property, and further provided that the Bor- rower shall give the Bank prompt notice of any such contest and that such reserve or other appropriate provision as shall be required by the Accountants in accordance with GAAP shall have been made therefor. 7.7. Condition of Property. At all times, maintain, protect and keep in good repair, working order and condition (ordinary wear and tear excepted), and cause each of its Subsidiaries so to do, all Property necessary to the operation of the Borrower's or such Subsidiary's business, as the case may be. 7.8. Observance of Legal Requirements. Observe and comply in all respects, and cause each of its Subsidiaries so to do, with all laws, ordinances, or- ders, judgments, rules, regulations, certifications, fran- chises, permits, licenses, directions and requirements of all Governmental Authorities, which now or at any time hereafter may be applicable to it or such Subsidiary, as the case may be, including, without limitation, ERISA and all Environmental Laws, a violation of which could reasonably be expected to - 35 - have a Material Adverse Effect, except such thereof as shall be contested in good faith and by appropriate proceedings diligently conducted by it or such Subsidiary, as the case may be, provided that the Borrower shall give the Bank prompt no- tice of such contest and that such reserve or other appropri- ate provision as shall be required by the Accountants in ac- cordance with GAAP shall have been made therefor. 7.9. Inspection of Property; Books and Records; Discus- sions. Keep, and cause each of its Subsidiaries to keep, proper books of record and account in which full, true and correct entries in conformity with GAAP and all requirements of law shall be made of all dealings and transactions in rela- tion to the business and activities of the Borrower or such Subsidiary, as the case may be, and permit representatives of the Bank to visit the offices of the Borrower or such Subsid- iary to inspect any of its or such Subsidiary's Property and examine and make copies or abstracts from any of its or such Subsidiary's books and records at any reasonable time and as often as may reasonably be desired, and to discuss the busi- ness, operations, prospects, licenses, Property and financial condition of the Borrower or such Subsidiary with the officers thereof and the Accountants. 7.10. Licenses, Intellectual Property. Maintain, and cause each of its Subsidiaries to maintain, in full force and effect, all material licenses, franchises, Intellectual Property, permits, licenses, authori- zations and other rights as are necessary for the conduct of its or such Subsidiary's business. 7.11.Assignment of Trademark. As soon as practicable but in any event within 60 days after the Effective Date, deliver to the Bank evidence in all respects reasonably satisfactory to the Bank that the Trademark shall have been duly and validly assigned to the Borrower and all necessary applications, registrations and recordings in connection therewith shall have been made, in- cluding, without limitation, any such applications, registra- tions and recordings which are required to be made in the United States Patent and Trademark Office or in any similar office or agency of the United States or any state thereof. - 36 - 7.12. Minimum Consolidated Tangible Net Worth. Maintain at all times during the periods set forth below, Consolidated Tangible Net Worth in amounts not less than the following: Period Amount Effective Date through August 31, 1993 $22,000,000 September 1, 1993 through August 31, 1994 $23,000,000 September 1, 1994 through August 31, 1995 $24,000,000 September 1, 1995 and thereafter $25,000,000 7.13. Current Ratio. Maintain at all times during the periods set forth below, a Current Ratio of not less than the ratios set forth below: Period Ratio Effective Date through August 31, 1994 3.00:1.00 September 1, 1994 and thereafter 3.50:1.00 7.14. Interest Coverage Ratio. Maintain at all times an Interest Coverage Ratio of not less than 4.00:1.00. 7.1.5. Maintenance of Certain Agreements. Maintain each of the Warehousing Agreement and the Greenfield Employment Agreement in full force and effect, provided, however, that the Borrower may enter into a new warehousing agreement with Jennifer Warehousing substantially in the form of the draft thereof dated August 31, 1993 and heretofore delivered to the Bank and (i) the Bank shall have received, and be satisfied in all respects with, a copy of - 37 - such new warehousing agreement, (ii) the Borrower shall maintain such new warehousing agreement in full force and effect and (iii) unless the Warehousing Agreement shall be superceded in its entirety by such new warehousing agreement, the Borrower shall continue to maintain the Warehousing Agreement in full force and effect. 8. NEGATIVE COVENANTS The Borrower covenants and agrees that, so long as this Agreement is in effect, any Loan remains outstanding and unpaid, or any other amount is owing to the Bank under any Loan Document the Borrower shall not, directly or indirectly: 8.1. Indebtedness. Create, incur, assume or suffer to exist any li- ability for Indebtedness, or permit any of its Subsidiaries so to do, except (i) Indebtedness due under the Loan Documents, (ii) Indebtedness of the Borrower or such Subsidiary existing on the Effective Date as set forth on Schedule 8.1, but not any increases or refinancings thereof and (iii) Indebtedness consisting of Contingent Obligations permitted by Section 8.4. 8.2. Liens. Create, incur, assume or suffer to exist any Lien, or permit any of its Subsidiaries so to do, upon any of its Property or such Subsidiary's Property, whether now owned or hereafter acquired, except (i) Liens for Taxes, assessments or similar charges incurred in the ordinary course of business which are not delinquent or which are being contested in ac- cordance with Section 7.4, provided that enforcement of such Liens is stayed pending such contest, (ii) Liens in connection with workers' compensation, unemployment insurance or other social security obligations (but not ERISA), (iii) deposits or pledges to secure bids, tenders, contracts (other than con- tracts for the payment of money), leases, statutory obliga- tions, surety and appeal bonds and other obligations of like nature arising in the ordinary course of business, (iv) zoning ordinances, easements, rights of way, minor defects, ir- regularities, and other similar restrictions affecting Real Property which do not materially adversely affect the value of such Real Property or the financial condition of the Borrower or such Subsidiary, as the case may be, or impair its use for the operation of the business of the Borrower or such Subsid- iary, (v) statutory Liens arising by operation of law such as - 38 - mechanics', materialmen's, carriers', warehousemen's liens in- curred in the ordinary course of business which are not delin- quent or which are being contested in accordance with Section 7.6, provided that enforcement of such Liens is stayed pending such contest, (vi) Liens arising out of judgments or decrees which are being contested in accordance with Section 7.8, pro- vided that enforcement of such Liens is stayed pending such contest, (vii) Liens in favor of the Bank under the Security Agreement and (viii) Liens on Property of the Borrower or such Subsidiary, as the case may be, existing on the Effective Date as set forth on Schedule 8.2, but not any increases or ref inancings in the amounts secured thereby. 8.3. Merger. Consolidation and Certain Dispositions of Property. Consolidate with, be acquired by, or merge into or with any Person, or sell, lease or otherwise dispose of all or substantially all of its Property, or permit any of its Sub- sidiaries so to do, provided, however, that any such Subsid- iary which owns a Jennifer Outlet Store may dispose of all or substantially all of its Property in connection with the ter- mination of the business operation of such Jennifer Outlet Store. 8.4. Continent Obligations. Assume, guarantee, indorse, contingently agree to purchase or perform, or otherwise become liable upon any Con- tingent Obligation or permit any of its Subsidiaries so to do, except (i) the Contingent Obligations of the Borrower or such Subsidiary, as the case may be, existing on the Effective Date as set forth on Schedule 8.4 and (ii) the Contingent Obliga- tions of the Borrower under the Jennifer Guaranty. 8.5. Dividends and Purchase of Stock. Declare or pay any dividends payable in cash or oth- erwise or apply any of its Property to the purchase, redemp- tion or other retirement of, or set apart any sum for the pay- ment of any dividends on, or make any other distribution by reduction of capital or otherwise in respect of, any shares of its Stock, or permit any of its Subsidiaries so to do, except that a wholly-owned Subsidiary of the Borrower may declare and pay dividends to the Borrower. 8.6. Investments. Loans. Etc. At any time, purchase or otherwise acquire, hold or invest in the Stock of, or any other interest in, any Person, - 39 - or make any loan or advance to, or enter into any arrangement for the purpose of providing funds or credit to, or make any other investment, whether by way of capital contribution, time deposit or otherwise, in or with any Person, or permit any of its Subsidiaries so to do, (all of which are sometimes re- ferred to herein as "Investments") except: (a) Investments in short-term domestic and eurodollar time deposits with the Bank, or any other com- mercial bank, trust company or national banking association incorporated under the laws of the United States or any state thereof and having undivided capital, surplus and undivided profits exceeding $500,000,000; (b) Investments in short-term direct obliga- tions of the United States or agencies thereof whose obliga- tions are guaranteed by the United States; (c) Investments existing on the date hereof as set forth on Schedule 8.6; (d) Investments consisting of loans or ad- vances to Affiliates in an aggregate outstanding principal amount not exceeding at any time $8,000,000, provided that (i) each such loan or advance shall be on such terms and shall be secured by such collateral as shall be satisfactory to the Bank and (ii) no Default or Event of Default shall exist im- mediately before or after giving effect to each such loan or advance; (e) Investments in connection with the estab- lishment after the Effective Date of additional Subsidiaries pursuant to Section 8.9 in an aggregate amount not exceeding $5,000,000; and (f) normal business banking accounts and short-term certificates of deposit and time deposits in, or issued by, federally insured institutions in amounts not ex- ceeding the limits of such insurance. 8.7. Business and Name Chanes. Materially change the nature of the business of the Borrower and its Subsidiaries as conducted on the Effective Date, or alter or modify its name, structure or status, or permit any of its Subsidiaries so to do. - 40 - 8.8. Sale of Property. Sell, exchange, lease, transfer or otherwise dispose of any of its Property, or permit any of its Subsidiaries so to do, except sales in the ordinary course of business. 8.9. Subsidiaries. Create or acquire any Subsidiary not set forth on Schedule 4.1, or permit any of its Subsidiaries so to do, ex- cept that the Borrower or such Subsidiary, as the case may be, shall be permitted to create additional Subsidiaries provided that (i) the business of each such additional Subsidiary shall consist solely of owning and operating a Jennifer Outlet Store and (ii) the aggregate number of all additional Subsidiaries permitted to be created hereunder shall not exceed twelve. 8.10. Certificate of Incorporation and By-laws. Amend or otherwise modify its certificate of incor- poration or by-laws in any way which would adversely affect the interests of the Bank under any of the Loan Documents, or permit any of its Subsidiaries so to do. 8.11. ERISA. Adopt or become obligated to contribute to any Plan or Multiemployer Plan, or permit any ERISA Affiliate so to do. 8.12. Prepavments of Indebtedness. Prepay or obligate itself to prepay, in whole or in part, any Indebtedness (other than the Indebtedness under the Loan Documents), or permit any of its Subsidiaries so to do. 8.13. Sale and Leaseback. Enter into any arrangement with any Person providing for the leasing by it of Property which has been or is to be sold or transferred by it to such Person or to any other Per- son to whom funds have been or are to be advanced by such Per- son on the security of such Property or its rental obliga- tions, or permit any of its Subsidiaries so to do. 8.14. Fiscal Year. Change its fiscal year from that in effect on the Effective Date, or permit any of its Subsidiaries so to do. - 41 - 8.15. Amendments. Etc. of Certain Areements. Enter into or agree to any amendment, modification or waiver of any term or condition of (i) the Warehousing Agreement, except to the extent that any term or condition thereof is amended, modified or waived pursuant to the new warehousing agreement referred to in Section 7.15, (ii) the Greenfield Employment Agreement or (iii) the new warehousing agreement referred to in Section 7.15. 8.16. Transactions with Affiliates. Except as permitted under Section 8.6(d), become a party to any transaction with an Affiliate unless its Board of Directors shall have determined that the terms and conditions relating thereto are as favorable to it as those which would be obtainable at the time in a comparable arm's-length trans- action with a Person other than such Affiliate, or permit any of its Subsidiaries so to do. 8.17. Maintenance of Cash and Cash Equivalents. Permit, at any time, the cash and cash equivalents of the Borrower and its Subsidiaries on deposit with, or is- sued by, the Bank to be in an amount less than $2,000,000. 9. DEFAULT 9.1. Events of Default. The following shall each constitute an "Event of Default" hereunder: (a) The failure of the Borrower to pay princi- pal on the Note on the date when due and payable or to pay any installment of interest or any other fees or expenses payable by it under any Loan Document when due and payable; or (b) The use of the proceeds of any Loan in a manner inconsistent with or in violation of Section 2.8; or (c) The failure of the Borrower to observe or perform any covenant or agreement contained in Sections 7.3, 7.12, 7.13, 7.14, 7.15 or Section 8; or (d) The failure to observe or perform any other term, covenant, or agreement contained in any Loan Docu- ment and such failure shall have continued unremedied for a - 42 - period of 30 days after the Chairman, President, Chief Execu- tive Officer, the Vice President-Finance and Treasurer or any other Vice President of the Borrower shall have obtained ac- tual knowledge thereof; or (e) Any representation or warranty of the Bor- rower (or of any officer of the Borrower on its behalf) made in any Loan Document or in any certificate, report, opinion (other than an opinion of counsel) or other document delivered or to be delivered pursuant thereto, shall prove to have been incorrect or misleading (whether because of misstatement or omission) in any material respect when made; or (f) Obligations of the Borrower (other than its obligations under the Note) or any of its Subsidiaries in an aggregate amount for the Borrower and its Subsidiaries in excess of $150,000, whether as principal, guarantor, surety or other obligor, for the payment of any Indebtedness or operat- ing leases (i) shall become or shall be declared to be due and payable prior to the expressed maturity thereof, or (ii) shall not be paid when due or within any grace period for the pay- ment thereof, or (iii) any holder of any such obligation shall have the right to declare such obligation due and payable prior to the expressed maturity thereof; or (g) The Borrower or any of its Subsidiaries shall (i) suspend or discontinue its business, (ii) make an assignment for the benefit of creditors, (iii) generally not be paying its debts as such debts become due, (iv) admit in writing its inability to pay its debts as they become due, (v) file a voluntary petition in bankruptcy, (vi) become insolvent (however such insolvency shall be evidenced), (vii) file any petition or answer seeking for itself any reorganization, ar- rangement, composition, readjustment of debt, liquidation or dissolution or similar relief under any present or future statute, law or regulation of any jurisdiction, (viii) peti- tion or apply to any tribunal for any receiver, custodian or any trustee for any substantial part of its Property, (ix) be the subject of any such proceeding filed against it which re- mains undismissed for a period of 45 days, (x) file any answer admitting or not contesting the material allegations of any such petition filed against it or any order, judgment or de- cree approving such petition in any such proceeding, (xi) seek, approve, consent to, or acquiesce in any such proceed- ing, or in the appointment of any trustee, receiver, custo- dian, liquidator, or fiscal agent for it, or any substantial part of its Property, or an order is entered appointing any such trustee, receiver, custodian, liquidator or fiscal agent and such order remains in effect for 45 days, (xii) take any - 43 - ` formal action for the purpose of effecting any of the forego- ing or looking to its liquidation or dissolution; or (h) An order for relief is entered under the United States bankruptcy laws or any other decree or order is entered by a court having jurisdiction (i) adjudging the Bor- rower or any of its Subsidiaries bankrupt or insolvent, (ii) approving as properly filed a petition seeking reorganization, liquidation, arrangement, adjustment or composition of or in respect of the Borrower or any of its Subsidiaries under the United States bankruptcy laws or any other applicable federal or state law, (iii) appointing a receiver, liquidator, as- signee, trustee, custodian, sequestrator (or other similar official) of the Borrower or any of its Subsidiaries or of any substantial part of the Property thereof, (iv) ordering the winding up or liquidation of the affairs of the Borrower or any of its Subsidiaries, and any such decree or order contin- ues unstayed and in effect for a period of 45 days; or (i) Judgments or decrees against the Borrower or any of its Subsidiaries in an aggregate amount for the Bor- rower and its Subsidiaries in excess of $150,000 shall remain unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of 30 days; or (j) The occurrence of an Event of Default un- der and as defined in the Security Agreement; or (k) Any Loan Document shall cease, for any reason, to be in full force and effect, or the Borrower shall so assert in writing or shall disavow any of its obligations thereunder; or (l) There shall occur a Material Adverse Change; or (m) Greenfield, Love and Seidner shall, col- lectively, not own, directly or indirectly, at least 10% of the issued and outstanding voting common Stock of the Borrower free and clear of all Liens; or (n) The occurrence of a default under the Warehousing Loan Agreement and the applicable grace period or cure period, if any, with respect thereto shall have expired; or (o) The occurrence of a default under the Warehousing Agreement and the applicable grace period or cure period, if any, with respect thereto shall have expired; or - 44 - (p) The occurrence of a default under the Greenfield Employment Agreement and the applicable grace pe- riod or cure period, if any, with respect thereto shall have expired. Upon the occurrence of an Event of Default or at any time thereafter during the continuance thereof, (a) if such event is an Event of Default specified in clause (g) or (h) above, the Commitment shall immediately and automatically ter- minate and the Loans, all accrued and unpaid interest thereon, and all other amounts owing to the Bank under the Loan Docu- ments shall immediately become due and payable, and the Bank may exercise any and all remedies and other rights provided to it in the Loan Documents, and (b) if such event is any other Event of Default, any or all of the following actions may be taken: (i) the Bank may declare the Commitment to be termi- nated forthwith, whereupon the Commitment shall immediately terminate, and (ii) the Bank may, by notice to the Borrower, declare the Loans, all accrued and unpaid interest thereon and all other amounts owing to it under the Loan Documents to be due and payable forthwith, whereupon the same shall im- mediately become due and payable and the Bank may exercise any and all remedies and other rights provided to it in the Loan Documents. Except as otherwise provided in this Section, pre- sentment, demand, protest and all other notices of any kind are hereby expressly waived. The Borrower hereby further ex- pressly waives and covenants not to assert any appraisement, valuation, stay, extension, redemption or similar laws, now or at any time hereafter in force which might delay, prevent or otherwise impede the performance or enforcement of any Loan Document. In the event that the Commitment shall have been terminated or the Note shall have been declared due and pay- able pursuant to the provisions of this Section, any funds received by the Bank from or on behalf of the Borrower shall be applied by the Bank in liquidation of the Loans and the obligations of the Borrower under the Loan Documents in the following manner and order: (i) first, to the payment of any fees or expenses due the Bank from the Borrower; (ii) second, to reimburse the Bank for any expenses due to the Bank under the Loan Documents; (iii) third, to the payment of accrued Commitment Fees, and all other fees, expenses and amounts due the Bank under the Loan Documents (other than principal and interest on the Note); (iv) fourth, to the payment of interest due on the Note; (v) fifth, to the payment of principal out- standing on the Note; and (vi) sixth, to the payment of any other amounts owing to the Bank under any Loan Document. - 45 - 10. OTHER PROVISIONS. 10.1. Amendments and Waivers. The Bank and the Borrower may, from time to time, enter into written amendments, supplements or modifications of the Loan Documents and the Bank may execute and deliver to the Borrower a written instrument waiving or a consent to a depar- ture from, on such terms and conditions as the Bank may specify in such instrument, any of the requirements of the Loan Documents or any Default or Event of Default and its con- sequences. Any such amendment, supplement, modification, waiver or consent shall be binding upon the Borrower, the Bank and all future holders of the Note. In the case of any waiver, the Borrower and the Bank shall be restored to their former position and rights under the Loan Documents, and any Default or Event of Default waived shall not extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. 10.2. Notices. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made (i) when delivered by hand, (ii) three Business Days after having been deposited in the mail, first-class postage prepaid or (iii) when sent, in the case of telecopier notice, in each case, addressed as fol- lows: if to the Borrower: Jennifer Convertibles, Inc. East 331 Route 4 West Paramus, New Jersey 07652 Attention: Harley J. Greenfield, President Telephone: (201) 343-1610 Telecopy: (201) 343-2274 with a copy to: Robinson Silverman Pearce Aronsohn & Berman 1290 Avenue of the Americas New York, New York 10104 Attention: Michael N. Rosen, Esq. Telephone: (212) 541-2000 Telecopy: (212) 541-4630 - 46 - and Bernard Wincig, Esq. 574 Fifth Avenue New York, New York 10036 Telephone: (212) 575-8333 Telecopy: (212) 575-8525 if to the Bank: IBJ Schroder Bank & Trust Company One State Street New York, New York 10004 Attention: Jennifer Marshall, Assistant Vice President Telephone: (212) 858-2954 Telecopy: (212) 425-0542, except that any notice, request or demand by the Borrower to or upon the Bank pursuant to Section 2.3 shall not be ef fec- tive until received. Any party to a Loan Document may rely on signatures of the parties thereto which are transmitted by telecopier or other electronic means as fully as if originally signed. 10.3. No Waiver: Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Bank, any right, remedy, power or privilege under any Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege under any Loan Document preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, pow- ers and privileges under the Loan Documents are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 10.4. Survival of Representations and Warranties. All representations and warranties made under the Loan Documents and in any document, certificate or statement delivered pursuant thereto or in connection therewith shall survive the execution and delivery of the Loan Documents. - 47 - 10.5. Payment of Expenses and Taxes. The Borrower agrees, promptly upon presentation of a statement or invoice therefor, to pay or reimburse the Bank for all its out-of-pocket costs and expenses, including, with- out limitation, the reasonable fees and disbursements of its counsel, incurred in connection with (i) the development, preparation and execution of the Loan Documents and any amend- ment, supplement or modification thereto (whether or not ex- ecuted and whether or not any Loan is made), any documents prepared in connection therewith and the consummation of the tranactIons conteniplated thereby, as well as all accounting, audit, appraisal, field exam and credit and background check fees incurred from time to time by the Bank, (ii) any Default or Event of Default and any enforcement or collection proceed- ings resulting therefrom or in connection with the negotiation of any restructuring or "work-out" (whether consummated or not) of the obligations of the Bank and the Borrower under any of the Loan Documents and (iii) the enforcement of this Sec- tion. In addition, the Borrower agrees to (i) pay, indemnify, and hold the Bank harmless from and against, any and all re- cording and filing fees and any and all liabilities with re- spect to, or resulting from any delay in paying, stamp, excise and other similar taxes, if any, which may be payable or de- termined to be payable in connection with the execution and delivery of, or consummation of any of the transactions con- templated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, the Loan Documents and any such other documents, and (ii) pay, indem- nify and hold the Bank and its officers, directors and employ- ees harmless from and against any and all other liabilities, obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever (including, without limitation, reason- able counsel fees and disbursements) with respect to the en- forcement and performance of the Loan Documents, the use of the proceeds of the Loans and the enforcement and performance of the provisions of any subordination agreement now or here- after executed in favor of the Bank (all the foregoing, col- lectively, the "Indemnified Liabilities") and, if and to the extent that the foregoing indemnity may be unenforceable for any reason, the Borrower agrees to make the maximum payment permitted or not prohibited under applicable law, provided, however, that the Borrower shall have no obligation hereunder to pay Indemnified Liabilities to the Bank to. the extent aris- ing from the gross negligence or willful miconduct of the Bank or claims between one indemnified party and another in- demnified party. The agreements in this Section shall survive the termination of the Commitment and the payment of all amounts payable under the Loan Documents. - 48 - 10.6. Successors and Assigns. (a) The Loan Documents shall be binding upon and inure to the benefit of the Borrower, the Bank, all future holders of the Note and their respective successors and as- signs, except that the Borrower may not assign, delegate or transfer any of its rights or obligations under the Loan Docu- ments without the prior written consent of the Bank. (b) The Bank may from time to time grant participa- tions in or assign all or any part of the Loans, the Note, or the Commitment to one or more banks, insurance companies, fi- nancial institutions, pension funds, mutual funds or other corporations or institutions. The Borrower agrees, at its expense, to cooperate fully with the Bank in connection with any such participation or assignment and to execute and de- liver such documents (including, without limitation, a new Note or notes) as the Bank shall reasonably require. (c) If any participation or assignment pursuant to subsection (b) above shall be made to any Person that is orga- nized under the laws of any jurisdiction other than the United States or any State thereof, such Person shall deliver to the Borrower and the Bank such certificates, documents or other evidence as the Borrower or the Bank may require from time to time as are necessary to establish that such Person is not subject to withholding under Section 1441 or 1442 of the Code or as may be necessary to establish, under any law imposing upon the Borrower, whether existing at the time of such par- ticipation or assignment or thereafter, an obligation to with- hold any portion of the payments made by the Borrower under the Loan Documents, that payments to such Person are not sub- ject to any such withholding because such Person is eligible for the benefits of a tax treaty which provides for a zero % rate of tax on any payments under the Loan Documents or be- cause any such payments to such Person are effectively con- nected with the conduct by such Person of a trade or business in the United States. (d) The Bank shall not, as between the Borrower and the Bank, be relieved of any of its obligations under the Loan Documents as a result of the granting of participations in all or any part of the Loans, the Commitment or the Note. (e) Notwithstanding anything to the contrary con- tained in Section 10.6(b), the Bank may at any time or from time to time assign all or any portion of its rights under the Loan Documents to a Federal Reserve Bank, provided that any - 49 - such assignment shall not release the Bank from its obliga- tions thereunder. 10.7. Counterparts. Each Loan Document (other than the Note) may be ex- ecuted by one or more of the parties thereto on any number of separate counterparts and all of said counterparts taken to- gether shall be deemed to constitute one and the same docu- ment. It shall not be necessary in making proof of any Loan Document to produce or account for more than one counterpart signed by the party to be charged. A telecopied counterpart of any Loan Document or to any document evidencing, and of any amendment, modification, consent or waiver to or of any Loan Document shall be deemed to be an originally executed counter- part. Any party to a Loan Document may rely upon the signa- tures of any other party thereto which are transmitted by telecopier or other electronic means to the same extent as if originally signed. 10.8. Set-off. In addition to any rights and remedies of the Bank provided by law, upon the occurrence of an Event of Default and the acceleration of the obligations owing to the Bank in connection with the Loan Documents, or at any time upon the occurrence and during the continuance of an Event of Default, under Section 9.1(a), the Bank shall have the right, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent not prohibited by ap- plicable law, to set-off and apply against any amounts owing to the Bank in connection with the Loan Documents, at, or at any time after, the happening of any of the above-mentioned events, including, without limitation, all deposits referred to in Section 8.17, all deposits created pursuant to the Cash Management Services Agreement and the ACM Cash Concentration Services Agreement and all other deposits of the Borrower with the Bank. To the extent not prohibited by applicable law, the aforesaid right of set-off may be exercised by the Bank against the Borrower or against any trustee in bankruptcy, custodian, debtor in possession, assignee for the benefit of creditors, receiver, or execution, judgment or attachment creditor of the Borrower, or against anyone else claiming through or against the Borrower or such trustee in bankruptcy, custodian, debtor in possession, assignee for the benefit of creditors, receivers, or execution, judgment or attachment creditor, notwithstanding the fact that such right of set-off shall not have been exercised by the Bank prior to the making, filing or issuance, or service upon the Bank of, or of notice - 50 - of, any such petition, assignment for the benefit of credi- tors, appointment or application for the appointment of a re- ceiver, or issuance of execution, subpoena, order or warrant. The Bank agrees promptly to notify the Borrower after any such set-off and application made by the Bank, provided that the failure to give such notice shall not affect the validity of such set-off and application. 10.9. Indemnity. The Borrower agrees to indemnify and hold harmless the Bank and its affiliates, directors, officers, employees, attorneys and agents (each an "Indemnified Person") from and against any loss, cost, liability, damage or expense (includ- ing the reasonable fees and disbursements of counsel of such Indemnified Person, including all local counsel hired by any such counsel) incurred by such Indemnified Person in investi- gating, preparing for, defending against, or providing evi- dence, producing documents or taking any other action in re- spect of, any commenced or threatened litigation, administra- tive proceeding or investigation under any federal securities law or any other statute of any jurisdiction, or any regula- tion, or at common law or otherwise, which is alleged to arise out of or is based upon (i) any untrue statement or alleged untrue statement of any material fact by the Borrower in any document or schedule executed or filed with any Governmental Authority by or on behalf of the Borrower; (ii) any omission or alleged omission to state any material fact required to be stated in such document or schedule, or necessary to make the statements made therein, in light of the circumstances under which made, not misleading; (iii) any acts, practices or omis- sions or alleged acts, practices or omissions of the Borrower or its agents relating to the use of the proceeds of any or all borrowings made by the Borrower which are alleged to be in violation of Section 2.8, or in violation of any federal se- curities law or of any other statute, regulation or other law of any jurisdiction applicable thereto; or (iv) any acquisi- tion or proposed acquisition by the Borrower of all or a por- tion of the Stock, or all or a portion of the assets, of any - -Person whether or not such Indemnified Person is a party thereto. The indemnity set forth herein shall be in addition to any other obligations or liabilities of the Borrower to each Indemnified Person under the Loan Documents or at common law or otherwise, and shall survive any termination of the Loan Documents, the expiration of the Commitment and the pay- ment of all Indebtedness of the Borrower under the Loan Docu- ments, provided that the Borrower shall have no obligation under this Section to an Indemnified Person with respect to any of the foregoing to the extent found in a final judgment of a court having jurisdiction to have resulted primarily out - 51 - of the gross negligence or wilful misconduct of such Indemni- fied Person or arising solely from claims between one such Indemnified Person and another such Indemnified Person. 10.10. Governing Law. The Loan Documents and the rights and obligations of the parties thereunder shall be governed by, and construed and interpreted in accordance with, the internal laws of the State of New York, without regard to principles of conflict of laws. 10.11. Headings Descriptive. Section headings have been inserted in the Loan Documents for convenience only and shall not be construed to be a part thereof. 10.12. Severability. Every provision of the Loan Documents is intended to be severable, and if any term or provision thereof shall be invalid, illegal or unenforceable for any reason, the valid- ity, legality and enforceability of the remaining provisions thereof shall not be affected or impaired thereby, and any in- validity, illegality or unenforceability in any jurisdiction shall not affect the validity, legality or enforceability of any such term or provision in any other jurisdiction. 10.13. Integration. All exhibits to a Loan Document shall be deemed to be a part thereof. The Loan Documents embody the entire agreement and understanding among the Borrower and the Bank with respect to the subject matter thereof and supersede all prior agreements and understandings among the Borrower and the Bank with respect to the subject matter thereof. 10.14. Consent to Jurisdiction. The Borrower hereby irrevocably submits to the ju- risdiction of any New York State or federal court sitting in the City of New York over any suit, action or proceeding aris- ing out of or relating to the Loan Documents. The Borrower hereby irrevocably waives, to the fullest extent permitted or not prohibited by law, any objection which it may now or here- after have to the laying of the venue of any such suit, action or proceeding brought in such a court and any claim that any such suit, action or proceeding brought in such a court has been brought in an inconvenient forum. The Borrower hereby - 52 - agrees that a final judgment in any such suit, action or pro- ceeding brought in such a court, after all appropriate ap- peals, shall be conclusive and binding upon it. 10.15. Service of Process. The Borrower agrees that process may be served against it in any suit, action or proceeding referred to in Section 10.14 by sending the same by first-class mail, or by overnight courier service, to the address of the Borrower set forth in Section 10.2. The Borrower hereby agrees that any such service (i) shall be deemed in every respect effective service of process upon it in any such suit, action, or pro- ceeding, and (ii) shall to the fullest extent enforceable by law, be taken and held to be valid personal service upon and personal delivery to it. 10.16. No Limitation on Service or Suit. Nothing in the Loan Documents or any modification, waiver, consent or amendment thereto shall affect the right of the Bank to serve process in any manner permitted by law or limit the right of the Bank to bring proceedings against the Borrower in the courts of any jurisdiction or jurisdictions in which the Borrower may be served. 10.17. WAIVER OF TRIAL BY JURY. THE BANK AND THE BORROWER HEREBY KNOWINGLY, VOL- UNTARILY AND INTENTIONALLY WAIVE ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING OUT OF, UNDER OR IN CONNECTION WITH THE LOAN DOCUMENTS OR THE TRANSAC- TIONS CONTEMPLATED THEREIN. FURTHER, THE BORROWER HEREBY CER- TIFIES THAT NO REPRESENTATIVE OF THE BANK OR COUNSEL TO THE BANK HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE BANK WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. THE BORROWER ACKNOWLEDGES THAT THE BANK HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, INTER ALIA, THE PROVISIONS OF THIS SECTION. 10.18. Concerning Inventory Owned by Subsidiaries. If the Borrower shall so request in writing, the Bank will consider such amendments to the Loan Documents as may be necessary or appropriate in its sole and absolute dis- cretion to include inventory owned by Subsidiaries of the Bor- rower in the Borrowing Base, provided that nothing herein shall require the Bank to agree to any such amendment unless it shall, in its sole and absolute discretion, decide to do so. In the event that the Bank shall agree to so include such - 53 - ` inventory, the Bank shall not be under any obligation to ex- ecute any such amendment or related document unless it shall, in its sole and absolute discretion, deem such amendment and related documents to be in form and substance satisfactory to it. - 54 - The parties hereto have caused this Credit Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. JENNIFER CONVERTIBLES, INC., a Delaware corporation By: ------------------------- Name: ------------------------- Title: ------------------------- IBJ SCHRODER BANK & TRUST COMPANY By: ------------------------- Name: ------------------------- Title: ------------------------- - 55 - The parties hereto have caused this Credit Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. JENNIFER CONVERTIBLES, INC., a Delaware corporation By: ------------------------- Name: ------------------------- Title: ------------------------- IBJ SCHRODER BANK & TRUST COMPANY By: ------------------------- Name: ------------------------- Title: ------------------------- - 56 - JENNIFER CONVERTIBLES EXHIBIT A FORM OF NOTE $2,000,000 _____________, 1993 New York, New York FOR VALUE RECEIVED, JENNIFER CONVERTIBLES, INC., a Dela- ware corporation (the "Borrower"), hereby promises to pay on tho Maturity Date to the order of IBJ SCHRODER BANK & TRUST COMPANY (the "Bank"), at the office of the Bank located at One State Street, New York, New York or at such other place as the Bank may specify from time to time, in lawful money of the United States of America, the principal sum of $2,000,000, or such lesser unpaid principal balance as shall be outstanding hereunder, together with interest from the date hereof, on the unpaid principal balance hereof outstanding from time to time, payable at the rate or rates and at the time or times provided for in the Credit Agree- ment, dated as of August 31, 1993, by and between the Borrower and the Bank (as the same may be amended, supple- mented or otherwise modified from time to time, the "Agreement"). Capitalized terms used herein which are not herein defined shall have the meanings ascribed thereto by the Agreement. In no event shall interest payable hereon exceed the Highest Lawful Rate. This Note is the Note referred to in the Agreement and is entitled to the benefits of, and is subject to the terms set forth in, the Agreement. The principal of this Note is payable in the amounts and under the circumstances, and its maturity is subject to acceleration upon the terms, set forth in the Agreement. Except as otherwise provided in the Agree- ment, if any payment on this Note becomes due and payable on a day which is not a Business Day, the maturity thereof shall be extended to the next Business Day and interest shall be payable at the applicable rate or rates specified in the Agreement during such extension period. Presentment for payment, demand, protest, notice of pro- test and notice of dishonor and all other demands, protests and notices in connection with the delivery, performance and enforcement of this Note are hereby waived, except as specifically otherwise provided in the Agreement. This Note is being delivered in, is intended to be per- formed in, shall be construed and interpreted in accordance with, and be governed by the internal laws of, the State of New York, without regard to principles of conflicts of law. This Note may only be amended by an instrument in writ- ing executed pursuant to the provisions of Section 10.1 of the Agreement. JENNIFER CONVERTIBLES, INC. By: ------------------------- Name: ------------------------- Title: ------------------------- -2- SCHEDULE TO NOTE Amount of principal paid or Notation Date Amount prepaid Made By - ---- ------ ------- ------- JENNIFER CONVERTIBLES EXHIBIT B FORM OF BORROWING REQUEST ______________ __, 199_ IBJ Schroder Bank & Trust Company One State Street New York, New York 10004 Attention: Jennifer Marshall, Assistant Vice President Re: Credit Agreement, dated as of August 31, 1993, by and between JENNIFER CONVERTIBLES, INC. (the "Bor- rower") and IBJ SCHRODER BANK & TRUST COMPANY (the "Agreement"). Capitalized terms used herein which are not herein defined shall have the meanings ascribed thereto by the Agreement. 1. Pursuant to Section 2.3 of the Agreement, the Bor- rower hereby gives notice of its intention to borrow Loans in an aggregate principal amount of $_______ on ______ __, 199 . 2. The Borrower hereby certifies that on the date hereof and on the Borrowing Date set forth above, and after giving effect to the Loans requested hereby: (a) The Borrower is and shall be in compliance with all of the terms, covenants and conditions of the Loan Docu- ments. (b) There exists and there shall exist no Default or Event of Default. (c) Each of the representations and warranties con- tained in the Agreement are true and correct on and as of the date hereof, and on the Borrowing Date set forth above. (d) Immediately after giving effect to the Loans, if any, requested to be made hereby, the aggregate outstanding principal balance of the Loans does not exceed the lesser of (i) the Commitment Amount on and as of such date and (ii) the Borrowing Base on and as of such date. The Borrower has caused this certificate to be executed by its Authorized Signatory as of the date and year first written above. JENNIFER CONVERTIBLES, INC. By: ------------------------- Name: ------------------------- Title: ------------------------- JENNIFER CONVERTIBLES EXHIBIT C FORM OF COMPLIANCE CERTIFICATE Date: ____________ I, ______________, do hereby certify that I am the Vice President-Finance and Treasurer of Jennifer Convertibles, Inc., a Delaware corporation (the "Borrcwer"), and that, as such, I am duly authorized to execute and deliver this Compliance Cer- tificate on the Borrower's behalf pursuant to Sections 5.15 and 7.1(c) of the Credit Agreement, dated as of August 31, 1993, by and between the Borrower and IBJ Schroder Bank & Trust Company (the "Bank") (as the same may be amended, supplemented or oth- erwise modified from time to time, the "Agreement"). Capital- ized terms used herein which are not herein defined shall have the meanings ascribed thereto by the Agreement. I hereby certify that: 1. Consolidated Tangible Net Worth as of ______ __, 199_, is $ , calculated as set forth on Schedule 1. 2. The Current Ratio as of ______ __, 199_, is _. _ :1.00, calculated as set forth on Schedule 2. 3. The Interest Coverage Ratio as of ________ __, 199_, is _. __ :1.00, calculated as set forth on Schedule 3. 4. The amount of cash and cash equivalents of the Borrower and it Subsidiaries on deposit with, or issued by, the Bank as of _______ __, 199_ is $_________, calculated as set forth on Schedule 4. 5. There exists no Default or Event of Default un- der the Agreement and, since February 28, 1993, there has oc- curred no Material Adverse Change. 6. The representations and warranties contained in the Loan Documents to which the Borrower is a party are true and correct in all material respects. IN WITNESS WHEREOF, I have executed this Compliance Cer- tificate on this ___ day of _______________, 19__. --------------------------- Vice President- Finance and Treasurer -2- Schedule 1 to Compliance Certificate dated __ /__ /__ Computation of Consolidated Tangible Net Worth 1. Shareholders' equity of the Borrower and its Subsidiaries determined on a Consolidated basis in accordance with GAAP $__________ 2. Unamortized debt discount and expenses $___________ 3. Unamortized organization and reorganization expenses $___________ 4. Patents $__________ 5. Trade or servicemarks $__________ 6. Tradenames $__________ 7. Franchises $__________ 8. Goodwill $_________ 9. Other intangible assets (Specify) $__________ 10. Total intangible assets (Sum of Items 2 through 9) $__________ 11. Consolidated Tangible Net Worth (Item 1 minus Item 10) $__________ 12. Minimum Required Consolidated Tangible Net Worth pursuant to Section 7.12 of the Agreement $__________ Schedule 2 to Compliance Certificate dated __/__/__ Computation of Current Ratio Consolidated Current Assets: 1. Current assets of the Borrower and its Subsidiaries determined on a Consolidated basis in accordance with GAAP $__________ Consolidated Current Liabilities: 2. Current liabilities of the Borrower and its Subsidiaries determined on a Consolidated basis in accordance with GAAP, including the current portion of long-term Indebtedness $__________ 3. Indebtedness in respect of the Loans $___________ 4. Consolidated Current Liabilities (Item 2 less Item 3) $___________ 5. Current Ratio (Item 1:Item 4) __ . ___ :1.00 6. Minimum Required Current Ratio pursuant to Section 7.13 of the Agreement __ . ___ :1.00 Schedule 3 to Compliance Certificate dated __/__/__ Computation of Interest Coverage Ratio 1. Net income of the Borrower and its Subsidiaries determined on a Consolidated basis in accordance with GAAP for the immediately preceding four fiscal quarters $___________ 2. Taxes paid by the Borrower and its Subsidiaries during such period $__________ 3. Interest expense of the Borrower and its Subsidiaries determined on a Consolidated basis in accordance with GAAP (adjusted to give affect to all interest rate swap, cap or other interest rate hedging arrangements and fees and expenses paid in connection with the same, all as determined in accordance with GAAP) to the extent paid or payable in cash during such period $__________ 4. Consolidated EBIT (Sum of Items 1, 2 and 3) $__________ 5. Consolidated Cash Interest Expense (from Item 3) $_________ 6. Interest Coverage Ratio (Item 4:Item 5) __ .__ :1.00 7. Minimum Required Interest Coverage Ratio pursuant to Section 7.14 of the Agreement 4.00:1.00 Schedule 4 to Compliance Certificate dated __ /__ /__ Computation of Cash and Cash Equivalents 1. Cash of the Borrower and its Subsidiaries on deposit with, or issued by, the Bank $__________ 2. Cash equivalents of the Borrower and its Subsidiaries on deposit with, or issued by, the Bank $_________ 3. Cash and cash equivalents (Item 1 plus Item 2) $__________ 4. Minimum permitted amount of cash and cash equivalents pursuant to Section 8.17 of the Agreement $ 2,000,000 EXHIBIT D FORM OF OPINION OF COUNSEL TO THE BORROWER [Date] IBJ Schroder Bank & Trust Company One State Street New York, New York 10004 Re: Credit Agreement (the "Agreement"), dated as of August 31, 1993, by and between Jennifer Convertibles, Inc. and IBJ Schroder Bank & Trust Company (the "Bank") Ladies and Gentlemen: We have acted as special counsel to Jennifer Convertibles, Inc., a Delaware corporation (the "Borrower"), in connection with the Agreement and the other Loan Documents. Capitalized terms used herein which are not herein defined shall have the meanings ascribed thereto by the Agreement. This opinion is furnished to you pursuant to Section 5.5 of the Agreement and may not be relied upon by any other person other than you, your successors and assigns and Emmet, Marvin & Martin, Special Counsel, or for any purpose other than in connection with the transactions contemplated by the Agreement, without our prior written consent in each instance. In connection with the foregoing and the delivery of this opinion, we have examined (i) the executed original of the Agreement, an executed original of the Note, executed originals of the other Loan Documents, and financing statements on Form UCC-1 signed by the Borrower, as debtor, and the Bank, as secured party (collectively, the "Financing Statements"), in connection with the execution and delivery of the Security Agreement; (ii) the certificate of incorporation and by-laws, each as amended to the date hereof, of the Borrower and (iii) those records of the corporate proceedings of the Borrower as we have deemed necessary as a basis for the opinions hereinafter expressed, including, without limitation, proceedings relative to the Loan Documents and the transactions contemplated thereby. We have also examined originals or copies, verified or otherwise identified to our satisfaction as being true copies, of certain records, documents and instruments of the Borrower, certificates of public officials, certificates of officers of the Borrower and all other records, documents, certificates and instruments as we have deemed necessary as a basis for the opinions hereinafter expressed. In our examination, we have assumed the genuineness of all signatures (other than those of the Borrower), the authenticity of all documents submitted to us as originals and the conformity with the originals (and the authenticity of such originals) of all documents submitted to us as copies. Based upon and subject to the foregoing and the qualifications set forth below, having regard for such legal considerations as we deem relevant, we are of the opinion that: 1. The Borrower is duly incorporated and validly existing in good standing under the laws of the jurisdiction of its formation, has all requisite power and authority to own its Property and to carry on its business as now conducted, and is in good standing and authorized to do business in each jurisdiction in which the nature of the business conducted therein or the Property owned therein makes such qualification necessary, except where such failure to qualify could not reasonably be expected to have a Material Adverse Effect. We have also assumed that the Loan Documents have been duly executed and delivered by, and constitute legal, valid and binding and enforceable obligations of each of the parties thereto other than the Parties. 2. The Borrower has full legal power and corporate authority to enter into, execute, deliver and perform the terms of the Loan Documents and to make the borrowings contemplated by the Agreement and the Note, to execute, deliver and carry out the terms of the Note and to incur the obligations provided for therein, all of which have been duly authorized by all proper and necessary corporate action and do not violate its Certificate of Incorporation or By-laws. 3. Each of the Loan Documents (other than the Note) constitutes, and the Note, when issued and delivered pursuant to the Agreement for value received, will constitute, the valid and legally binding obligation of the Borrower, enforceable in accordance with its terms. 4. To the best of our knowledge, except as set forth in Section 4.5 to the Agreement, there are no actions, suits, proceedings or claims (whether or not purportedly on behalf of the Borrower) pending or threatened against the Borrower, or maintained by the Borrower, at law or in equity, before any Governmental Authority which: (i) if adversely determined, could reasonably be expected to have a Material Adverse Effect or (ii) call into question the validity or enforceability of the Loan Documents. 5. No consent, authorization or approval of, notice to, or exemption by, the stockholders, partners, any Governmental Authority or any other Person (except for those which have been obtained, made or given) is required to authorize, or is required in connection with the execution, delivery and performance of the Loan Documents, or is required as a condition to the validity or enforceability of the Loan Documents. -2- 6. To the best of our knowledge, the Borrower is not in default under any mortgage, indenture, contract or agreement to which it is a party or by which it or any of its Property is bound, the effect of which default could reasonably be expected to have a Material Adverse Effect. To the best of our knowledge, the execution, delivery or carrying out of the terms of the Loan Documents will not constitute a default under, or result in the creation or imposition of, or obligation to create, any Lien upon the Property of the Borrower pursuant to the terms of any existing mortgage, indenture, contract or agreement. 7. To the best of our knowledge, the Borrower is not in default with respect to any judgment, order, writ, injunction, decree or decision of any Governmental Authority which default could reasonably be expected to have a Material Adverse Effect. To the best of our knowledge, the Borrower is complying in all material respects with all applicable statutes, regulations, rules and orders of all Governmental Authorities, a violation of which could reasonably be expected to have a Material Adverse Effect. 8. The Borrower is not subject to regulation under the Public Utility Holding Company Act of 1935, as amended, the Federal Power Act or the Investment Company Act of 1940, as amended, and the Borrower is not subject to any statute or regulation which prohibits or restricts the incurrence of Indebtedness under the Loan Documents, including, without limitation, statutes or regulations relative to common or contract carriers or to the sale of electricity, gas, steam, water, telephone, telegraph or other public utility services. 9. To the best of our knowledge, the Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. If used in accordance with Section 2.8 of the Agreement, no part of the proceeds of the Loan will be used, directly or indirectly, for a purpose which violates any law, rule or regulation of any Governmental Authority, including, without limitation, the provisions of Regulations G, T, U or X of the Board of Governors of the Federal Reserve System, as amended. If used in accordance with Section 2.8 of the Agreement, no part of the proceeds of the Loan will be used, directly or indirectly, to purchase or carry Margin Stock or to extend credit to others for the purpose of purchasing or carrying Margin Stock. 10. To the best of our knowledge, the Borrower possesses or has the right to use all franchises, Intellectual Property, licenses and other rights as are material and necessary for the conduct of its business, and with respect to which it is in compliance, with no known conflict with the valid rights of others which could reasonably be expected to have a Material Adverse Effect. To the best of our knowledge, no event has -3- occurred which permits or, after notice or lapse of time, or both, could reasonably be expected to permit, the revocation or termination of any such franchise, Intellectual Property, license or other right and which revocation or termination could reasonably be expected to have a Material Adverse Effect. 11. Upon the taking and retaining of possession by the Bank of the Pledged Collateral, if any, the presentation for filing of the Financing Statements at the Filing Offices listed on Schedule 1 hereto with respect to the Collateral (other than the Pledged Collateral, if any) and tender of the applicable filing or processing fee therefor, the security interests granted under the Security Agreement will constitute duly perfected security interests in and to all of the Borrower's right, title and interest in the Collateral. The foregoing opinions are subject to and qualified by the following additional qualifications: A. All opinions, to the extent they relate to the enforceability of any agreement or obligation, are subject to and qualified by the following: 1. the effect and application of bankruptcy, insolvency, reorganization, moratorium and other similar laws now or hereafter in effect which relate to or limit creditors' rights generally; and 2. the effect and application of general principles of equity, whether considered in a proceeding in equity or an action at law. B. Wherever we have asserted above that a matter is "to the best of our knowledge", our knowledge is limited to the actual knowledge of those attorneys in our office who have participated in this engagement. We are members of the Bar of the State of New York and we express no opinion herein concerning any law other than the laws of the State of New York, the federal laws of the United States of America and the corporate law of the State of Delaware. Very truly yours, -4- SCHEDULE 1 LIST OF FILING OFFICES JENNIFER CONVERTIBLES EXHIBIT E FORM OF SECURITY AGREEMENT SECURITY AGREEMENT (this "Agreement"), dated as of ___________, 199_, made by JENNIFER CONVERTIBLES, INC., a Delaware corporation (the "Borrower"), to IBJ SCHRODER BANK & TRUST COMPANY (the "Bank"). RECITALS A. The Borrower has entered into a Credit Agreement, dated as of August 31, 1993, by and between the Borrower and the Bank (as the same may be amended, supplemented or other- wise modified from time to time, the "Credit Agreement"). Capitalized terms used herein which are not herein defined shall have the meanings ascribed thereto in the Credit Agree- ment. B. The Borrower has also made a Guaranty (the "Guar- anty"), dated as of August 31, 1993, in favor of the Bank, pursuant to the Term Loan Agreement, dated as of August 31, 1993, by and between Jennifer Warehousing, Inc., a New York corporation, and the Bank (as the same may be amended, supplemented or otherwise modified from time to time, the "Term Loan Agreement"). C. It is a condition precedent to the making of the first Loan that the Borrower shall have executed and deliv- ered this Agreement. It is a condition precedent to the mak- ing of the term loan under the Term Loan Agreement that the Borrower shall have executed and delivered the Guaranty. The obligations of the Borrower under the Guaranty shall be secured as provided for herein if and when this Agreement shall be executed and delivered. NOW THEREFORE, in consideration of the premises and in order to induce the Bank to make the Loans, the Borrower hereby agrees with the Bank as follows: 1. Grant of Security. To secure the prompt and complete payment, obser- vance and performance of all of the obligations (as the same may be amended, increased, modified, renewed, refinanced, re- funded or extended from time to time, collectively, the "Ob- ligations") of the Borrower now or hereafter existing under the Loan Documents and under the Guaranty (collectively, the "Bank Debt Documents"), the Borrower hereby assigns, trans- fers and pledges to the Bank, and hereby grants to the Bank, a security interest in and to, and a lien upon, all of the Borrower's rights, title and interest in and to the following, whether now owned or existing or hereafter arising or ac- quired and wherever located (collectively, the "Collateral"): (a) All "inventory" as defined in the UCC (as de- fined below), including, without limitation, all goods now owned and hereafter acquired by the Borrower (wherever lo- cated, whether in the possession of the Borrower or of a bai- lee or other Person, whether for sale, storage, transit, pro- cessing, use or otherwise and whether consisting of whole goods, spare parts, components, supplies, materials, or con- signed, returned or repossessed goods) which are held for sale or lease or to be furnished (or have been furnished) under any contract of service or which are finished goods, raw materials, work in process or materials used or consumed in the Borrower's business, in each case whether now owned or hereafter acquired; and all accessions and additions thereto, substitutions and replacements therefor, and the products and Proceeds thereof (collectively, the "Inventory"); and (b) All loans and advances made by the Borrower to any limited partnership, any of its Subsidiaries or any of its Affiliates (collectively, the "Advances") and all chattel paper, instruments, documents and general intangibles in re- spect of or evidencing the Advances, in each case whether now owned or hereafter acquired by or for the benefit of the Bor- rower, including, without limitation, the certificates, notes and debt instruments described on Schedule 1 hereto (col- lectively, the "Pledged Debt"), and all payments and prepay- ments thereunder and other instruments and Property from time to time delivered in respect thereof or in exchange therefor, in each case whether now owned or hereafter acquired by or for the benefit of the Borrower, and all letters of credit, guaranties, liens, security interests and other security for the Advances, in each case whether now owned or hereafter acquired by or for the benefit of the Borrower; and all addi- tions and accessions to each of the foregoing, substitutions and replacements therefor and the products and Proceeds thereof. -2- As used herein, the term "Proceeds" shall have the meaning assigned to it under Article 9 of the New York Uni- form Commercial Code (as the same is amended from time to time, the "UCC") and, to the extent not otherwise included, shall include, but not be limited to: (i) any and all pro- ceeds of any insurance, causes and rights of action or settlements thereof, escrowed amounts or Property, judicial and arbitration judgments and awards, payable to the Borrower from or in respect of any Person from time to time with respect to the Collateral; (ii) any and all payments (in any form whatsoever) made or due and payable to the Borrower from time to time in connection with any requisition, conf is- cation, condemnation, seizure or forfeiture of all or any part of the Collateral by any Governmental Authority; (iii) all claims of the Borrower for losses or damages arising out of or relating to or for any breach of any agreements, cov- enants, representations or warranties or any default whether or not with respect to or under any of the foregoing Col- lateral (without limiting any direct or independent rights of the Bank with respect to the Collateral); and (iv) any and all other amounts from time to time paid or payable under or in connection with the Collateral. 2. Borrower Remains Liable. Anything herein to the contrary notwithstanding, (a) the Borrower shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereun- der to the same extent as if this Agreement had not been ex- ecuted, (b) the exercise by the Bank of any of its rights hereunder shall not release the Borrower from any of its du- ties or obligations under the contracts and agreements in- cluded in the Collateral, and (c) the Bank shall not have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall the Bank be obligated to perform any of the obligations or duties of the Borrower thereunder, to make any payment, to make any inquiry as to the nature or sufficiency of any pay- ment received by the Borrower or the sufficiency of any per- formance by any party under any such contract or agreement or to take any action to collect or enforce any claim for pay- ment assigned hereunder. 3. Delivery of Pledged Collateral. All certificates, notes and other debt instruments, if any, representing or evidencing the Pledged Debt and all -3- other certificates, notes and debt instruments at any time owned or acquired by or for the benefit of the Borrower in respect thereof (collectively, the "Pledged Collateral") shall be delivered to and held by or on behalf of the Bank pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instru- ments of transfer or assignments in blank, all in form and substance satisfactory to the Bank. Upon the occurrence and during the continuance of an Event of Default, the Bank shall have the right, at any time in its discretion and without notice to the Borrower, to transfer to or to register in the name of the Bank or any of its nominees any or all of the Pledged Collateral. In addition, upon the occurrence and during the continuance of an Event of Default, the Bank shall have the right at any time to exchange certificates, notes or debt instruments representing or evidencing Pledged Col- lateral for certificates, notes or debt instruments of smaller or larger denominations. 4. Representations and Warranties. The Borrower represents and warrants as follows: (a) Names: Tradenames. Except as set forth in Part A of Schedule 4(a) hereto, the Borrower has not during the preceding five years (i) been known by any other corpo- rate name, (ii) been the surviving corporation of a merger or consolidation or (iii) acquired all or substantially all of the Property of any other Person. As of the date of this Agreement, the Borrower currently conducts business under its own name and, in certain areas and for certain operations, the tradenames listed on Part B of Schedule 4(a) hereto. (b) Offices: Collateral Locations. As of the date of this Agreement (i) the chief executive office and chief place of business of the Borrower are located at the address set forth in Part A of Schedule 4(b) hereto, (ii) in addition to such chief executive office and chief place of business, the Borrower maintains only the offices and places of business set forth in Part B of Schedule 4(b) hereto and (iii) the locations listed in Part C of Schedule 4(b) hereto constitute all locations at which Inventory is located. (c) Possession of Inventory. The Borrower has exclusive possession and control of the Inventory, except for Inventory in transit with common or other carriers. -4- (d) Absence of Liens: No Offsets. The Bor- rower is the legal and beneficial owner of the Collateral, free and clear of all Liens. No disputes, rights of setoff, counterclaims or defenses exist with respect to the Col- lateral or any part of the Collateral. (e) Pleded Collateral. To the best of the Borrower's knowledge, the Pledged Debt has been duly autho- rized, issued and delivered, and is the legal, valid, binding and enforceable obligation of the respective issuers thereof. The Pledged Debt constitutes all of the Pledged Collateral. (f) Security Interest. This Agreement creates a valid security interest in the Collateral, securing the payment of the Obligations, and all filings and other actions necessary or desirable to perfect such security interests have been duly taken. The delivery and pledge of the Pledged Collateral pursuant to this Agreement and all other filings and other actions taken by the Borrower to perfect such security interests prior to the date hereof, create a valid and perfected first priority security interest in the Pledged Collateral securing the payment of the Obligations, except for Pledged Collateral consisting of checks and drafts received in the ordinary course of business. (g) Representation and Warranties. All of the representations and warranties made by the Borrower in all instruments and documents evidencing and securing the Obligations or any part thereof, including, without limita- tion, the Bank Debt Documents, are true and correct in all material respects. 5. Further Assurances. (a) The Borrower agrees that from time to time, at its expense, the Borrower shall promptly execute and deliver all further instruments and documents, and take all further action, that the Bank may reasonably request, in order to perfect and protect any security interests granted hereby or to enable the Bank to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, the Borrower shall promptly execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, and promptly take such other action as the Bank may reasonably request, in order to perfect and preserve the security interests granted hereby. -5- (b) The Borrower hereby authorizes the Bank to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Col- lateral without the signature of the Borrower where permitted by law. The Bank shall provide the Borrower with a copy of any such statement or amendment, provided that no failure to do so shall affect the rights of the Bank hereunder, result in any liability of the Bank to the Borrower or in any way affect the validity of such filing. A photographic or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be suf- ficient as a financing statement where permitted by law. (c) The Borrower shall furnish to the Bank from time to time statements and schedules further identifying and describing the Collateral and such other reports in connec- tion with the Collateral as the Bank may reasonably request, all in reasonable detail. 6. As to Inventory. The Borrower shall: (a) Keep the Inventory at the places speci- fied in Section 4(b) and deliver written notice to the Bank at least thirty days prior to establishing any other location at which it reasonably expects to maintain Inventory having an aggregate fair market value in excess of $50,000, in which jurisdiction all action required by Section 5 shall have been taken with respect to all such Inventory. (b) Maintain or cause to be maintained in good repair and condition, excepting ordinary wear and tear and damage due to casualty, all of the Inventory, and make or cause to be made all appropriate repairs, renewals and re- placements thereof, to the extent not obsolete and consistent with past practice of the Borrower or as required by any Gov- ernmental Authority, as quickly as practicable after the oc- currence of any loss or damage thereto which are necessary or desirable to such end. The Borrower shall promptly furnish to the Bank a statement respecting any material loss or dam- age to any of the Inventory with an aggregate fair market value exceeding $50,000 as a result of a single occurrence. -6- 7. As to the Pledged Collateral. (a) So long as no Event of Default shall have oc- curred and be continuing: (i) The Borrower shall be entitled to exer- cise any consensual rights pertaining to the Pledged Col- lateral or any part thereof for any purpose not inconsistent with the terms of this Agreement and the other Bank Debt Documents; provided, however, that the Borrower shall not ex- ercise or refrain from exercising any such right without the consent of the Bank if such action or inaction would have a material adverse effect on the fair market value of any part of the Pledged Collateral or the validity, priority or per- fection of the security interests granted hereby or the rem- edies of the Bank hereunder. (ii) The Borrower shall be entitled to re- ceive and retain any and all principal and interest paid in respect of the Pledged Collateral to the extent not prohib- ited by this Agreement; provided, however, that any and all principal and interest paid or payable other than in cash in respect of, and instruments and other Property received, re- ceivable or otherwise distributed in respect of, or in ex- change for, Pledged Collateral, shall forthwith be delivered to the Bank to hold as Pledged Collateral and shall, if received by the Borrower, be received in trust for the ben- efit of the Bank, be segregated from the other Property of the Borrower, and be forthwith delivered to the Bank, as Pledged Collateral in the same form as so received (with any necessary indorsement). (iii) The Bank shall execute and deliver (or cause to be executed and delivered) to the Borrower all such instruments as the Borrower may reasonably request for the purpose of enabling the Borrower to exercise the consensual rights which it is entitled to exercise pursuant to clause (i) above and to receive the principal or interest payments which it is authorized to receive and retain pursuant to clause (ii) above. (b) Upon the occurrence and during the continuance of an Event of Default and at the Bank's option and following written notice by the Bank to the Borrower: (i) All rights of the Borrower to exercise the consensual rights which it would otherwise be entitled to -7- exercise pursuant to Section 7(a) (i) and to receive the prin- cipal and interest payments which it would otherwise be au- thorized to receive and retain pursuant to Section 7(a) (ii) shall cease, and all such rights shall thereupon become vested in the Bank, who shall thereupon have the sole right to exercise such consensual rights and to receive and hold as Pledged Collateral such principal and interest payments. (ii) All principal and interest payments which are received by the Borrower contrary to the provisions of Section 7(b) (i) shall be received in trust for the benefit of the Bank, shall be segregated from other funds of the Bor- rower and shall be forthwith paid over to the Bank as Pledged Collateral in the same form as so received (with any neces- sary indorsement). (c) In the event that all or any part of the cer- tificates, notes or debt instruments constituting the Pledged Collateral are lost, destroyed or wrongfully taken while such certificates, notes or debt instruments are in the possession of the Bank, the Borrower agrees that it will cause the de- livery of new certificates, notes or debt instruments in place of the lost, destroyed or wrongfully taken certifi- cates, notes or debt instruments upon request therefor by the Bank without the necessity of any indemnity bond or other se- curity other than the Bank's agreement or indemnity therefor customary for security agreements similar to this Agreement. 8. Other Covenants and Agreements of the Borrower. The Borrower covenants and agrees that on and after the date of this Agreement until the indefeasible cash pay- ment in full of the Obligations, unless the Bank shall other- wise consent in writing: (a) Defense of Collateral. The Borrower will de- fend the Collateral against all claims and demands of all Persons at any time claiming the same or any interest therein adverse to the interests of the Bank. (b) Security Interest. The Borrower covenants that the security interests granted hereby constitute and shall at all times constitute continuing perfected first priority se- curity interests in the Collateral. (c) Encumbrances; Filings. The Borrower will not (i) further hypothecate, pledge, encumber, transfer, sell or otherwise suffer to exist a security interest in, or a Lien -8- on, the Collateral or any portion thereof in favor of any Person other than the Bank as provided herein, except for Permitted Liens and except for transfers or sales to the ex- tent permitted under the Bank Debt Documents or (ii) sign or file or authorize the signing or filing of any document or instrument perfecting any Lien on the Collateral except for Permitted Liens. The inclusion of "Proceeds" of the Col- lateral under the security interest granted herein shall not be deemed a consent by the Bank to any sale or other disposi- tion of any Collateral except as expressly permitted herein. 9. The Bank Appointed Attorney-in-Fact. Effective upon the occurrence and during the con- tinuance of an Event of Default, the Borrower hereby ir- revocably appoints the Bank the Borrower's attorney-in-fact, with full authority in the place and stead of the Borrower and in the name of the Borrower or otherwise, from time to time in the Bank's discretion, to take any action and to ex- ecute any instrument which the Bank may deem necessary or advisable to accomplish the purposes of this Agreement, in- cluding, without limitation: (a) to obtain and adjust insurance required to be paid to the Bank pursuant to Section 7.5 of the Credit Agreement and pursuant to the other Bank Debt Documents, (b) to ask, demand, collect, sue for, re- cover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral, (c) to receive, indorse, and collect any drafts or other chattel paper, instruments and documents in connection with clause (a) or (b) above, (d) to file any claims or take any action or institute any proceedings which the Bank may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Bank with respect to any of the Collateral and (e) to receive, indorse and collect all in- struments made payable to the Borrower representing any prin- cipal payment or interest payment in respect of the Pledged Collateral or any part thereof and to give full discharge for the same. -9- 10. The Bank May Perform. If the Borrower fails to perform any agreement con- tained herein, the Bank may itself perform, or cause perfor- mance of, such agreement, and the reasonable expenses of the Bank incurred in connection therewith shall be payable by the Borrower under Section 14. 11. The Bank's Duties. The powers conferred on the Bank hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Ex- cept for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereun- der, the Bank shall have no duty as to any Collateral. The Bank shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which the Bank accords its own Property, it being understood that the Bank shall not be under any obligation to (i) ascertain or take action with respect to conversions, exchanges, maturities or other matters relative to any Pledged Collateral, whether the Bank has or is deemed to have knowledge of such matters, or (ii) take any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral, but may do so at its option, and all reasonable expenses incurred in connection therewith shall be for the sole account of the Borrower and shall be added to the Obligations. 12. Events of Default. The following shall each constitute an "Event of Default" hereunder: (a) If any representation or warranty made herein or in any certificate furnished by the Borrower in connection with this Agreement shall prove to have been in- correct or misleading (whether because of misstatement or omission) in any material respect when made; or (b) If the Borrower shall fail to observe or perform any term, covenant or agreement contained in Section 8(c) of this Agreement; or (c) If the Borrower shall fail to perform or observe any other covenant or agreement on its part to be - 10 - performed or observed pursuant to this Agreement and such failure shall have continued unremedied for a period of thirty days after the Chairman, President, Chief Executive Officer, the Vice President-Finance and Treasurer or any other Vice President of the Borrower shall become aware of such failure; or (d) The occurrence of an Event of Default un- der and as defined in the Bank Debt Documents; or (e) If the Borrower shall contest or disavow its obligations under this Agreement or this Agreement shall not remain in full force and effect. 13. Remedies. Upon the occurrence of an Event of Default or at any time thereafter during the continuance thereof, the Bank may exercise any and all remedies and other rights provided under this Agreement, including, without limitation, the fol- lowing: (a) The Bank may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party upon default under the UCC (whether or not the UCC applies to the affected Collateral) and also may (i) require the Borrower to, and the Borrower hereby agrees that it will at its expense and upon request of the Bank forthwith, assemble all or any part of the Col- lateral as directed by the Bank and make it available to the Bank at a place designated by the Bank which is reasonably convenient to the Bank and the Borrower, (ii) without notice, except as specified below, sell, lease, assign, grant an op- tion or options to purchase or otherwise dispose of the Col- lateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Bank's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as may be com- mercially reasonable. The Borrower agrees that, to the ex- tent notice of sale shall be required by law, at least five Business Days' notice to the Borrower of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Bank shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Bank may adjourn any public or private sale from time to time by an- nouncement at the time and place fixed therefor, and such - 11 - sale may, without further notice, be made at the time and place to which it was so adjourned. (b) Notwithstanding any provision to the con- trary contained in any Bank Debt Document, any cash held by the Bank as Collateral and all cash proceeds received by the Bank in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the sole discretion of the Bank, be held by the Bank as Col- lateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to the Bank pursuant to Section 14) in whole or in part by the Bank against all or any part of, the Obligations as shall be determined by the Bank in its sole discretion, provided, however, that to the extent that any such cash or cash proceeds shall be applied to Obligations in respect of the Loan Documents, such cash or cash proceeds shall be applied in accordance with Section 9.1 of the Credit Agreement, and to the extent such cash or cash proceeds shall be applied to Obligations in respect of the Guaranty, such cash or cash proceeds shall be applied in ac- cordance with the provisions thereof. Any surplus of such cash or cash proceeds held by the Bank and remaining after payment in full of all the Obligations shall be promptly paid over to the Borrower or to whomsoever may be lawfully en- titled to receive such surplus. (c) The Borrower hereby expressly waives and covenants not to assert any appraisement, valuation, stay, extension, redemption or similar laws, now or at any time hereafter in force, which might delay, prevent or otherwise impede the performance or enforcement of this Agreement. 14. Expenses. The Borrower will upon demand pay to the Bank any and all reasonable sums, costs and expenses which the Bank may pay or incur pursuant to the provisions of this Agreement or in negotiating, executing, perfecting, defending, protect- ing or enforcing this Agreement or the security interests granted herein or in enforcing payment of the Obligations or otherwise in connection with the provisions hereof, includ- ing, but not limited to court costs, reasonable collection charges, reasonable travel expenses, and reasonable at- torneys' fees and disbursements, all of which, together with interest at the highest rate then payable on any of the Obli- gations, shall be part of the Obligations. - 12 - 15. Amendments Etc. No amendment or waiver of any provision of this Agreement or consent to any departure by the Borrower or any of its Subsidiaries herefrom shall in any event be effective unless the same shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 16. Notices. All notices and other communications provided for hereunder shall be given in the manner and to the addresses set forth in Section 10.2 of the Credit Agreement. 17. Continuing Security Interest; Transfer of Notes; Termination. This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until the indefeasible cash payment in full of the Obligations and the termination of each of the Bank Debt Documents, (ii) be binding upon the Borrower, its successors and assigns and (iii) inure, together with the rights and remedies of the Bank hereunder, to the benefit of the Bank, any successor or assign of the Bank. Except to the extent not permitted by the Bank Debt Documents or the Term Loan Agreement, the Bank may assign or otherwise transfer the Note or the term note held by it under the Term Loan Agreement, as the case may be, to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to the Bank herein or otherwise. Nothing set forth herein or in any other Bank Debt Document is intended or shall be construed to give any other Person any right, remedy or claim under, to or in respect of this Agreement, any other Bank Debt Document or any Collateral. The Borrower's successors and assigns shall include, without limitation, a receiver, trustee or debtor-in-possession thereof or therefor. 18. Other Provisions. (a) No provision of this Agreement may be waived, modified or otherwise changed by any means, including, with- out limitation, any course of dealing, course of performance - 13 - or trade usage, or oral evidence of any nature, except pursu- ant to a writing executed by the party against which enforce- ment of such waiver, modification or change is sought. (b) No failure by the Bank to exercise, and no de- lay by the Bank in exercising, any right or remedy hereunder shall operate as a waiver thereof. (c) Section headings have been inserted herein for convenience only and shall not be construed to be a part of this Agreement. Unless the context otherwise requires, words in the singular number include the plural, and words in the plural include the singular. (d) This Agreement may be executed in any number of counterparts, each of which shall be an original and all of which shall constitute one agreement. It shall not be necessary in making proof of this Agreement or of any docu- ment required to be executed and delivered in connection herewith or therewith to produce or account for more than one counterpart signed by the party to be charged. (e) Every provision of this Agreement is intended to be severable, and if any term or provision hereof shall be invalid, illegal or unenforceable for any reason, the valid- ity, legality and enforceability of the remaining provisions hereof or thereof shall not be affected or impaired thereby, and any invalidity, illegality or unenforceability in any ju- risdiction shall not affect the validity, legality or en- forceability of any such term or provision in any other ju- risdiction. (f) All Schedules hereto shall be deemed to be a part hereof. (g) Each and every right, remedy and power granted to the Bank hereunder or allowed at law or by any other agreement shall be cumulative and not exclusive, and may be exercised by the Bank from time to time. (h) This Agreement is the "Security Agreement" re- ferred to in the Credit Agreement. The Borrower and the Bank acknowledge that Sections 10.13 (Integration), 10.14 (Consent to Jurisdiction), 10.15 (Service of Process), 10.16 (No Limitation of Service or Suit) and 10.17 (WAIVER OF TRIAL BY JURY) of the Credit Agreement, are made applicable to this Agreement and all such provisions are incorporated by refer- ence herein as if fully set forth herein. - 14 - 19. Governing Law: Terms. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to conflicts of laws rules, except to the extent that the validity or perfection of the security interest hereun- der, or remedies hereunder, in respect of any particular Col- lateral are governed by the laws of a jurisdiction other than the State of New York. Unless otherwise defined herein or in the Notes, terms used in Articles 8 and 9 of the UCC are used herein as therein defined. - 15 - IN WITNESS WHEREOF, the Borrower has caused this Secu- rity Agreement to be duly executed and delivered by its of- ficer thereunto duly authorized as of the date first above written. JENNIFER CONVERTIBLES, INC. By: ------------------------- Name: ------------------------- Title: ------------------------- Accepted and Agreed to: IBJ SCHRODER BANK & TRUST COMPANY By: ------------------------- Name: ------------------------- Title: ------------------------- - 16 - SCHEDULE 1 to Security Agreement Dated as of __________, 199_ Pledged Debt: - ------------ Debtor Date Face Amount Balance Due - ------ ---- ----------- ----------- SCHEDULE 4(a) to Security Agreement Dated as of __________, 199_ PART A - List of Other Corporate Names Mergers or Consolida- tion and Acquisitions: PART B - List of Tradenames: SCHEDULE 4(b) to Security Agreement Dated as of ___________, 199_ PART A - Chief Executive Office and Chief Place of Business: ______________________________________ ______________________________________ ______________,__________ ___________ (_______ County) PART B - Other Offices and Places of Business: ______________________________________ ______________________________________ _______________, __________ _________ (_______ County) ______________________________________ ______________________________________ ______________, __________ __________ (_______ County) ______________________________________ ______________________________________ ______________, ___________ _________ (_________ County) PART C - Location of Inventory:1 ______________________________________ ______________________________________ ______________, ___________ _________ (_________ County) - ----------------------- 1 Indicate whether any location is a public warehouse. -2- JENNIFER CONVERTIBLES EXHIBIT F FORM OF BORROWING BASE CERTIFICATE Date: _________ I, ____________, do hereby certify that I am the Vice President-Finance and Treasurer of Jennifer Convertibles, Inc., a Delaware corporation (the "Borrower"), and that, as such, I am duly authorized to execute and deliver this Borrowing Base Certificate on the Borrower's behalf pursuant to Section 6.4 and 7.1(d) of the Credit Agreement, dated as of August 31, 1993, by and between the Borrower and IBJ Schroder Bank & Trust Company (the "Bank") (as the same may be amended, supplemented or otherwise modified from time to time, the "Agreement"). Capitalized terms used herein which are not herein defined shall have the meanings ascribed thereto by the Agreement. I hereby certify that: 1. The Borrowing Base on and as of __________, 199_, is $_______, computed as shown on the attached Schedule. 2. The aggregate outstanding principal balance of the Loans on and as of the date hereof is less than or equal to the lesser of (i) the Commitment Amount on and as of the date hereof and (ii) the Borrowing Base. IN WITNESS WHEREOF, I have executed this Borrowing Base Certificate on this __ day of ______________, 19__. -------------------------- Vice President - Finance and Treasurer Computation of Borrowing Base I. Inventory consisting of first quality, currently finished products held for sale to customers in the ordinary course of business, valued at the lower of cost or market value, determined on a first-in, first-out basis, and (i) such inventory is owned by the Borrower, (ii) such inventory conforms to the representations and warranties contained in the Agreement and in the Security Agreement and (iii) such inventory is subject to a fully perfected first priority security interest in favor of the Bank pursuant to the Security Agreement $_______ II. Ineligible items: A. Inventory which consists of Special Order Goods $______ B. Inventory which is slow moving, obsolete, used, damaged or otherwise not merchantable $_______ C. Inventory which the Bank determines to be ineligible $______ III. Total of Items IIA through IIC $_______ IV. Eligible Inventory (Item I less Item III) $_______ V. Borrowing Base (50% of Item IV) $________ -2- JENNIFER CONVERTIBLES EXHIBIT G FORM OF SOLVENCY CERTIFICATE I, _______________, do hereby certify on this __ day of ___________ 199_, that I am the Vice President-Finance and Treasurer of Jennifer Convertibles, Inc., a Delaware corpora- tion (the "Borrower"), and that, as such, I am duly authorized to execute and deliver this Solvency Certificate on behalf of the Borrower pursuant to Section 5.13 of the Credit Agreement, dated as of August 31, 1993, by and between the Borrower and IBJ Schroder Bank & Trust Company (as the same may be amended, supplemented or otherwise modified from time to time, the "Agreement"). Capitalized terms used herein which are not herein defined shall have the meanings ascribed thereto by the Agreement. On the basis of the examination described below, I do hereby certify that, as of the date hereof: (a) The "present fair saleable value" of the as- sets of the Borrower exceeds the amount that will be required to pay the probable liabilities on or in respect of existing debts and liabilities of the Borrower as they come due, whether such debt is matured or unmatured, liquidated or un- liquidated, fixed or contingent. For purposes of this Cer- tificate, "present fair saleable value" means the amount at which the assets of the Borrower would likely sell, under current market conditions, as part of a going concern and for continued use as part of a going concern between a willing buyer and a willing seller within a reasonable period of time with neither party acting under duress and with both parties acting with reasonable knowledge of all relevant facts. (b) The assets of the Borrower do not constitute unreasonably small capital for the Borrower to carry out its business as now conducted and as proposed to be conducted, including the capital needs of the Borrower, taking into ac- count the particular capital requirements of the business conducted by the Borrower and projecting the capital require- ments and capital availability therefor. (c) The Borrower does not intend to incur debts or liabilities beyond its ability to pay such debts and li- abilities as they mature, taking into account the timing and amounts of cash flow expected to be received by the Borrower and of amounts to be payable on or in respect of debts and liabilities of the Borrower. IN WITNESS WHEREOF, I have executed this Solvency Cer- tificate on behalf of the Borrower. ------------------------- Vice President-Finance and Treasurer -2- JENNIFER CONVERTIBLES SCHEDULE 4.1 TO REVOLVING CREDIT AGREEMENT DATED AUGUST 31, 1993 LIST OF SUBSIDIARIES ATTACHMENT TO SCHEDULE 4.1 TO REVOLVING CREDIT AGREEMENT DATED AUGUST 31, 1993
STORE STORE NAME ADDRESS - ----- ------- BURLINGTON CONVERTIBLES 15 CAMBRIDGE ST, BURLINGTON MA 01803 WESTBORO CONVERTIBLES UNIT 108 BELMONT CTR, 276 BOSTON TPK, RT 9 EAST, WESTBORO, MA 01551 BOSTON POST RD CONVERTIBLES 1770 BOSTON POST RD., MILFORD CT 06460 SAUGUS CONVERTIBLES 186 BROADWAY, SAUGUS MA 01906 STUART ST. CONVERTIBLES 240 STUART STREET, BOSTON MA 02116 WEST ROXBURY CONVERTIBLES 1524 VFW PARKWAY ROUTE 1, WEST ROXBURY MA 02132 CAMBRIDGE CONVERTIBLES 1 PORTER SQUARE, CAMBRIDGE MA 21613 DANBURY SQUARE CONVERTIBLES 15 BACKUS AVENUE, DANBURY CT 06438 EAST BRUNSWICK CONVERTIBLES 285-291 ROUTE 18 SOUTH, EAST BRUNSWICK NJ 08816 GRAND CONCOURSE 2450 GRAND CONCOURSE, BRONX NY 10458 WISCONSIN CONVERTIBLES 1634 WISCONSIN AVENUE, WASHINGTON DC 20001-86 HARTSDALE CONVERTIBLES 365 CENTRAL AVENUE, SCARSDALE NY 10530 HIGH RIDGE CONVERTIBLES 1135 HIGH RIDGE ROAD, STANFORD CT 06905 CONTOUR RD CONVERTIBLES 18306 CONTOUR RD. MONTGOMERY VLLGE PLR. GAITHERSBURG MD 20877 CIPRIANO SQUARE CONVERTIBLES 8849-51 GREENBELT RD. CIPRIANO SQE. D-2, GREENBELT MD 20770 NICHOLSON LN CONVERTIBLES 5050 NICHOLSON LANE, ROCKVILLE MD 20852 NICOLE CONVERTIBLES 142 MONTAGUE ST., BROOKLYN HGHTS NY 11201 PORTSMOUTH CONVERTIBLES 1981 WOODBURY AVENUE CONSUMERS PLAZA, PORTSMOUTH NH 03801 DANIEL WEBSTER CONVERTIBLES 225 DANIEL WEBSTER HWY., SOUTH NASHBA NH 03060 LONG BRANCH (FORMERLY RT 35) 318 HIGHWAY 36 SUITE 304 WEST LONG BRANCH NJ 07764 PARAMUS CONVERTIBLES EAST 327 ROUTE 4 PARAMUS, NJ 07652 ROUTE 17 CONVERTIBLES 185 ROUTE 17 SOUTH, PARAMUS NJ 07652 ROUTE 440 CONVERTIBLES HUDSON MALL ROUTE 440, JERSEY CITY NJ 07304 ROUTE 46 CONVERTIBLES 285 ROUTE 46 WEST, TOTOWA NJ 07512 ROUTE 7 CONVERTIBLES 554 MAIN AVENUE, NORWALK CT 06850 ROUTE 10 CONVERTIBLES 31-21 ROUTE 10, DANVILLE NJ 07034 STATEN ISLAND CONVERTIBLES 2823 RICHMOND AVENUE, STATEN ISLAND NY 10314 UNION CONVERTIBLES 25-76 ROUTE 22 EAST, UNION NJ 07083 LEESBURG PIKE CONVERTIBLES 3501-8 SOUTH JEFFERSON ST., LESBURG PIKE PLZ, BAILEYS CREEDS VA 22041 VIENNA CONVERTIBLES 81-50 LEESBURG PIKE, VIENNA VA 22180 VALLEY STREEM CONVERTIBLES 2 EAST CIRCLE DRIVE, VALLEY STREAM NY 11581 WOODBRIDGE CONVERTIBLES 520 ROUTE 1 NORTH, WOODBRIDGE NJ 07895 CENTERBACK CONVERTIBLES* 257 CENTERBACK MALL ROUTE 25, CENTERBACK NY 11726 FRAMINGHAM CONVERTIBLES 255 WORCESTER ROAD, FRAMINGHAM, MA 01701
* 51% of the outstanding capital stock of such Subsidiary is owned by Borrower, and the remainder of such stock is owned by Richard Friedman. JENNIFER CONVERTIBLES SCHEDULE 8.1 TO REVOLVING CREDIT AGREEMENT DATED AUGUST 31. 1993 LIST OF EXISTING INDEBTEDNESS None. JENNIFER CONVERTIBLES SCHEDULE 8.2 TO REVOLVING CREDIT AGREEMENT DATED AUGUST 31, 1993 LIST OF EXISTING LIENS None. JENNIFER CONVERTIBLES SCHEDULE 8.4 TO REVOLVING CREDIT AGREEMENT DATED AUGUST 31. 1993 LIST OF EXISTING CONTINGENT OBLIGATIONS None. JENNIFER CONVERTIBLES SCHEDULE 8.6 TO REVOLVING CREDIT AGREEMENT DATED AUGUST 31. 1993 LIST OF EXISTING INVESTMENTS None. EX-10.34 7 AMENDMENT NO. 1 TO WAREHOUSING AGREEMENT AMENDMENT NO. 1 TO WAREHOUSING AGREEMENT AMENDMENT NO. 1 TO WAREHOUSING AGREEMENT, dated as of May 28, 1994, between JENNIFER CONVERTIBLES, INC., a Delaware corporation ("Jennifer"), and JENNIFER WAREHOUSING, INC., a New York corporation ("Warehousing") W I T N E S S E T H: WHEREAS, Jennifer and Warehousing are parties to a Warehousing Agreement (the "Warehousing Agreement"), dated as of December 31, 1993, pursuant to which the parties agreed to certain warehousing and distribution arrangements in connection with the operation of Jennifer Convertibles stores; WHEREAS, the parties desire to amend certain of the terms and conditions of the Warehousing Agreement upon the terms and conditions hereinafter set forth; NOW THEREFORE, the parties hereto hereby agree as follows: 1. Definitions. All terms used herein which are defined in the Warehousing Agreement and not otherwise defined herein are used herein as defined therein. 2. Amendment to First Preamble. The first "Whereas" clause of the Warehousing Agreement is hereby amended by deleting such clause in its entirety and replacing it with the following: WHEREAS, Jennifer is in the business of owning, operating and licensing retail stores operating under the name (i) "Jennifer Convertibles(REGISTERED TRADEMARK) specializing in sofabeds, companion pieces and related items, (ii) Jennifer Leather Specializing in leather furniture and (iii) Elegant Living specializing in upholstered living room furniture (the Jennifer Convertibles, Jennifer Leather and Elegant Living Stores are hereinafter referred to as the "Jennifer Stores");" 3. Amendment to Second Preamble. The second "Whereas" clause of the Warehousing Agreement is hereby amended by deleting the phrase "and Florida" appearing therein and inserting the phrase ", Florida and California" in its place. 4. Amendment to Definitions. The definition of the word "Merchandise" appearing in the Warehousing Agreement is hereby amended by deleting such phrase in its entirety and replacing it with the following: ""Merchandise" shall mean (i) sofabeds, sofas, loveseats and related articles compatible with the type and quality of merchandise generally sold in Jennifer Convertibles stores, (ii) leather furniture and related articles compatible with the type and quality of merchandise generally sold in Jennifer Leather stores, (iii) upholstered living room furniture and related articles compatible with the type and quality of merchandise generally sold in Elegant Living stores and (iv) Accessories." 5. Amendment to Section 3(a). Section 3(a) of the Warehousing Agreement is hereby amended by deleting such Section in its entirety and inserting the following in its place. "3. Warehousing Fees. (a) Jennifer shall pay to Warehousing within 25 days after the end of each calendar month a warehousing fee equal to the sum of (i) 5% of the aggregate Net Sales (as defined below) of all Pre-purchased Inventory (other than Accessories) and Special Order Merchandise (other than Accessories) delivered to customers of Jennifer Stores owned by Jennifer or its subsidiaries during such calendar month and (ii) 5% of the aggregate suggested retail selling price of all Merchandise delivered during such calendar month to Jennifer Stores owned by Jennifer or its subsidiaries for display or use. With respect to Merchandise delivered to customers of Jennifer Stores owned by Jennifer or any of its subsidiaries, affiliates or partnerships controlled by Jennifer or any subsidiary of Jennifer or delivered to such stores for display or use, Jennifer shall be solely and exclusively entitled to any and all discounts or rebates, including, without limitation, volume related discounts and any warehouse handling, truckload or other shipping discounts (including early payment discounts) refunded or credited to Jennifer by its suppliers and Warehousing shall have no interest in, and not be entitled to, any such discounts or rebates." -2- 6. Amendment to Section 9 (b) . Section 9 (b) of the Warehousing Agreement is hereby amended by deleting the phrase "Attention: Edward B. Seidner" appearing therein and inserting the phrase "Attention: Fred J. Love" in its place. 7. Continued Effectiveness. The Warehousing Agreement is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects except that all references in the Warehousing Agreement to (i) Jennifer Convertibles stores shall mean Jennifer Stores as such term is defined in this Amendment and (ii) "this Agreement", "hereto", "herein", "thereof", "hereunder" or words of like import referring to the Warehousing Agreement shall mean the Warehousing Agreement as amended by this Amendment. 8. Effective Date. The provisions of this Amendment shall be retroactive to, and effective as of, January 1, 1994. 9. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the conflict of laws principles thereof. 10. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original and together which shall be deemed one instrument. IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of the day and year first above written. JENNIFER CONVERTLES, INC. By: /s/ Harley J. Greenfield ------------------------- Name: Harley J. Greenfield Title: President JENNIFER WAREHOUSING, INC. By: /s/ Fred J. Love ------------------------- Name: Fred J. Love Title: President -3- EX-10.35 8 AMENDMENT NO. 1 TO PURCHASING AGREEMENT Exhibit 10.35 1994 10-K AMENDMENT NO. 1 TO PURCHASING AGREEMENT AMENDMENT NO. 1 TO PURCHASING AGREEMENT, dated as of May 28, 1994, between JENNIFER CONVERTIBLES, INC., a Delaware corporation ("Jennifer"), and JARA ENTERPRISES, INC., a New York corporation (the "Private Company") W I T N E S S E T H: WHEREAS, Jennifer and the Private Company are parties to a Purchasing Agreement (the "Purchasing Agreement"), dated as of December 31, 1993, pursuant to which the parties agreed to certain merchandise purchasing arrangements in connection with the operation of Jennifer Convertibles stores; WHEREAS, the parties desire to amend certain of the terms and conditions of the Purchasing Agreement upon the terms and conditions hereinafter set forth; NOW, THEREFORE, the parties hereto hereby agree as fol1ows: 1. Definitions. All terms used herein which are defined in the Purchasing Agreement and not otherwise defined herein are used herein as defined therein. 2. Amendment to Section 2(a) . Section 2(a) of the Purchasing Agreement is hereby amended by deleting such Section in its entirety and replacing it with the following: "2. Purchasing. (a) Private Company, its subsidiaries, its licensees and those stores now managed by the Private Company and set forth in Schedule 1 attached hereto (the "Managed Stores"), shall purchase from Jennifer and Jennifer shall sell to the Private Company, its subsidiaries, licensees and Managed Stores, Pre-purchased Inventory and Special Order Merchandise at Jennifer's cost as invoiced by the supplier for such Pre-purchased Inventory and Special Order Merchandise. In respect of Merchandise purchased by the Private Company, its subsidiaries, licensees or Managed Stores, the Private Company shall receive the benefit of any discounts or rebates, including, without limitation, volume related discounts and warehouse handling, truckload or other shipping discounts (other than early payment discounts) (collectively referred to as "Rebates") to the extent such Rebates are refunded or credited to Jennifer by its suppliers and on a monthly basis Jennifer shall remit to Jennifer - New York, Inc., on behalf of the Private Company, all such Rebates to which the Private Company is entitled to hereunder, either (i) in the event Rebates are credited by a supplier then, on or before the fifteenth day of each calendar month, Jennifer shall remit an amount equal to the Private Company's share of all such Rebates generated on account of invoices paid by Jennifer during the prior month or (ii) in the event Rebates are directly remitted to Jennifer by check or other means of payment from a supplier then, on or before the fifteenth day of each calendar month, Jennifer shall remit an amount equal to the Private Company's share of all such Rebates reflected in the Rebate payments directly made by such suppliers during the prior month, provided, however, that in the case of both clauses (i) and (ii) above the Private Company has in fact paid Jennifer for the Merchandise relating to any such Rebates to be remitted to the Private Company hereunder. The Private Company, its subsidiaries, licensees and Managed Stores shall have no interest in, and shall not be entitled to, any Rebates refunded or credited to Jennifer by its suppliers and attributable to Merchandise purchased by Jennifer or any of its subsidiaries or affiliates or partnerships controlled by Jennifer or any subsidiary of Jennifer, for sale other than to the Private Company, its subsidiaries, licensees and Managed Stores, it being acknowledged and agreed that all such Rebates (including early payment discounts) shall be for the sole and exclusive benefit of Jennifer." 3. Amendment to Section 2(b). Section 2(b) of the Purchasing Agreement is hereby amended by adding the phrase "or Managed Stores" after the word "licensees" appearing therein. 4. Amendment to Section 2(c). Section 2(c) of the Purchasing Agreement is hereby amended by adding the phrase "or Managed Stores" after the word "licensees" in each instance where such word appears therein other than at the end of such Section. 5. Amendment to Section 3. Section 3 of the Purchasing Agreement is hereby amended by deleting such Section in its entirety and replacing it with the following: "3. Payment. The Private Company shall, and shall cause each of its subsidiaries, and licensees and Managed Stores to, pay Jennifer (i) for all Pre-purchased Inventory purchased, within thirty (30) days of when such Prepurchased Inventory is delivered to customers of the Private Company, such subsidiary or such licensee or Managed Store, and (ii) for all Special Order Merchandise purchased, within thirty (30) days after the arrival of such Special Order Merchandise at the Warehouse, or on such better terms as may be available from time to time to any of Jennifer's licensees (other than Jennifer's subsidiaries). 6. Amendment to Section 4. Section 4 of the Purchasing Agreement is hereby amended by adding the phrase ", provided, however, that notwithstanding any such termination the Private Company, and each of its subsidiaries, licensees and Managed Stores, shall remain liable to pay Jennifer all amounts then due and owing by them hereunder. 7. Promissory Note. In order to evidence a $1,000,000 receivable currently on the books of Jennifer in respect of Rebates owed by the Private Company to Jennifer for periods prior to January 1, 1994, the Private Company shall deliver to Jennifer the promissory note, substantially in the form attached hereto as Exhibit A, which note shall be in the original principal amount of $1,000,000 and payable in 36 equal consecutive monthly installments commencing August 1, 1994, together with 8% interest. 8. Continued Effectiveness. The Purchasing Agreement is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects except that all references in the Purchasing Agreement to "this Agreement", "hereto", "herein", "thereof", "hereunder" or words of like import referring to the Purchasing Agreement shall mean the Purchasing Agreement as amended by this Amendment. 9. Effective Date. The provisions of this Amendment shall be retroactive to, and effective as of, January 1, 1994. 10. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the conflict of laws principles thereof. 11. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original and together which shall be deemed one instrument. IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of the day and year first above written. JENNIFER CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------- Name: Harley J. Greenfield Title: President JARA ENTERPRISES, INC. By: /s/ Fred J. Love -------------------------------- Name: Fred J. Love Title: President Schedule 1 Managed Stores -------------- GSB Park Slope, Inc. 498 Fifth Avenue Brooklyn, New York 11215 Jennifer Clarkstown, Inc. 83 East Route 49 Nanuet, New York 10954 Great South Bay Branford, Inc. 249 West Main Street Branford, Connecticut 06405 Annapolis-Jennifer, Inc. 2488 Solomons Island Road Annapolis, Maryland 21401 Rudzin 149th Street Furniture, Inc. 349 East 149th Street Bronx, New York 10451 Jennifer Short Hills LIC., Inc. 688 Morris Turnpike Short Hills, New Jersey 07078 GSB Bensonhurst, Inc. 6317 18th Avenue Brooklyn, New York 11204 Rudzin Elmhurst Furniture, Inc. 88-12 Queens Boulevard Elmhurst, New York 11373 Cutler Ridge 19415 South Dixie Highway Miami, Florida 33157 EX-10.38 9 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (the "Agreement") dated as of July 29, 1994, by and between Jennifer Convertibles, Inc., a Delaware corporation (the "Buyer"), and Jerome I. Silverman (the "Seller"). RECITALS A. The Seller, among other things, is engaged in the business of providing financial and accounting services to the Buyer (the "Business") and is the owner of all of the issued and outstanding shares of capital stock of JISCO Holding Corp. ("JISCO"), the tenant under a lease dated July 18, 1991, as amended (the "Lease") affecting 6,997 square feet of gross rentable area at 417-419 Crossways Park Drive, Woodbury, New York 11797 (the "Leased Premises"). B. In connection with the termination of Seller's provision of services to the Buyer, the Seller desires to sell to the Buyer, and the Buyer desires to purchase from the Seller, the JISCO stock and certain of the assets of the Seller which are used in the Business and located at the Leased Premises upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual representations, warranties and covenants which are to be made and performed by the respective parties, it is hereby agreed as follows: ARTICLE I - - SALE AND PURCHASE OF ASSETS AND ASSUMPTION OF LIABILITIES Section 1.1 The Purchase and Sale. Upon the terms and subject to all of the conditions set forth herein, on the Closing Date (as defined in Section 3.1), the Seller agrees to sell to the Buyer, free and clear of all liens, restrictions, security interests, claims, charges, or encumbrances whatsoever ("Encumbrance"), (a) all of the issued and outstanding capital stock of JISCO (the "JISCO Stock"), (b) all of the right, title and interest in and to all property and assets owned by the Seller and used in the Business and located at the Leased Premises which are listed on Schedule 1.1 hereto (the "Property"), (c) all right, title and interest of the Seller under contracts, leases and other agreements which are listed on Schedule 1.2 hereto (the "Contracts") and (d) all corporate records and books of account of JISCO and including, without limiting the generality of the foregoing, minute books, share register books, share certificate books and corporate seals, and all books and records, correspondence and files of or relating to the business of the Buyer, Purchased Assets (hereinafter defined) and/or the employees as to which the Buyer has agreed to offer employment pursuant to Section 4.2 hereof (collectively, the "Records"; and JISCO Stock, the Property, the Contracts and the Records are referred to herein collectively as the "Purchased Assets"), and the Buyer agrees to purchase the Purchased Assets from the Seller. The Purchased Assets shall not include (a) cash, cash equivalents and accounts receivable of the Seller as of the date hereof and the Closing Date, (b) the personal property owned by Seller and located at the Leased Premises listed on Schedule 1.3 hereto and (c) any records of the Seller not relating to the Buyer, including, without limitation, records relating to Jara Enterprises, Inc. and any of its subsidiaries or affiliates (other than the Buyer) and any records relating to clients of the Seller (other than the Buyer). To the extent that any Contract is not assignable to the Buyer, the Seller shall use its reasonable efforts to provide the Buyer with all of the benefits of such Contract. To the extent that any Contract described above is not assignable to the Buyer without the consent of a third party, which consent has not been obtained as of the Closing Date, if the Closing occurs prior to obtaining of such consent, then (x) such Contract shall not be assigned to the Buyer until the consent has been obtained; (y) the Seller shall use its best efforts to obtain the consent; and (z) until the consent is obtained the Seller shall do all things reasonably necessary and cooperate with Buyer to provide the Buyer with all of the benefits of any such Contract. In obtaining any such consent the Seller will not agree to modification or amendment to any Contract or otherwise obligate the Buyer to pay any additional sums of money thereunder without obtaining the Buyer's prior written consent. Section 1.2 Assumption of Liabilities. Subject to the conditions herein set forth, upon the transfer of the Purchased Assets on the Closing Date, the Buyer shall assume all liabilities and obligations of the Seller which are listed on Schedule 1.3 hereto arising on or after September 1, 1994 under each Contract assigned to the Buyer pursuant to this Agreement, or to which the Buyer otherwise specifically consents in writing (the "Assumed Liabilities") . Except as specifically set forth herein, the Buyer has not, and shall not be deemed to have, assumed any other obligations or liabilities of the Seller whatsoever of any kind or nature, whether accrued, absolute, contingent or otherwise, and the Seller shall be solely responsible for and fully and promptly pay and discharge any and all such obligations or liabilities when due. -2 - ARTICLE II -- PURCHASE PRICE Section 2.1 Purchase Price. The aggregate purchase price to be paid by the Buyer to the Seller for the Purchased Assets, and the rights and benefits conferred hereunder, shall be $256,488.22 (the "Purchase Price"). Section 2.2 Payment. On or before July 31, 1994, the Buyer shall, by wire transfer or bank check of immediately available funds, prepay the Purchase Price to the Seller. ARTICLE III -- CLOSING Section 3.1 Closing. The closing of the transactions contemplated by this Agreement (the "Closing") shall be held at 10:00 a.m. on September 1, 1994, or on such other date as may be agreed upon by the parties hereto (the "Closing Date"), at the offices of Dickstein, Shapiro & Morin, L.L.P., 598 Madison Avenue, New York, New York 10022 or at such other place as may be agreed upon by the parties hereto. Section 3.2 Deliveries by the Seller. At the Closing, the Seller shall deliver the following items to the Buyer: (a) The share certificates representing the JISCO Stock duly endorsed for transfer to the Buyer, with all applicable tax stamps attached. (b) The resignation in writing of all directors and officers of JISCO, effective as of the Closing Date. (c) Executed documents of transfer and assignment required to transfer Seller's right, title and interest to the Purchased Assets (other than the JISCO Stock) to the Buyer, consisting of a Bill of Sale, Assignment and Assumption Agreement substantially in the form attached hereto as Exhibit 3.2 and such other deeds, bills of sale, assignments or other instruments of conveyance and transfer necessary or appropriate to vest legal, good and marketable title in and to the Purchased Assets, free and clear of all Encumbrances; (d) The Records, Contracts and Purchased Assets; and (e) All other previously undelivered items required to be delivered by the Seller to the Buyer at or prior to the Closing pursuant to this Agreement or otherwise required in connection herewith unless waived in writing by the Buyer. Section 3.3 Deliveries by the Buyer. At or prior to the Closing, the Buyer shall deliver the following items to the Seller: -3- (a) the Purchase Price as required under Section 2.2; (b) executed documents reasonably requested by the Seller providing for the assumption of the Assumed Liabilities in accordance with Section 1.2 of this Agreement, including without limitation, the Bill of Sale, Assignment and Assumption Agreement substantially in the form attached hereto as Exhibit 3.2; and (c) all other previously undelivered items required to be delivered by the Buyer at or prior to the Closing pursuant to this Agreement or otherwise required in connection herewith unless waived in writing by the Seller. ARTICLE IV -- ADDITIONAL AGREEMENTS Section 4.1 Expenses. Except as otherwise stated herein, the Buyer and the Seller will pay their own expenses incident to the preparation and carrying out of this Agreement and the expenses and fees involved in the preparation and delivery of all documents required to be delivered by or on behalf of it hereunder. Section 4.2 Employees. (a) Commencing on August 29, 1994, the Buyer shall offer to employ, and will employ if such offer of employment is accepted, the persons listed on Schedule 4.2 hereto (the "Employees") on the same terms, conditions and benefits by which such Employees were employed by Seller immediately prior to such date, and otherwise in accordance with the policies of Buyer with respect to its employees of similar status generally. The Seller shall reimburse Buyer for the wages of all such Employees (including all social security, unemployment and disability insurance, payroll taxes and other amounts incurred or paid by Buyer) for the period of August 29, 1994 through August 31, 1994. Such reimbursement shall be made by Seller to Buyer on or about September 9, 1994. Prior to November 30, 1994, Buyer shall not terminate the employment of any such Employee without cause. For the purposes of this Agreement, the term "cause" shall mean (i) willfully and materially refusing or failing to carry out specific directions of the Buyer or its officers, directors or supervisors, or willfully refusing or failing to perform a material part of his or her duties, including by reason of repeated unexcused absence from work; (ii) wilful engaging by the Employee in conduct which is materially or repeatedly injurious to the Buyer, monetarily or otherwise; (iii) willfully acting fraudulently or dishonestly in his relations with the Buyer; (iv) committing larceny, embezzlement, conversion or any act involving the misappropriation of funds in the course of his or her employment; or (v) conviction of any crime involving an act of moral turpitude. No act or failure to act on the Employee's part shall be deemed "willful" unless done, or omitted to be done, by him not in good faith and without a reasonable belief that his or her action or omission was in the best interest of the Buyer. -4 - (b) Seller shall continue to provide health insurance to the Employees through February 28, 1995 pursuant to the terms and conditions by which such Employees were provided such insurance on August 28, 1994. Buyer shall reimburse Seller for the full premium of such insurance for each such Employee (or other payment made to such Employee in lieu of insurance premiums) (i) with respect to the Chubb major medical coverage, on a monthly basis on the 5th day of each calendar month for the period from the 7th day of the current calendar month through the 6th day of the following calendar month, commencing September 5, 1994 and (ii) with respect to Blue Cross/Blue Shield hospitalization coverage, on a quarterly basis on the 5th day of September and December 1994 for the three month periods of September 1, 1994 through November 30, 1994 and December 1, 1994 through February 28, 1995, respectively; which premium as of the date hereof is $3,618.12 per month and $3032.25 per quarter, respectively. The September reimbursement for the insurance premiums of Employees shall also include reimbursement for insurance coverage for the Employees for the period from September 1, 1994 through September 6, 1994. The Employees shall be subject to any co-payment which may be charged to Buyer's employees generally. On March 1, 1995, Seller shall no longer be required to provide health insurance to any such Employee who is then employed by Buyer. (c) Buyer shall provide workman's compensation and disability insurance to the Employees commencing on September 1, 1994. (d) Commencing on September 1, 1994, Seller shall reimburse Buyer on a weekly basis for services performed for Seller by any Employee, based on time records kept by such Employee and submitted to Buyer. The Seller agrees that its use of the Employees shall be conducted in a manner so as to not unreasonably interfere with the duties being performed by the Employees for the Buyer. Such reimbursement shall consist of the pro rata portion of the salary of such Employee for the time spent working on Seller's behalf plus payroll taxes on such salary as well as the pro rata portion of workman's compensation and disability insurance, health insurance and other benefits. All reimbursements hereunder shall be paid within seven (7) days after the end of the week in which such services were performed. (e) Any amounts payable by Seller to Buyer hereunder may, in Buyer's discretion, be offset and credited against amounts otherwise payable by Buyer to Seller hereunder. Section 4.3 Occupancy. (a) Through February 28, 1995, the Seller and the persons listed on Schedule 4.3 hereto (or any replacement thereof) shall have the right to continue to jointly occupy that portion of the Leased Premises currently occupied by the Seller (except as otherwise provided for herein), maintain keys and have access to such premises and be permitted to utilize the Purchased Assets notwithstanding the transfer of title - 5 - pursuant to this Agreement. The Seller agrees that its occupancy of the Leased Premises and use of the Purchased Assets shall be conducted in a manner so as to not unreasonably interfere with the Buyer's occupancy of the Leased Premises and use of the Purchased Assets. The Seller shall not remove any Records or other files or documents from the Leased Premises relating to the Buyer, the Leased Premises, the Purchased Assets or JISCO. Notwithstanding this continued occupancy, Seller and his employees shall not be responsible to Buyer for rent or utilities (excluding telephone, which telephone costs shall be calculated by the telephone computer for extensions used by the Seller and the persons listed on Schedule 4.3 hereto or any replacements thereof) . In the event that the office space currently under construction by Buyer is not complete on February 28, 1995, Seller and the persons listed on Schedule 4.3 hereto shall continue to have all rights of occupancy and use set forth in this Section 4.3 until such construction is complete. (b) After August 1, 1994 and until February 28, 1995 (or such later date as provided for in the last sentence of clause (a) above), Seller shall have the right to occupy the office previously used by Al Ferrara. (c) At any time on or prior to the Closing Date, the Seller shall have the right to change the name of JISCO to such other name as shall be reasonably acceptable to the Buyer. (d) The Seller covenants that, from and after the date hereof and until the Closing Date, except as otherwise consented to in writing by the Buyer, the Seller shall conduct the business of JISCO in the ordinary course and consistent with prior practice and shall maintain, keep and preserve all of the Purchased Assets in good condition and repair and maintain insurance thereon in accordance with present practice. The Seller shall give the Buyer prompt written notice of any material change in or addition to any of the information contained in the representations and warranties made by the Seller in this Agreement or other notice or event affecting any of the Purchased Assets which occurs after the date hereof and prior to the Closing Date. Without limiting the generality of the foregoing: (i) Seller will not, without Buyer's prior written approval, change the certificate of incorporation or by-laws of JISCO or merge or consolidate or obligate JISCO to do so with or into any other entity; and (ii) Seller will not, without Buyer's prior written approval, enter into, or permit JISCO to enter into, any contract, agreement, commitment or other understanding or arrangement which could have the effect of binding the Buyer or otherwise create any obligation or liability on the Buyer. Section 4.4 Transition. (a) Effective August 31, 1994, the Buyer is terminating the services of Seller and his company. The Seller hereby agrees to assist and cooperate with the Buyer and -6 - its Chief Financial Officer before and after September 1, 1994 for the purpose of effecting an orderly transition of the Records and accounting services and functions previously performed by Seller and his company to the Buyer and its accounting staff. (b) The termination of the Seller's services by the Buyer pursuant to clause (a) above shall not apply to Jennifer Chicago, L.P., Southeastern Florida Holding Co., Inc., Jennifer L.P. II, Jennifer L.P. III, Jennifer L.P. IV, Jennifer L.P. V, Jennifer L.P. VI, Jennifer L.P. VII and Jennifer L.P. VIII, unless Buyer or the appropriate entity shall send a notice to Seller that the services of Seller will no longer be required, which notice shall be sent at least fourteen (14) days prior to the date of termination. Section 4.5 Notice to Employees. Within one (1) week following the execution of this Agreement, Seller agrees to notify all of its employees of the transfer of the accounting services and functions currently performed by the Seller to the Buyer and that from and after August 29, 1994 the Employees shall be offered positions with the Buyer and, if the Employees accept employment with the Buyer, they will become employees of the Buyer under the supervision of the Buyer and its Chief Financial Officer. Section 4.6 Indemnification. (a) The Seller shall indemnify and hold harmless the Buyer and JISCO and their respective affiliates, successors and assigns, from and against any losses, damages, expenses or liabilities, including, without limitation, reasonable attorneys' fees, which may be sustained, suffered or incurred by the Buyer or JISCO, or their affiliates, successors and assigns, arising from or in connection with (i) the breach of any Seller's covenants, representations, warranties, agreements, obligations or undertakings hereunder and (ii) any claim, cost expense, liability or obligation incurred with respect to the liabilities or obligations of the Seller not expressly assumed by the Buyer in accordance with this Agreement. (b) The Buyer shall indemnify and hold harmless the Seller, and his successors and assigns, from and against any losses, damages, expenses or liabilities, including, without limitation, reasonable attorneys' fees, which may be sustained, suffered or incurred by the Seller, or his successors and assigns, arising from or in connection with (i) the breach of any Buyer's covenants, representations, warranties, agreements, obligations or undertakings hereunder, (ii) any claim, cost expense, liability or obligation incurred with respect to the Assumed Liabilities and (iii) any claim or action brought against the Seller as a result of the termination of an Employee by the Buyer during the period from September 1, 1994 through November 30, 1994. -7 - ARTICLE V -- REPRESENTATIONS AND WARRANTIES OF THE SELLER The Seller represents and warrants to the Buyer, and the Buyer in agreeing to consummate the transactions contemplated by this Agreement has relied upon such representations and warranties, that: Section 5.1 Title to the Purchased Assets. The Seller has good, valid and marketable title to all of the Purchased Assets, free and clear of all Encumbrances, except for assets which are currently being leased or financed and which are set forth on Schedule 5.5 hereto. The Seller has, except for such leased or financed assets which are set forth on Schedule 5.5 hereto, and on the Closing Date will have, complete and unrestricted power and the unqualified right to sell, assign, transfer, convey and deliver to the Buyer, and will transfer and convey to the Buyer at the Closing, and the Buyer will acquire at the Closing, good, valid and marketable title to the Purchased Assets free and clear of any Encumbrance whatsoever. The Purchased Assets are in good operating condition and repair. Section 5.2 Valid and Binding Agreement. This Agreement has been duly and validly executed and delivered by the Seller and constitutes a valid and binding agreement of the Seller, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization or similar laws relating to creditors' rights generally. Section 5.3 No Violation, Etc. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby nor compliance by the Seller with any of the provisions hereof will (i) violate or conflict with the Certificate of Incorporation of JISCO or any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to JISCO or Seller or (ii) violate, or conflict with, or result in a breach of any provision of, or constitute a default (or any event that, with or without due notice or lapse of time, or both, would constitute a default) under, or result in the termination of, accelerate the performance required by, or result in the creation of any lien, security interest, charge or other encumbrance upon any of the properties or assets of the Seller or JISCO under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation of the Seller. Section 5.4 Consents and Approvals. Except as set forth on Schedule 5.4, no material permit, consent, approval or authorization of, or declaration, filing or registration with, any governmental authority is necessary in connection with the execution and delivery by the Seller of this Agreement or the consummation by any of it of the transactions contemplated hereby and -8- no consent of any third party is required to consummate any of the transactions contemplated hereby. The sale of the JISCO Stock to the Buyer pursuant to this Agreement does not constitute an assignment of the lease for the Leased Premises or require the consent of the landlord of the Leased Premises or any other party. Section 5.5 Leases and Other Loans. Except as set forth in Schedule 5.5 hereto, none of the Purchased Assets are subject to any leases or other security interests. Seller shall acquire title to all leased assets and repay all loans secured by Purchased Assets before the Closing Date. Section 5.6 Broker's or Finder's Fees. No agent, broker, investment banker, person or firm acting on behalf of the Seller or under the authority of the Seller is or will be entitled to any broker's or finder's fee or any other commission or similar fee directly or indirectly from any of the parties hereto in connection with any of the transactions contemplated hereby. Section 5.7 Litigation. There is no action, proceeding or investigation pending or threatened against the Seller, and Seller is not aware of any basis for any such action, proceeding or investigation, which could result in a liability which would have a material adverse effect on the Purchased Assets, JISCO or the ability of the Seller to consummate the transactions contemplated hereunder. Section 5.8 JISCO. (a) JISCO is duly organized, validly existing and in good standing under the laws of the State of New York and has the power to own, lease or operate its properties and to carry on its business as now being conducted. The authorized capital stock of Company consists of 200 shares of common stock, no par value, all of which are issued and outstanding. JISCO has no subsidiaries. The Seller shall furnish to the Buyer on or before the Closing Date true and complete copies of the certificate of incorporation and by-laws of JISCO, and all amendments thereto. As of the date hereof JISCO has not, and on the Closing Date JISCO will have not, adopted by-laws. All issued shares of capital stock of JISCO are duly authorized, validly issued and fully-paid and non-assessable. No options, warrants or other rights for the purchase of any of the capital stock of JISCO or any security convertible into such stock are authorized and outstanding. The Seller is the registered holder and beneficial owner of the JISCO stock, free and clear of all Encumbrances. (b) JISCO has no liabilities, whether absolute, accrued, contingent or otherwise, except for the Lease and as disclosed in writing by the Seller to the Buyer. All federal, state, local and foreign income, excise, property, sales, and other taxes, assessments, governmental charges, penalties, interest and fines - 9 - due and payable by JISCO and by any other person, firm or corporation which will or may be liabilities of JISCO, for all periods ending on or before the Closing Date, have been paid in full. JISCO has filed, or will file prior to the Closing Date, all federal, state, local and foreign income, excise, property, sales, withholding, social security, information returns, and other tax returns, reports and related information ("Returns") required to have been filed by them, and no extension of the time for filing a Return will be in effect on the Closing Date. The Returns that have been filed have been accurately prepared and have been duly and timely filed. There are no actions, suits, proceedings, investigations or claims now threatened or pending against JISCO in respect of taxes, governmental charges or assessments, or any matter under discussion with any governmental authority relating to taxes, governmental charges or assessments asserted by any such authority. Section 5.9 Operation. JISCO has not conducted any active business or other operation at any time during its existence. Its sole function, at all times, has been as the lessee in respect of the Leased Premises. Section 5.10 Contracts. All of the Contracts and the Lease are valid and binding, enforceable in accordance with their respective terms, and are in full force and effect. Except as set forth in this Agreement, there is not under any Contract (a) any existing default by the Seller, or JISCO under the Lease for the Leased Premises, or any event which, after notice or lapse of time, or both, would constitute a default by Seller or JISCO or result in a right to accelerate by any other person or a loss of any rights of the Seller or JISCO and (b) to the best of Seller's knowledge, any default by any other person, or any event which, after notice or lapse of time, or both, would constitute a default by any such person or result in a right to accelerate by the Seller or a loss of any rights of any such person. True and complete copies of all Contracts and the Lease (together with any and all amendments thereto) have been delivered to the Buyer. Section 5.11 Employees. Schedule 4.2 hereto contains a complete and accurate listing of all of the employees of the Seller who work on financial matters for the Buyer, their respective salaries and benefits. Each of the Employees while employed by the Seller is and will continue through the Closing Date to be an employee at will of Seller, and there are no agreements or understandings, written or oral, between the Seller and any of the Employees as to their employment or otherwise. As of the Closing Date, none of the Employees are or will be owed any accrued vacation, severance, back pay or other compensation or benefits. This representation shall not affect the agreement between the Buyer and the Seller set forth in Section 4.2 hereof. - 10 - Section 5.12 Disclaimer. EXCEPT AS SET FORTH IN THIS ARTICLE V SELLER MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED. ARTICLE VI -- REPRESENTATIONS AND WARRANTIES OF THE BUYER The Buyer represents and warrants to the Seller, and the Seller in agreeing to consummate the transactions contemplated by this Agreement has relied upon such representations and warranties, that: Section 6.1 Organization, Standing and Power. The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite power and authority (corporate and other) to own, lease and operate its properties, to carry on its business as now being conducted and to enter into this Agreement and consummate the transactions contemplated hereby. Section 6.2 Valid and Binding Agreements. All necessary action on the part of the Buyer has been taken to authorize the execution and delivery of this Agreement, the performance of its obligations hereunder and consummation of the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by the Buyer and constitutes a valid and binding agreement of the Buyer, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization or similar laws or equitable principles relating to creditors' rights generally. Section 6.3 No Violation. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby nor compliance with any of the provisions hereof will (i) violate or conflict with the Certificate of Incorporation of the Buyer or any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to the Buyer, or (ii) violate or conflict with, or result in a breach of any of the provisions of, or constitute a default (or any event which, with or without due notice or lapse of time, or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in the creation of any lien, security interest, charge or other encumbrance upon the stock or any of the properties or assets of the Buyer under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument of the Buyer. Section 6.4 Consents and Approvals. No permit, consent, approval or authorization of, or declaration, filing or registration with, any governmental authority is necessary to be obtained by Buyer in connection with the execution and delivery of this -11- Agreement by the Buyer or the consummation by the Buyer of the transactions contemplated hereby and no consent of any third party is required to be obtained by Buyer to consummate any of the transactions contemplated hereby. Section 6.5 Broker's or Finder's Fees. No agent, broker, investment banker, person or firm acting on behalf of the Buyer or under the authority of the Buyer is or will be entitled to any broker's or finder's fee or any other commission or similar fee directly or indirectly from any of the parties hereto in connection with any of the transactions contemplated hereby. ARTICLE VII -- CONDITIONS PRECEDENT TO OBLIGATIONS OF THE BUYER All obligations of the Buyer that are to be discharged under this Agreement are subject to the Seller's fulfillment, at Closing or effective as of the Closing Date or any of the dates specified herein, of each of the following conditions (unless expressly waived in writing by the Buyer at any time at or prior to the Closing) and the Seller shall be use best efforts to cause each of such conditions to be satisfied: Section 7.1 Representations and Warranties. On the Closing Date, the representations and warranties of the Seller set forth in Article V or elsewhere in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though such representations and warranties had been made on and as of the Closing Date and the Buyer shall have received at the Closing a certificate, dated the Closing Date, signed by the Seller to such effect. Section 7.2 Covenants, Agreements and Conditions. The Seller shall have performed and complied with all covenants, agreements and conditions contained in this Agreement required to be performed by it on or prior to the Closing Date, and the Buyer shall have received at the Closing a certificate, dated the Closing Date, signed by the Seller to such effect. Section 7.3 Consents and Approval. All consents to be obtained in connection with the transactions contemplated by this Agreement by the Seller and all documents incident thereto shall be reasonably satisfactory in form and substance to the Buyer and its counsel, each of whom shall have received all such originals or certified or other copies of such documents as either may reasonably request. Section 7.4 Proceedings. No action or proceeding shall be pending or threatened to restrain or prevent the consummation of the transactions contemplated hereby. -12- Section 7.5 Deliveries. The Seller shall have delivered to the Buyer the items referred to in Section 3.2 or otherwise in this Agreement. ARTICLE VIII -- CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLER All obligations of the Seller that are to be discharged under this Agreement at the Closing are subject to the Buyer's fulfillment at the Closing or effective as of the Closing Date or other dates specified in this Agreement of each of the following conditions (unless expressly waived in writing by the Seller at any time at or prior to the Closing) and the Buyer shall use its reasonable efforts to cause each of such conditions to be satisfied: Section 8.1 Representations and Warranties. On the Closing Date, the representations and warranties of the Buyer set forth in Article VI of this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though such representations and warranties had been made on and as of the Closing Date, and the Seller shall have received at the Closing a certificate, dated the Closing Date, signed by the President or Vice President of the Buyer to such effect. Section 8.2 Covenants, Agreements and Conditions. The Buyer shall have performed and complied with all covenants, agreements and conditions contained in this Agreement required to be performed by it on or prior to the Closing Date, and the Seller shall have received at the Closing a certificate, dated the Closing Date, signed by the President or a Vice President of the Buyer to such effect. Section 8.3 Consents and Approval. All consents to be obtained in connection with the transactions contemplated by this Agreement and all documents incident thereto shall be reasonably satisfactory in form and substance to the Seller and their counsel, Dickstein, Shapiro & Morin, L.L.P., each of whom shall have received all such originals or certified or other copies of such documents as either may reasonably request. Section 8.4 Proceedings. No action or proceeding shall be pending or threatened to restrain or prevent the consummation of the transactions contemplated hereby. Section 8.5 Deliveries. The Buyer shall have delivered to the Seller the items referred to in Section 3.3 or otherwise in this Agreement. ARTICLE IX - - POST CLOSING MATTERS -13- Section 9.1 Further Assurances. Each party hereto shall cooperate with the other, and execute and deliver, or cause to be executed and delivered, all such other instruments, including instruments of conveyance, assignment and transfer, and take all such other actions as may be reasonably requested by the other party hereto from time to time, consistent with the terms of this Agreement, to effectuate the purposes and provisions of this Agreement. Section 9.2 Prorating of Expenses. After the Closing Date, any bills or requests for payment received by either the Seller or the Buyer in connection with the Leased Premises, the Business, the Purchased Assets or JISCO which reflect in whole or part liabilities retained or assumed, respectively, by the Seller on the one hand, or the Buyer on the other (excluding any federal, state, or local income taxes), shall be allocated between the Seller and the Buyer on the basis of the amount of time covered by such bill or request that the liabilities were the responsibility of the Seller or by the Buyer, or as otherwise appropriate under the terms of this Agreement; provided, however, that, unless the failure to pay could adversely affect a party or its rights, neither party shall pay such bill or request for payment without the prior consent of the other party, not to be unreasonably withheld or delayed. ARTICLE X -- MISCELLANEOUS Section 10.1 Survival of Representations, Warranties and Agreements. All representations and warranties of the Buyer and the Seller contained in Articles V and VI herein and in any certificate executed and delivered by any of them in connection with this Agreement, shall terminate and expire one (1) year after the Closing Date. All agreements of the parties contemplating performance after the Closing Date shall survive the Closing Date until the expiration of the applicable statute of limitations for any claim relating thereto. Section 10.2 Notices. All notices, requests, consents and other communications hereunder shall be in writing and may be delivered personally (including by courier) or by first-class registered or certified mail, postage prepaid, or by recognized overnight delivery service or by telecopy, addressed to the following addresses or to other such addresses as may be furnished in writing by one party to the others: (a) if to the Seller: Jerome I. Silverman 417 Crossways Park Drive Woodbury, New York 11791 Telecopy: (516) 364-0505 -14- with a copy to: Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W. Washington, D.C. 20037 Attention: John W. Griffin, Esq. Telecopy: (202) 887-0689 (b) if to the Buyer: Jennifer Convertibles, Inc. 419 Crossways Park Drive Woodbury, New York 11791 Attention: Harley Greenfield Telecopy: (516) 496-8380 with a copy to: Robinson Silverman Pearce Aronsohn & Berman 1290 Avenue of the Americas New York, New York 10104 Attention: Michael Rosen, Esq. Telecopy: (212) 541-4630 Service of any such notice or other communication so made by mail shall be deemed complete on the day of actual delivery thereof as shown by the addressee's registry or certification receipt. Section 10.3 Risk of Loss. Legal title, equitable title and risk of loss with respect to the Purchased Assets shall not pass to the Buyer until the Purchased Assets are transferred to the Buyer on the Closing Date. Section 10.4 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to such jurisdiction's conflicts of laws principles. The parties agree that venue for any suit, action, proceeding or litigation arising out of or in relation to this Agreement shall be in any federal or state court in the State of New York having subject matter jurisdiction. Section 10.5 Modification; Waiver. This Agreement shall not be altered or otherwise amended except pursuant to an instrument in writing signed by the Buyer and the Seller. Any party may waive any misrepresentation by any other party, or any breach of warranty by, or failure to perform any covenant, obligation or agreement of, any other party, provided that mere inaction or failure to exercise any right, remedy or option under this Agreement, or delaying in exercising the same, will not operate as nor -15- shall be construed as a waiver, and no waiver will be effective unless set forth in writing and only to the extent specifically stated therein. Section 10.6 Entire Agreement. This Agreement, the schedules and exhibits hereto and any other agreements or certificates delivered pursuant hereto constitute the entire agreement of the parties hereto with respect to the matters contemplated hereby and supersede all previous written or oral negotiations, commitments, representations and agreements. Notwithstanding the foregoing, or anything contained herein to the contrary, the parties hereto agree that nothing contained herein shall be construed to modify or waive any rights of the Seller or the Buyer under any other contract, arrangement, agreement or understanding, oral or written, between the Seller and the Buyer (or any of the Buyer's affiliates) which is not specifically referred to herein and the Seller and the Buyer hereby reserve any and all rights which he or it may have with regard to any such agreement, arrangement or understanding, or with respect to any other claims they may have as to each other or third parties, including, without limitation, that certain letter Agreement dated June 25, 1991 and the fact that Seller is designated as the accountant for Jennifer L.P. III, Jennifer L.P. IV, Jennifer L.P. V, Jennifer L.P. VI, Jennifer L.P. VII and Jennifer L.P. VIII pursuant to their respective partnership agreements. Section 10.7 Assignment; Successors and Assigns. This Agreement may not be assigned by the Seller or the Buyer without the prior written consent of the other party. Subject to Section 11.1, all covenants, representations, warranties and agreements of the parties contained herein shall be binding upon and inure to the benefit of their respective successors and assigns. Section 10.8 Public Announcements. Except as provided for herein, no written public announcement of the transactions contemplated hereby prior to the Closing or of the terms hereof at any time shall be made by any party without the prior written consent of the other party, not to be unreasonably withheld or delayed, except to the extent as may be required by law in the opinion of counsel to the Buyer or counsel to the Seller, or as the Buyer may determine reasonably necessary and appropriate in response to inquiries. Section 10.9 Severability. The provisions of this Agreement are severable, and in the event that any one or more provisions are deemed illegal or unenforceable, the remaining provisions shall remain in full force and effect. Section 10.10 No Third-Party Beneficiary. This Agreement is intended and agreed to be solely for the benefit of the parties hereto, and no third party shall accrue any benefit, claim or -16- right of any kind whatsoever pursuant to, under, by or through this Agreement. Section 10.11 Execution in Counterpart. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. JENNIFER CONVERTIBLES, INC. BY: /s/ Harley Greenfield ---------------------------------- Name: Harley Greenfield Title: President /s/ Jerome I. Silverman -------------------------------------- JEROME I. SILVERMAN -17- ATTACHMENTS TO PURCHASE AGREEMENT Schedule 1.1 Property Schedule 1.2 Contracts, Leases and Agreements Schedule 1.3 Exempt Personal Property Exhibit 3.2 Bill of Sale, Assignment and Assumption Agreement Schedule 4.2 Employees Schedule 4.3 Seller's Employees Schedule 5.4 Consents and Approvals Schedule 5.5 Leases and Other Loans Schedule 1.1 PROPERTY Computer System .. Accessories Telephone System .. Alarm Desks File Cabinets Chairs Job Costs, Electrician and Upgrades Storage Shelving Tax Office Sound System Kitchen Custom Shelving, Wall Shelving Window Treatments Bookcases, Light Fixtures Xerox Prepaid Tax Service 1995 Security Deposit on Lease Shredder Adding Machines, staples, hole punches, desk accessories, pencil sharpeners, and storeroom full of supplies (approx.) All of the furniture and fixtures from the following rooms which is not set forth on Schedule 1.3: Executive Office 1st Executive Office 2nd Small Conference Room Administrator' s Office Schedule 1.2 CONTRACTS, LEASES AND AGREEMENTS Contract for Computer Maintenance with Adept Network Technologies Contract for Telephone Maintenance with PSR Technology Inc. Contract for Burglar and Fire Alarm SAB Burglar & Fire Alarms Inc. Schedule 1.3 EXEMPT PERSONAL PROPERTY Personal desks pictures 4 wall pictures in Jerry Silverman's office 2 wall pictures in Diana Silverman's office 2 wall pictures in Isabelle Silverman's office 1 Triplex picture in main conference room 11 wall pictures in Philip Silverman's office 9 wall pictures in Irwin Silverman's office 1 wall picture in secondary conference room 5 wall pictures in the office extension Some mementos Antique lamp Rollabout file Personal filing cabinets Steelmaster organizer filing cabinets Personal microfilm machine and camera viewer Software on 1040 Solutions Program Tax books 6 digital computers and printers (DEC) used for clients other than Buyer and 7 digital computers and printers currently in storage All of Philip's furniture (easily identified) All Jerome I. Silverman stationery and signs Personal plants received as presents EXHIBIT 3.2 BILL OF SALE, ASSIGNMENT AND ASSUMPTION AGREEMENT -------------------- KNOW ALL PERSONS BY THESE PRESENTS, that JEROME I. SILVERMAN (the "Seller"), pursuant to that certain Asset Purchase Agreement (the "Asset Purchase Agreement') dated as of July 29, 1994, by and among the hereinafter named Buyer and the Seller, and for good and valuable consideration, the receipt of which is hereby acknowledged, hereby sells, assigns, transfers, sets over, conveys and delivers unto JENIFER CONVERITBLES, INC., a Delaware corporation (the "Buyer"), effective as of 12:01 a.. on the date hereof, (a) all of the issued and outstanding capital stock (the "JISCO Stock") of JISCO Holding Corp. ("JISCO"), (b) all of the right, title and interest in and to all property and assets owned by the Seller and used in the Business and located at the Leased Premises which are listed on Exhibit A hereto (the "Property"), (C) all right, title and interest of the Seller under contracts, leases and other agreements which are listed On Exhibit B hereto (the "Contracts") and (d) all corporate records and books of account of JISCO and including, without limiting the generality of the foregoing, minute books, share register books, share certificate books and corporate seals, and all books and records, correspondence and files of or relating to the business of the Buyer, Purchased Assets (hereinafter defined) and/or the employee(collectively, the "Records"); and JISCO Stock, the Property, the Contracts, and the Records are referred to herein collectively as the "Purchased Assets"). PROVIDED HOWEVER, that the Purchased Assets shall not include and the Seller shall retain all of his right, title and interest in and to all of the following: (a) cash, cash equivalents and accounts receivable of the Seller as of the date hereof and the Closing Date; (b) the personal property owned by the Seller and located at the Leased Premises listed on Exhibit C hereto; and (c) any records of the Seller not relating to the Buyer, including, without limitation, records relating to Jara Enterprises, Inc. and any of its subsidiaries or affiliates (other than the Buyer) and any records relating to clients of the Seller (other than the Buyer). TO HAVE AND TO HOLD, the entire right, title and interest of the Seller in and to the Purchased Assets hereby sold, transferred, conveyed an assigned to the Buyer, its successors and assigns, to and for its and their own use and benefit forever. The Buyer hereby assumes and agrees to pay and discharge, when due all liabilities and obligations of the Seller which are listed on Exhibit B hereto arising on or after September 1, 1994 under each Contract assigned to the 8uyer pursuant to this Agreement, or to which the Buyer otherwise specifically consents in writing (the "Assumed Liabilities"). Except as specifically 2 Set forth herein, the Buyer has not, and shall not be deemed to have, assumed any other obligations or liabilities of the Seller whatsoever of any kind or nature, whether accrued, absolute, contingent or otherwise, and the Seller shall be solely responsible for and fully and promptly pay and discharge any and all such obligations or liabilities when due. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. Capitalized terms not defined herein shall have the meanings given such terms in the Asset Purchase Agreement. This Agreement shall be effective on the date hereof and shall be binding upon and inure to the benefit of the parties hereto and to their respective successors and assigns. 3 IN WITNESS WHEREOF, the Buyer and the Seller have each caused this Bill of Sale, Assignment and Assumption Agreement to be duly executed on this 1st day of September, 1994. SELLER: ------------------------------------------- JEROME I. SILVERMAN BUYER: JENNIFER CONVERTIBLES, INC. By: -------------------------------------- Name: Title: 4 EXHIBIT A --------- Purchased Assets Computer System . . Accessories Telephone System . . Alarm Desks File Cabinets Chairs Job Costs, Electrician and Upgrades Storage Shelving Tax office Sound System Kitchen Custom Shelving, Wall Shelving Window Treatments Bookcases, Light Fixtures Xerox Prepaid Tax Service 1995 Security Deposit on Lease Shredder Adding machines, staples, hole punches, desk accessories, pencil sharpeners, and storeroom full of supplies (approx.) All of the furniture and fixtures from the following rooms which is not set forth on Exhibit C: Executive Office 1st Executive Office 2nd Small Conference Room Administrator's Office 5 EXHIBIT B --------- Assigned Agreements Contract for Computer Maintenance with Adept Network Technologies Contract for Telephone Maintenance With PSR Technology Inc. Contract for Burglar and Fire Alarm with SAB Burglar & Fire Alarms Inc. 6 EXHIBIT 3 --------- Exempt Personal Property Personal desk pictures 4 wall pictures in Jerry Silverman's office 2 wall pictures in Diana Silverman's office 2 wall pictures in Isabelle Silverman's office 1 Triplex picture in main conference room 11 wall pictures in Philip Si1verman's office 9 wall pictures in Irwin Silverman's office 1 wall picture in secondary conference room 5 wall pictures in the office extension Some mementos Antique lamp Rollabout file Personal filing cabinets Steelmaster organizer filing cabinets Personal microfilm machine and camera viewer Software on 1040 Solutions Program Tax books 6 digital computers and printers (DEC) used for clients other than Buyer and 7 digital computers and printers currently in storage All of Philip's furniture (easily identified) All Jerome I. Silverman stationery and signs Personal plants received as presents 7 Schedule 4.2 Employees Yearly Salary as of 7/29/94 Benefits ------------- -------- Muriel Ganz $ 30,000 Gina Marie Andriani 22,100 Lisa Baricevio 22,620 Patricia Notarfrancesco Z3,000 Roberta Rosenblatt 22,100 E1izabeth Tellona * 314.00 pr hr. Roger Chin * 7.O0 pr hr Resemary Gannotta 23,4OO Donna Gooley 24,500 Denise Harwood * 7.00 pr br. Laura Johnson 32,000 Dona1d Luckman * 7.00 pr hr. Dominick Mirabelli * 7.00 pr hr. Denise Briggs 26,000 Robert Caporaso 33,O0O Margaret Caraldi 40,000 Mario DePascale 25,0OO Donna Fabiano 43,000 Joyce Fox 70,000 CPE courses req by law. Annual renewal of all prof. licenses David Gerber 33,000 Education Courses limited to $2,OOO per year. Lisa Ladd 45,000 Tina Mahoney 26,000 Joseph Mendelsohn 75,000 Jennifer Wynne 30,000 Schedule 4.3 SELLER'S EMPLOYEES Jerome Silverman Diana Silverman Isabelle Silverman Irwin Silverman Philip Silverman Judy Kantor Gina Lo Cascio Frank Reppazo Maria Lu Andrea Ettinger Kimberly Kaszuba Karen Califano Yvette Gigan Lorraine Sheahan Schedule 5.4 CONSENTS AND APPROVALS Contract for Computer Maintenance with Adept Network Technologies Contract for Telephone Maintenance with PST Technology Inc. Contract for Burglar and Fire Alarm SAB Burglar & Fire Alarms Inc. Schedule 5.5 LEASES AND OTHER LOANS ATT Capital (phone system) WASCO Funding (equipment) Chase Manhattan (equipment) Xerox Corp. (equipment) EX-11.1 10 STATEMENT RE: COMPUTATION OF NET (LOSS) PER SHARE
JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF NET (LOSS) EARNINGS PER SHARE YEARS ENDED AUGUST 27, 1994 AND AUGUST 31, 1993 AND 1992 (in thousands, except per share data) 1994 1993 1992 ---- ---- ---- Fully Fully Fully Primary Diluted Primary Diluted Primary Diluted ----------- ---------- ---------- --------- ---------- ----------- Adjusted net (loss) earnings: Net (loss) earnings ($14,617) ($14,617) $506 $506 $2,175 $2,175 Interest adjustments - - (1) 44 (1) 426 (1) 121 (1) 224 ----------- ---------- ---------- --------- ---------- ----------- Adjusted net (loss) earnings ($14,617) ($14,617) $550 $932 $2,296 $2,399 =========== ========== ========== ========= ========== =========== Weighted average common and common equivalent shares outstanding: Weighted average common shares outstanding 5,701 5,701 5,078 5,078 3,927 3,927 Weighted average common equivalents - - (1) 935 (1) 1,555 (1) 678 (1) 835 ----------- ---------- ---------- --------- ---------- ----------- Weighted average common and common equivalent shares outstanding 5,701 5,701 6,013 6,633 4,605 4,762 =========== ========== ========== ========= ========== =========== Net (loss) earnings per common and common equivalent shares ($2.56) ($2.56) $0.09 $0.14 $0.50 $0.50 =========== ========== ========== ========= ========== ===========
(1) Calculated based on modified treasury stock method. EX-22.1 11 SUBSIDIARIES OF THE COMPANY JENNIFER CONVERTIBLES INC. & SUBSIDIARIES 11-2824646 FORM 7004 MEMBERS OF THE AFFILIATED GROUP FOR FISCAL YEAR ENDED AUGUST 26, 1995 NAME OF COMPANY F.E.I.N. - ------------------------------------------------------------------------------- 1. JENNIFER CONVERTIBLES INC. (PARENT) 11-2824646 2. JENNIFER MANAGEMENT, INC. 11-3031730 3. JENNIFER - CHICAGO, LTD. 36-3780505 4. JENNIFER CONVERTIBLES LICENSING CORP. 51-0338920 5. JENNIFER FINANCIAL CORP. 51-0341201 6. JENNIFER MANAGEMENT II, CORP. 51-0339177 7. JENNIFER MANAGEMENT III, LTD. 52-1783552 8. JENNIFER MANAGEMENT IV, CORP. 51-0349129 9. JENNIFER MANAGEMENT V, LTD. 51-0349876 10. JENNIFER MANAGEMENT VI, INC. 51-0356054 11. JENNIFER MANAGEMENT VII, CORP. 52-1908845 12. JENNIFER MANAGEMENT VIII, CORP. 52-1908846 13. JENNIFER MEDIA CORP. 51-0363593 14. JENNIFER PURCHASING CORP. 11-3187319 15. JENNIFER CROSSWAYS PARK DRIVE, INC. 11-3289114 16. ELEGANT LIVING MANAGEMENT, INC. 51-0345049 17. ELEGANT LIVING INC. 11-3199627 18. JENNIFER LEATHER-BEVERLY CA., INC. 95-4530534 19. JENNIFER LEATHER-WEST COAST CA., INC. 95-4530535 20. BOSTON POST ROAD CONVERTIBLES 11-2832027 21. DANBURY SQUARE CONVERTIBLES, INC. 06-1208887 22. HIGH RIDGE CONVERTIBLES, INC. 06-1214626 23. JENNIFER NORWALK, INC. 11-2824768 24. JENNIFER LEATHER-WESTPORT CT., INC. 06-1419322 25. ROUTE 7 CONVERTIBLES, INC. 11-2824769 26. JENNIFER LEATHER-FT. LAUDERDALE, INC. 65-0527550 27. JENNIFER LEATHER-KENDALL FL., INC. 65-0540130 28. JENNIFER LEATHER-NAPLES FL., INC. 65-0499299 29. JENNIFER LEATHER-TAMARAC FL., INC. 65-0501875 30. JENNIFER LEATHER-WEST BOCA RATON FL., INC. 65-0555559 31. J.C. FAIRVIEW HEIGHTS II, INC. 37-1306185 32. J.C. CLEARWATER II, INC. 35-1858256 33. J.C. GREENWOOD II, INC. 35-1858257 34. J.C. LAFAYETTE II, INC. 35-1858255 35. J.C. MONUMENT CIRCLE II, INC. 35-1858254 36. J.C. LENEXA KS II, INC. 48-1136462 37. CIPRIANO SQUARE CONVERTIBLES, INC. 52-1551921 38. CONTOUR ROAD CONVERTIBLES, INC. 52-1552029 39. NICHOLSON LANE CONVERTIBLES, INC. 52-1551922 40. JENNIFER LEATHER-ROCKVILLE PIKE INC. 52-1877735 41. BROCKTON CONVERTIBLES, INC. 04-3028021 42. BURLINGTON CONVERTIBLES, INC. 06-1249746 43. CAMBRIDGE CONVERTIBLES, INC. 04-3039584 44. FRAMINGHAM CONVERTIBLES, INC. 04-3169121 45. SAUGUS CONVERTIBLES, INC. 04-2988314 46. SPRINGFIELD CONVERTIBLES, INC. 06-1249746 47. STEWART STREET CONVERTIBLES, INC. 04-2988308 48. WEST ROXBURY CONVERTIBLES, INC. 04-2988300 49. WESTBORO CONVERTIBLES, INC. 06-1232727 50. JENNIFER LEATHER-BOYLSTON MA, INC. 04-3239831 51. JENNIFER LEATHER-BURLINGTON MA, INC. 04-3274464 52. JENNIFER LEATHER-NATICK MA, INC. 04-3253369 53. JENNIFER LEATHER-SEEKONK MA, INC. 06-1413687 54. JENNIFER LEATHER-WEST ROXBURY MA, INC. 06-1403211 55. J.C. BIRMINGHAM II, INC. 38-3099335 56. J.C. CRANBROOK II, INC. 38-3099334 57. J.C. DEARBORN MI II, INC. 38-3129121 58. J.C. NOVI MI II, INC. 38-3207962 59. J.C. PONTIAC MI II, INC. 38-3129117 60. J.C. ROSEVILLE II, INC. 38-3099337 61. J.C. UTICA II, INC. 38-3099331 62. J.C. BENJAMIN PLAZA MO II, INC. 43-1634036 63. J.C. BRIDGETON II, INC. 43-1634038 64. J.C. CHESTERFIELD CROSSING MO II, INC. 43-1634042 65. J.C. FLORISSANT II, INC. 43-1634043 66. J.C. LADUE MO II, INC. 36-3947958 67. J.C. MACKENZIE POINTE MO II, INC. 43-1634045 68. J.C. PLAZA BUILDING MO II, INC. 43-1634037 69. J.C. ST. PETERS II, INC. 43-1634034 70. KAYE STREET CONVERTIBLES, INC. 02-0417247 71. PORTSMOUTH CONVERTIBLES, INC. 02-0417246 72. SOUTH NASHUA CONVERTIBLES, INC. 02-0417245 73. CONVERTIBLES OF UNION, INC. 22-3386103 74. CONVERTIBLES OF WOODBRIDGE, INC. 22-3388303 75. EAST BRUNSWICK CONVERTIBLES, INC. 22-2810455 76. EAST GREENBROOK CONVERTIBLES, INC. 22-2901671 77. JENNIFER LONG BRANCH, INC. 22-3211058 78. JENNIFER ROUTE 4, INC. 11-2787491 79. JENNIFER PARAMUS INC. 11-3283616 80. PATERSON CONVERTIBLES, INC. 22-2917879 81. PARAMUS CONVERTIBLES, INC. 11-2856003 82. ROUTE 10 CONVERTIBLES, INC. 11-2856003 83. ROUTE 17 CONVERTIBLES, INC. 11-2858872 84. ROUTE 35 CONVERTIBLES, INC. 11-2858874 85. ROUTE 440 CONVERTIBLES, INC. 11-2856001 86. ROUTE 46 CONVERTIBLES, INC. 11-2855888 87. UNION CONVERTIBLES, INC. 11-2827199 88. WOODBRIDGE CONVERTIBLES, INC. 22-2901659 89. JENNIFER LEATHER-EAST BRUNSWICK, N.J., INC. 22-3358661 90. JENNIFER LEATHER-PARAMUS, N.J., INC. 22-3219041 91. JENNIFER LEATHER-SHORT HILLS, N.J., INC. 22-3342177 92. JENNIFER LEATHER-TOMS RIVER, INC. APPLIED F 93. JENNIFER LEATHER-TOTOWA, N.J., INC. 22-3347160 94. JENNIFER LEATHER-UNION, N.J. INC. 11-3214494 95. JENNIFER LEATHER-WOODBRIDGE, N.J., INC. 11-3199633 96. CONVERTIBLES OF GRAND CONCOURSE, INC. 13-3842471 97. GRAND CONCOURSE CONVERTIBLES, INC. 11-2746529 98. HARTSDALE CONVERTIBLES, INC. 13-3251681 - 2 - 99. JENNIFER CENTRAL, INC. 11-2754431 100. JENNIFER CONCOURSE, INC. 11-2698082 101. JENNIFER ELMHURST, INC. 11-3037234 102. JENNIFER MONTAGUE, INC. 13-3178331 103. JENNIFER NICOLE, INC. 11-3182892 104. JENNIFER 149TH STREET, INC. 11-3031729 105. JENNIFER OUTLET CENTER, INC. 11-3199590 106. JENNIFER RICHMOND, INC. 11-2816041 107. JENNIFER SUNRISE, INC. 11-2816044 108. NICOLE CONVERTIBLES, INC. 11-2655985 109. STATEN ISLAND CONVERTIBLES, INC. 11-2766409 110. VALLEY STREAM CONVERTIBLES, INC. 11-2841130 111. COUNTRY GLEN CONVERTIBLES, INC. 11-3118862 112. ELEGANT LIVING-BROADWAY I, INC. 13-3715187 113. ELEGANT LIVING-CARLE PLACE I, INC. 11-3158664 114. ELEGANT LIVING-SCARSDALE I, INC. 13-3704166 115. ELEGANT LIVING-VICTORY BOULEVARD I, INC. 11-3173282 116. GLEN PLACE LEATHER, INC. 11-3173285 117. JENNIFER LEATHER-110, INC. 11-3230374 118. JENNIFER LEATHER-66TH STREET, INC. 11-3214493 119. JENNIFER LEATHER-83RD STREET, INC. 13-3729465 120. JENNIFER LEATHER-BROADWAY, INC. 11-3199628 121. JENNIFER LEATHER-CARLE PLACE, INC. 11-3173263 122. JENNIFER LEATHER-CROSSGATES, INC. 06-3253369 123. JENNIFER LEATHER-ELMHURST, INC. 11-3199587 124. JENNIFER LEATHER-FARMINGDALE, INC. 11-3199637 125. JENNIFER LEATHER-GRAND CONCOURSE, INC. 11-3231605 126. JENNIFER LEATHER-KINGS HIGHWAY, INC. 11-3172841 127. JENNIFER LEATHER-NANUET, INC. 11-3254905 128. JENNIFER LEATHER-SELDEN, INC. 11-3199635 129. JENNIFER LEATHER-SOUTHHAMPTON I, INC. 11-3158662 130. JENNIFER LEATHER-STATEN ISLAND, INC. 11-3214490 131. JENNIFER LEATHER-VICTORY BOULEVARD, INC. 11-3173279 132. JENNIFER LEATHER-WESTSIDE, INC. 11-3199630 133. JENNIFER-YONKERS, INC. 11-3173283 134. LEESBURG PIKE CONVERTIBLES, INC. 54-1444131 135. FAIRFAX CONVERTIBLES, INC. 62-1363913 136. VIENNA CONVERTIBLES, INC. 54-1488104 137. JENNIFER LEATHER-VIENNA, INC. 54-1749067 138. WISCONSIN CONVERTIBLES, INC. 52-1594507 139. JENNIFER LEATHER-GEORGETOWN, INC. 52-1877738 140. J.C. EAST TOWNE WI II, INC. 39-1751986 141. J.C. FASHION SQUARE WI II, INC. 39-1751983 142. J.C. WEST ALLIS WI II, INC. 39-1751984 - 3 - -----END PRIVACY-ENHANCED MESSAGE-----