-----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, FnLBynY60Xn8qVCkO/o1YsrgP/Gfk4cg8pNwJ0NxXhz4lI3g2NevVyz3YabOezTK HDjOQxilIsRGPteIerLNvw== 0000950136-96-000982.txt : 19961106 0000950136-96-000982.hdr.sgml : 19961106 ACCESSION NUMBER: 0000950136-96-000982 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19950826 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: 96654560 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 26, 1995 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, 1995: $11,008,622. Shares of Common Stock outstanding as of November 30, 1995: 5,700,725 DOCUMENTS INCORPORATED BY REFERENCE NONE PART I Item 1. Business Recent Developments In late November 1994, the Company was advised by KPMG Peat Marwick ("Peat"), its independent auditors at the time, that its method of accounting for certain of its licensees should be changed and would likely require a restatement of previously announced financial results. The financial statements included herein consolidate the operating losses for 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. As a result of the late filing of this Annual Report, the Company is simultaneously filing its Quarterly Reports on Form 10-Q for the quarters ended November 25, 1995, February 24, 1996 and May 25, 1996 (the "Quarterly Reports"). Certain of the information contained in this Annual Report is out of date and, accordingly, this Annual Report should be read in conjunction with the Quarterly Reports. Unless expressly otherwise stated, information in this Annual Report is as of August 26, 1995. 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 130 Jennifer Convertibles(R) stores located on the Eastern seaboard, in the Midwest, on the West Coast and in the Southwest. As of August 26, 1995, the Company also operated 38 "Jennifer Leather" ("Jennifer Leather") stores and one "Elegant Living" ("Elegant Living") store. Of the Jennifer Convertibles(R) stores, as of August 26, 1995, 51 were owned by the Company and 79 were licensed by the Company. 2
NUMBER OF STORES IN OPERATION AS OF AUGUST 26, 1995 ================================================================================= ELEGANT TOTAL LPS AND OTHER PRIVATE TOTAL CONVERTIBLES LEATHER LIVING COMPANY LICENSEES(1) COMPANY(2) STORES --------------------------------------------------------------------------------- REGION TRI-STATE AREA NEW YORK 7 12 1 20 3 25 48 NEW JERSEY 9 8 17 4 21 CONNECTICUT 4 1 5 2 7 --------------------------------------------------------------------------------- SUBTOTAL 20 21 1 42 9 25 76 ARIZONA 3 3 CALIFORNIA 4 4 22 26 FLORIDA 5 5 13 18 GEORGIA 4 4 ILLINOIS 15 15 INDIANA 3 3 3 KANSAS 1 1 1 MARYLAND 3 1 4 3 7 MASSACHUSETTS 6 5 11 11 MICHIGAN 6 6 6 MISSOURI 5 5 5 NEVADA 2 2 NEW HAMPSHIRE 2 2 2 OHIO 4 4 PENNSYLVANIA 4 4 VIRGINIA 2 1 3 3 WISCONSIN 2 2 2 WASHINGTON, D.C. 1 1 2 2 --------------------------------------------------------------------------------- TOTAL 51 38 1 90 79 25 194 =================================================================================
(1) These include 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 25 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 26, 1995, was owned by an individual who was a principal stockholder of the Company and the brother-in-law of Harley J. Greenfield, the Company's Chairman of the Board, Chief Executive Officer and a director and principal stockholder. In addition, Mr. Greenfield and Edward Seidner (also an officer, director and principal stockholder of the Company) retain a substantial economic interest in the Private Company through ownership of $10,273,204 in the aggregate principal amount of secured Private Company promissory notes issued in connection with the redemption of their stock ownership in the Private Company. Accordingly, the Private Company 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 25 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." 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 3 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 --------------------------------------------- 1995 1994 1993 1992 1991 1990 1989 1988 1987 ---- ---- ---- ---- ---- ---- ---- ---- ---- Company-owned stores open at end of period (1)(2)(3) 90 55 34 33 33 39 42 31 13 Licensed stores open at end of period 79 113 87 42 15 0 0 0 0 -- --- --- -- -- -- -- -- -- Total stores open at end of period 169 168 121 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) For fiscal 1995 includes the 38 Jennifer Leather stores and one Elegant Living store open at the end of such fiscal year. 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. 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 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. 4 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 50% 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. 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 LPs' expenditures for advertising were approximately $14,900,000 (11.9%) 5 of sales in the fiscal year ended August 26, 1995 as compared to approximately $11,400,000 (11.7%) of sales in the prior year. The Company creates advertising campaigns which may be 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 most of its licensees, which are responsible for their respective costs of advertising; however, 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. In fiscal 1995, the Company and the LPs closed an aggregate of 37 stores. Several were closed for non-performance, but a number of such closings were due to the Company's plan to combine separate Jennifer Convertibles and Jennifer Leather stores located in the same demographic areas into one store. The primary benefit of combining both operations into one store was an elimination of the real estate expenses and other expenses associated with the closed showroom. Additional benefits realized included reductions of personnel and, in a number of cases, elimination of duplicate office equipment and telephone lines. Although combining 6 two stores into one store generally reduces sales, management believes that sales at the combined store will generate more profit due to the elimination or reduction of expenses described above. Although the Company and the LPs closed a number of stores during fiscal 1995, the Company does not anticipate closing a significant number of stores during fiscal 1996 and it will selectively open additional stores if attractive opportunities present themselves. Sources of Supply 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 Relationships 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 26, 1995, 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 Industries Natuzzi S.p.A. The loss of Klaussner as a supplier could have a material adverse effect on the Company. In March 1996, as part of a series of transactions (the "Klaussner Transaction") the Company, among other things, granted Klaussner a security interest in substantially all of its assets in exchange for improved credit terms. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a fuller description of the Klaussner Transaction. 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 26, 1995, an aggregate of 79 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 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. In addition, as set forth under "Legal Proceedings," the MOUS contemplate that the Company will receive the limited partnership interests in licensees which now own 55 licensed stores, representing all but 20 of the royalty bearing licensed stores in connection with the settlement of certain litigation. 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 7 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 the Company purchases merchandise for the licensees. The Company also provides certain accounting services to certain licensees for which it generally charges $6,000 per store. As of August 26, 1995, the Company was owed an aggregate of $15,106,000 for royalties, advances and merchandise by its licensees, a substantial portion of which was overdue. Of such amount, $10,629,000 due from the LPs is not shown separately on the Company's financial statements as a result of the consolidation of the LPs and $4,477,000 due from Unconsolidated Licensees was reserved against in such financial statements due to doubts as to collectibility. The Private Company has agreed to assume $1,866,000 of such amount. 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." 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), the Company currently utilizes the warehousing and distribution facilities leased and operated by the Private Company and, as of July 1996, consisting of a 236,000 square foot warehouse facility in North Carolina, and satellite warehouse facilities in New Jersey and California (collectively, the "Warehouse Facilities"). Until June 1996, the Company had utilized a warehouse facility in Inwood, New York. The Warehouse Facilities service Company-owned and licensed stores and the Private Stores. The Company presently 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 of the Private Company, it has done so to avoid the administrative and other costs associated with developing and maintaining the infrastructure 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 8 Facilities to customers of the Company-owned stores plus 5% of the retail selling price of all merchandise delivered from the Warehouse Facilities 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 service, 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. As described in "Legal Proceedings," the MOUS contemplate that the Company and the Private Company will enter into a new warehousing agreement pursuant to which the arrangements described above will be substantially revised and the Company will take over the warehousing and related functions over a period ending January 1, 1999. In contemplation of the settlement, the Company has begun to take over certain of the related functions, including customer service, cash processing, order processing and store support. 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 26, 1995, the Company had 478 employees including eight 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 9 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 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 26, 1995, 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 1996, 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 8 of "Notes to Consolidated Financial Statements." Item 3. Legal Proceedings. The Company is 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 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. 11 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 Inwood Warehouse facility 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 Inwood Warehouse before December 31, 1998 (as it has already done), then the Private Company would pay the 13 APITAL PRINTING SYSTEMS] Company $25,000 per month starting January 1, 1999 for a period of 84 months. The Settlement Agreement also provided that if the Inwood Warehouse was sold for more than $4,500,000 (net of all reasonable and customary expenses and brokerage commissions), the Company would be entitled to any such excess. However, the Inwood 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 55 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), 14 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. 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 Peat, Zises and/or Seidman, the Derivative Litigation MOU contains provisions designed to relieve those receiving releases from any claims by Peat, Seidman and/or Zises 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. Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable 16 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 26, 1995 was the Nasdaq National Market(R) (the "NASDAQ NMS") until the Common Stock was delisted effective April 17, 1995. Thereafter, the Common Stock traded in the "pink sheets", until May 16, 1995, when it commenced trading on the Bulletin Board. 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 until April 17, 1995 and, thereafter the high and low bid prices of the Common Stock in the over-the-counter market. Such quotations since April 17, 1995 reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. High Low ---- --- Fiscal Year 1995: 1st Quarter..................... $ 8 5/8 $ 6 1/2 2nd Quarter..................... 7 1/2 2 1/4 3rd Quarter..................... 4 1/4 2 3/4 (NASDAQ) 2 1/2 2 1/4 (Pinksheets) 2 5/8 2 1/8 (Bulletin Board) 4th Quarter..................... 3 1/2 2 (Bulletin Board) 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 As of November 30, 1995, there were approximately 290 holders of record and approximately 4,178 beneficial owners for the Common Stock. On November 30, 1995, the closing bid and asked prices of the Common Stock as reported on the NASDAQ Bulletin Board were $2 3/8 and $2 9/16, 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. As of August 26, 1995, the Company's revolving loan agreement prohibits the payment of dividends. 17 Item 6. Selected Financial Data The following table presents certain selected financial data for Jennifer Convertibles, Inc. and subsidiaries:
(in thousands, except share data) --------------------------------- Year Ended Year Ended Year Ended Year Ended Year Ended 8/26/95 8/27/94 8/31/93 8/31/92 8/31/91 ------- ------- ------- ------- ------- Operations Data: Net sales $126,074 $97,420 $64,348 $33,383 $25,999 --------- --------- --------- --------- --------- Cost of sales, including store occupancy, warehousing, delivery and fabric protection 86,964 67,974 43,898 20,741 16,804 Selling, general and administrative expenses 45,955 34,139 22,652 10,618 8,452 Termination of consulting agreement, legal and other costs 500 6,604 - - - Write off of purchased limited partners' interests - 3,482 - - - Provision for losses on amounts due from Private Company and Unconsolidated Licensees 3,088 3,284 - - - Loss from store closings 1,670 - - - - Depreciation and amortization 2,261 2,091 1,583 555 518 --------- --------- --------- --------- --------- 140,438 117,574 68,133 31,914 25,774 --------- --------- --------- --------- --------- Operating (loss) income (14,364) (20,154) (3,785) 1,469 225 --------- --------- --------- --------- --------- Other income (expense) Royalty income 523 644 711 779 175 Interest income 311 473 674 237 - Interest expense (48) (61) (640) (164) (137) Gain on sale of securities - 336 61 - - Other income, net 1,670 1,374 696 74 179 --------- --------- --------- --------- --------- 2,456 2,766 1,502 926 217 --------- --------- --------- --------- --------- (Loss) income before income taxes (benefit), minority interest and extraordinary item (11,908) (17,388) (2,283) 2,395 442 Income taxes (benefit) 160 (322) 113 968 265 --------- --------- --------- --------- --------- (Loss) income before minority interest and extraordinary item (12,068) (17,066) (2,396) 1,427 177 Extraordinary item-utilization of net operating loss carryforwards - - - 748 143 Minority interest share of losses - 2,449 2,902 - - ========= ========= ========= ========= ========= Net (loss) earnings ($12,068) ($14,617) $506 $2,175 $320 ========= ========= ========= ========= ========= (Loss) earnings per common and common equivalent share: Before extraordinary item ($2.12) ($2.56) $0.09 $0.34 $0.06 Extraordinary item - - - 0.16 0.05 ========= ========= ========= ========= ========= Net (loss) earnings per share ($2.12) ($2.56) $0.09 $0.50 $0.11 ========= ========= ========= ========= ========= Weighted average number of common and common equivalent shares 5,700,725 5,700,725 6,013,000 4,605,000 2,985,000 ========= ========= ========= ========= ========= Cash Dividends - - - - - ========= ========= ========= ========= ========= Store data: 8/26/95 8/27/94 8/31/93 8/31/92 8/31/91 - ----------------- Company-owned stores open at end of period 90 55 34 33 33 Consolidated licensed stores open at end of period 68 99 73 28 3 Licensed stores not consolidated open at end of period 11 14 14 14 12 ========= ========= ========= ========= ========= Total stores open at end of period 169 168 121 75 48 ========= ========= ========= ========= ========= Balance Sheet Data: 8/26/95 8/27/94 8/31/93 8/31/92 8/31/91 - ------------------- ------- ------- ------- ------- ------- Working capital (deficiency) ($10,988) $1,240 $11,573 $11,053 $1,615 Total assets 33,871 44,922 37,488 28,819 8,291 Long-term obligations 337 477 118 11,733 384 Total liabilities 38,154 37,137 15,305 16,539 4,471 (Capital deficiency) stockholders' equity (4,283) 7,785 22,183 12,280 3,820 (Capital deficiency) stockholders' equity per share ($0.75) $1.37 $3.69 $2.67 $1.26
18 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 and 1995 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. 19 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 8/26/95 -------- -------- -------- Total operating losses before capital contributions of LP's $(7,013) $(9,781) $(7,288) -------- -------- -------- Total capital contributions 2,902 2,449 - -------- -------- -------- Net operating losses $(4,111) $(7,332) $(7,288) ======== ======== ======== 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 26, 1995 COMPARED TO FISCAL YEAR ENDED AUGUST 27, 1994: Net sales increased by 29.4% to $126,074,000 for the fiscal year ended August 26, 1995 as compared to $97,420,000 for the year ended August 27, 1994. This increase is attributable in part to the opening of 20 new Jennifer Leather stores and 20 new Jennifer Convertibles stores. The Company and the LP's closed an aggregate of 35 Jennifer Convertibles stores, one Elegant Living store and one Jennifer Leather store in the fiscal year. Comparable store sales (those open for a full year in each period) increased by 4.7%. 20 All royalty income earned in the fiscal year ended August 26, 1995 of $523 has been fully reserved due to uncertainty as to the collectibility of such amounts from the Unconsolidated Licensees. Cost of sales increased 27.9% to $86,964,000 for the year ended August 26, 1995 from $67,974,000 for the fiscal year ended August 27, 1994. The dollar increase of $18,990,000 is attributable to the higher sales while the decrease in the cost of sales as a percentage of sales to 68.9% from 69.8% is essentially due to lower costs of merchandise due to higher vendor rebates and lower occupancy costs due to the closed stores. Warehouse expenses of $6,304,000 and fabric protection services of $3,804,000 provided by the Private Company increased from $4,871,000 and $3,298,000, respectively, from the previous year due to the higher sales volume in the current fiscal year. Selling, general and administrative expenses were $45,955,000 for the fiscal year ended August 26, 1995, as compared to $34,139,000 for the fiscal year ended August 27, 1994, an increase of $11,816,000, or 34.6% 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 were 36.5% for the fiscal year ended August 26, 1995 as compared to 35.0% in the prior year. Advertising expenses increased by $4,372,000, or 38.5%, 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 $4,701,000, or 36.7%, due to the 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. The Company's receivables from the Private Company, the Unconsolidated Licensees and S.F.H.C increased by $1,256,000 in the fiscal year ended August 26, 1995 to $6,372,000. These entities have losses and capital deficiencies. The Company has fully reserved for all amounts due from the Private Company and the Unconsolidated Licensees. This resulted in a provision for loss of $3,088,000. In the prior year, the Company had reserved the full amount of amounts due from Unconsolidated Licensees which totalled $3,284,000. On November 1, 1995, the Company signed an Offset Agreement with the Private Company whereby it assumed $1,866,000 of indebtedness to the Company previously owed by certain Unconsolidated Licensees. In connection with the uncertainty of collectibility and the relationship between the Company, the Private Company and the Unconsolidated Licensees, the Company will account for subsequent transactions with these entities on an offset basis. However, if the result of the offset is a receivable due from them, then such net amount will be generally recognized only at the time when cash is received from these entities. The Company and LP's closed an aggregate of 37 stores during the fiscal year ended August 26, 1995. As a result, the Company wrote off various store fixed assets, reversed the deferred rent liability previously established for these stores and incurred settlement costs to eliminate the leasehold liabilities for these stores. These costs aggregated $1,670,000. Interest income decreased by $162,000 to $311,000 for the fiscal year ended August 26, 1995 as compared to the prior year. The decrease reflects the generally lower level of investments throughout the fiscal year, and lower levels of interest rates. 21 Other income increased to $1,670,000 in the fiscal year ended August 26, 1995 from $1,374,000 in the prior year. This increase is primarily attributable to adjustments related to cancelled customer orders. Net (loss) in the fiscal year ended August 26, 1995 was $(12,068,000) compared to a net (loss) of $(14,617,000) in the prior year, a decrease of loss of $2,549,000. The primary reason for the decreased loss was due to the charges in the prior year for termination of consulting agreement, legal and other costs of $6,604,000 and the write-off of purchased limited parties' interests of $3,482,000; however, operating losses in the fiscal year ended August 26, 1995 increased as discussed above. 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%. 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: 22 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. 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. 23 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. LIQUIDITY AND CAPITAL RESOURCES: As of August 26, 1995, the Company and LP's had an aggregate working capital deficiency of $10,988,000 compared to $1,240,000 of working capital at August 27, 1994 and had available cash and cash equivalents of $7,729,000 compared to $13,089,000 at August 27, 1994. The Company is continuing to fund the operations of the LP's which, as described above, continue to generate operating losses. All such losses have been consolidated in the Company's consolidated financial statements. Additionally, the Company's receivables from the Private Company, the Unconsolidated Licensees, including S.F.H.C. increased by $1,256,000 in the current fiscal year. These entities have operating losses and capital deficiencies. Accordingly, a reserve for possible non-collection of such receivables in the amount of $3,088,000 for the current fiscal year has been provided. There can be no assurance that the total receivables will be collected. It is the Company's intention to continue to fund these operations in the future. The Company and the Private Company have entered into offset agreements that permit the two companies to offset their current obligations to each other. As part of such agreements, the Private Company agreed to assume certain liabilities owed to the Company by the Unconsolidated Licensees. 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 26, 1995. 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. In March 1996, the Company executed a Credit and Security Agreement ("Agreement") with its principal supplier, Klaussner Furniture Industries, Inc. ("Klaussner") which effectively extended the payment terms for merchandise shipped from 60 days to 81 days. As part of the Agreement, the Company granted a security interest in all of its assets as well as assigning leasehold interests, trademarks and a licensee agreement to operate the Company's business in the event of default. Klaussner also lent $1,440,000 to the Private Company to be used to pay down the mortgage balance on the warehouse property. This paydown also reduced the Company's guarantee to the mortgagor. In June 1996, the Private Company sold its principal New York warehouse and repaid the mortgage thereon. As a result, the Company's guaranty of a portion of such mortgage obligation was extinguished without any liability to the Company. 24 The proposed settlement of the derivative and class action litigations (as described elsewhere) will come from insurance company payments and the issuance of new Preferred Stock by the Company. There will be no cash outlays by the Company other than legal costs. Additionally, a new proposed agreement with the Private Company (as described in the Notes to the Consolidated Financial Statements) contemplates significant changes to the operating relationship between the companies. 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. In fiscal 1995, the Company and the LP's closed an aggregate of 37 stores. Several were closed for non-performance, but a number of such closings were due to the Company's decision to combine separate Jennifer Convertibles and Jennifer Leather stores located in the same demographic areas into one store. The primary benefit of combining both operations into one store was an elimination of the real estate expenses and other expenses associated with the closed showroom. Additional benefits realized included reductions of personnel and, in a number of cases, elimination of duplicate office equipment and telephone lines. Although combining two stores into one store generally reduces sales, management believes that sales at the combined store will generate more profit due to the elimination or reduction of expenses described above. Management feels that with the above noted Klaussner Agreement and significant cost cutting measures undertaken subsequent to August 26, 1995, including, but not limited to, the closing of approximately five stores and the reduction in salaries of certain management personnel, the Company will have adequate cash flow to fund its operations. For the year ended August 26, 1995 and year ended August 27, 1994, the Company and the LP's spent $4,292,000 and $5,021,000, respectively, for capital expenditures. The Company anticipates capital expenditures totalling approximately $1,000,000 during fiscal 1996 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 26, 1995. 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 and the Company's Current Report on Form 8-K dated September 20, 1994. 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 November 30, 1995 are as follows: Position(s) with the Name Age Company - -------------------- --- --------------------- Harley J. Greenfield 51 Chairman of the Board, Chief Executive Officer and President Edward G. Bohn 50 Director Kevin J. Coyle 51 Director Edward B. Seidner 41 Director and Executive Vice President Bernard Wincig 64 Director George J. Nadel 53 Executive Vice President, Chief Financial Officer and Treasurer Rami Abada 36 Executive Vice President and Chief Operating Officer Ronald E. Rudzin 33 Senior Vice President - Retail Stores Leslie Falchook 35 Vice President - Administration Kevin Mattler 38 Vice President - Store Operations Howard Horowitz 45 Vice President - Real Estate/Construction 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 eight meetings during the 1995 fiscal year. All of the directors attended each of the meetings, except for Fred Love, a former director who missed one of such meetings. 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 26, 1995, consisted of Messrs. Greenfield and Seidner. The Stock Option Committee held two meetings during the last fiscal year. The Stock Option Committee is authorized to administer the Company's stock option plans. The Board of Directors has an Audit Committee, which during the fiscal year ended August 26, 1995, consisted of Harley Greenfield, Bernard Wincig and Michael Colnes until February 1995 when Mr. Colnes 26 resigned and Edward Bohn and Kevin Coyle were added. During such fiscal year, the Audit Committee held six meetings. 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. In December 1994, the Company established a Monitoring Committee consisting of Bernard Wincig and Michael Colnes to monitor transactions between the Company and the Private Company. The Monitoring Committee currently consists of Edward Bohn, Kevin Coyle and Bernard Wincig. Set forth below is a biographical description of each director and executive officer of the Company as of August 26, 1995. 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. Edward G. Bohn Mr. Bohn has been a director of the Company since February 1995. Since March 1995, he has been engaged as a Consultant for Borlas Sales in Avenel, New Jersey, an importer/exporter of consumer electronics. Borlas also handles the sale and installation of software. Since June 1995, he has been a Director of Nuwave Technologies, Inc. He has also operated as an Independent Consultant in financial and operational matters since September 1994 through the present. Mr. Bohn was employed by Emerson Radio Corporation, which designs and sells consumer electronics, in various capacities from January 1983 through March 1994. From March 1993 to March 1994, he was the Senior Vice President-Special Projects; he was Chief Financial Officer from March 1991 through March 1993 and Treasurer/Vice President of Finance prior to that. Emerson Radio filed in the United States Bankruptcy Court, District of New Jersey, for protection under Chapter 11 of the Federal Bankruptcy Act on September 29, 1993 and was discharged on March 31, 1994. Kevin J. Coyle Mr. Coyle was appointed as a director of the Company in February 1995. Mr. Coyle is a certified public accountant specializing in litigation support. Until 1993, Mr. Coyle was President of Olde Kraft Company Ltd. ("Olde Kraft"), a retail furniture business operating seven stores in the New York Metropolitan Area. Olde Kraft filed a Chapter XI petition in bankruptcy in October 1993 and converted to a Chapter VII in October 1994. Mr. Coyle graduated from Queens College with a BS in accounting and is a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants. 27 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. George J. Nadel Mr. Nadel joined the Company and became Executive Vice President, Chief Financial Officer and Treasurer on August 1, 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 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. 28 Howard Horowitz 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. As a result of the Company's closing of certain stores and its limited near term expansion plans, the office of Vice President - Real Estate Construction was eliminated and Mr. Horowitz's employment with the Company ended on May 3, 1996. 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 26, 1995, August 27, 1994 and August 31, 1993 (or such shorter period as such employees were employed by the Company) of those persons who were (i) the chief executive officer at August 26, 1995 and (ii) the four other most highly compensated executive officers of the Company at August 26, 1995 whose total annual salary and other compensation exceeded $100,000 (collectively, the "Named Executive Officers").
ANNUAL LONG-TERM COMPENSATION COMPENSATION -------------- -------------- SECURITIES NAME AND FISCAL UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY ($) OPTIONS(#) COMPENSATION - ----------------------- -------- -------------- -------------- -------------- Harley J. Greenfield, 1995 $400,000(1) 0(1) 0 Chairman of the Board, 1994 0(1) 0(1) 0 Chief Executive 1993 0(1) 25,000(1) 0 Officer and President Edward B. Seidner, 1995 $300,000 0 0 Executive Vice President George J. Nadel 1995 $202,083 50,0000(2) 0 Executive Vice 1994 16,667(2) 0 President and Chief Financial Officer Leslie Falchook, 1995 $144,670(3) 0 0 Vice President-- 1994 144,670(3) 0 0 Administration 1993 133,000(3) 20,000(3) 0 Rami Abada 1995 $150,000 0 0 Executive Vice 1994 100,000 0 0 President and Chief Operating Officer Ronald E. Rudzin 1995 $150,000 0 0 Senior Vice President 1994 100,000 0 0 Retail Stores
30 - --------------------- (1) 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) Mr. Nadel joined the Company towards the end of fiscal 1994. On August 1, 1995, Mr. Nadel was granted options to purchase 25,000 shares of Common Stock at $2.50 per share and, on February 1, 1995, Mr. Nadel was granted options to purchase 25,000 shares of Common Stock at $3.53 per share, in each case the market value on the date of grant. Such options vest over a three-year period. (3) In the fiscal years ended August 26, 1995, August 27, 1994 and August 31, 1993 the Private Company was responsible for $ -0-,$ -0- 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. Effective February 1, 1995, Non-employee directors receive a fee of $10,000 per year, plus $500 per meeting attended (an aggregate of $34,000 in fiscal 1995). Directors are reimbursed for out-of-pocket expenses incurred in connection with their services as such. Effective February 1, 1996, the salaries of each of the Company's officers was reduced (other than George J. Nadel, a portion of whose salary was deferred), in connection with the Company's cost-cutting program. The annual salaries of the Company's executive officers, effective February 1, 1996 are as follows: Harley Greenfield-$320,000; Edward Seidner - $240,000, George J. Nadel - $225,000, of which approximately $26,000 is deferred until September 1, 1996, Rami Abada - $120,000, Ronald E. Rudzin - $120,000, Leslie Falchook - $116,000 and Kevin Mattler - $96,000. 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 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 26, 1995, Mr. Greenfield received 31 approximately $360,000 of interest, severance pay, distributions and other payments from the Private Company. The Company is not responsible for the payment of such benefits to Mr. Greenfield. 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 $144,670 per annum for the year ended August 26, 1995, which amount may be increased at the discretion of the Board of Directors. Stock Option Plans The Company has Incentive and Non-Qualified Stock Option Plans (the "Plans"), pursuant to which, as of August 26, 1995, options to purchase an aggregate of 656,547 shares of Common Stock were outstanding and under which options to purchase an aggregate of 190,453 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 26, 1995. The Plans are administered by a Stock Option Committee (the "Committee") consisting of two persons appointed by the Board of Directors. As of August 26, 1995, the Committee consisted of Harley Greenfield 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. 32 OPTION GRANTS IN LAST FISCAL YEAR The only options granted to Named Executive Officers during the fiscal year ended August 26, 1995 were the options to purchase 25,000 shares of Common Stock at $2.50 per share and options to purchase 25,000 shares of Common Stock at $3.53 per share granted to George J. Nadel. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
Name of Securities Underlying Value of Unexercised Unexercised Options at In-the-Money Options at August 26, 1995 August 26, 1995(1) ----------------------------- -------------------------- Shares Acquired on Value Name Exercise(#) Realized Unexercisable Exercisable Unexercisable Exercisable - -------------------- ----------- -------- ------------- ----------- ------------- ----------- Harley J. Greenfield(2)(4) N/A N/A 60,000 237,047 $0 $0 Edward B. Seidner N/A N/A 0 0 0 0 George J. Nadel(3)(4) N/A N/A 50,000 0 0 0 Leslie Falchook(4)(5) N/A N/A 6,666 38,334 0 9,375 Rami Abada N/A N/A 0 0 0 0 Ronald E. Rudzin(4)(6) N/A N/A 0 50,000 0 18,250
- ------------------- (1) Amount reflects the market value of the underlying shares of Common Stock as reported on the Bulletin Board on August 26, 1995 (a bid price of $3.125) 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 August 1, 1995 to Mr. Nadel at an exercise price of $2.50 per share and 25,000 options granted on February 1, 1995 at an exercise price of $3.53 per share, none of which options were exercisable at August 26, 1995. (4) All options were granted at an exercise price equal to the market value of the underlying Common Stock on the date of grant. (5) 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 13,334 were exercisable at August 26, 1995. (6) Includes 50,000 options granted on March 7, 1988 at an exercise price of $2.75 per share, which options have all vested. 33 Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of August 26, 1995, 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 26, 1995 - ---------------- ------------ --------------- Harley J. Greenfield 1,151,211 (2)(3) 19.9% Fred J. Love 585,662 (2)(5)(6) 10.3 Edward B. Seidner 553,914 (2)(4) 9.7 Jara Enterprises, Inc. ("Jara") 343,579 (6) 6.0 Bernard Wincig 144,573 (7) 2.5 Edward G. Bohn 0 (8) 0 Kevin J. Coyle 1,250 (8) * Leslie Falchook 63,334 (9) 0.1 George J. Nadel 0 (10) 0 Rami Abada 53,000 (11) 0.1 Ronald E. Rudzin 62,500 (12) 0.1 28.0 All directors and executive 1,676,657 (2)(3)(4)(5)(6)(7)(8)(9) officers as a group (eleven (11) persons) (10)(11)(12)(13) - ----------------- * Less than 1.0% (1) All of such shares are owned directly with sole voting and investment power, unless otherwise noted below. (2) The address of Messrs. Greenfield and Seidner is c/o Jennifer Convertibles, 419 Crossways Park Drive, Woodbury, New York 11797. The address of Fred J. Love was c/o Jennifer Convertibles, 245 Roger Avenue, Inwood, New York 11696 as of August 26, 1995 and is One Ames Court, Plainview, New York 11803 as of the date of this Annual Report. Mr. Greenfield and Mr. Love are brothers-in-law. See "Certain Relationships and Related Transactions." Subsequent to August 26, 1995, the shares of Common Stock owned by Messrs. Greenfield, Seidner and Love and the Private Company were pledged to Klaussner. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) Includes (a) 492,916 shares of Common Stock owned by Messrs. Love and Seidner which have been placed in a voting trust (the "Voting Trust") administered by Mr. Greenfield as a voting trustee, pursuant to the Jennifer Voting Trust Agreement, under which Mr. Greenfield has shared voting and shared dispositive power with respect to such shares, (b) 171,790 Shares owned by Jara and representing a portion of 292,831 shares underlying options granted to Mr. Greenfield by Mr. 34 Love (which are already included as beneficially owned under (a) above) and the Private Company (the "Greenfield Option"), over which Mr. Greenfield has no voting power but has shared dispositive power, as such shares may not be disposed of without the consent of Mr. Greenfield, and (c) 237,047 shares underlying vested options (but does not include 60,000 shares of Common Stock underlying stock options not vested as of August 26, 1995) granted to Mr. Greenfield by the Company, with respect to which shares Mr. Greenfield would have sole voting and dispositive power upon exercise of such options. 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." (4) Includes (a) 250,583 shares of Common Stock owned by Mr. Seidner which are subject to the Voting Trust, over which Mr. Seidner has shared voting and shared dispositive power, and (b) 292,831 shares underlying the options granted to Mr. Seidner by Mr. Love and the Private Company (the "Seidner Option"), over which Mr. Seidner has no voting power but has shared dispositive power, as such shares may not be disposed of without the consent of Mr. Seidner. (5) Includes (a) 343,579 shares of Common Stock owned by the Private Company, over which Mr. Love has sole voting and dispositive power, as such shares are not subject to the Voting Trust, but which are subject to the Greenfield Option and the Seidner Option (the "Options") granted to Messrs. Greenfield and Seidner, respectively, (the "Optionees") and may not be disposed of without the consent of the relevant Optionee, and (b) 243,083 shares owned by Mr. Love which are subject to the Voting Trust and the Options and as to which Mr. Love has no voting power but has shared dispositive power. (6) All of such shares are beneficially owned by Mr. Love , the sole stockholder of Jara. Includes shares of Common Stock owned by three of Jara's wholly-owned subsidiaries. Jara's address was 245 Roger Avenue, Inwood, New York 11696 as of August 26, 1995 and is One Ames Court, Plainview, New York 11803 as of the date of this Annual Report. Mr. Love has sole voting and shared dispositive power over such shares, as such shares are subject to the Options and may not be disposed of without the consent of the relevant Optionee. Does not include 50,000 shares of Common Stock pledged to Jara by Rami Abada, an executive officer of the Company. (7) Includes 8,800 shares of Common Stock owned by Mr. Wincig's wife and 25,000 shares of Common Stock underlying vested options. (8) Does not include, as to each individual, 25,000 shares of Common Stock underlying options granted, which options have not yet vested. (9) Does not include 6,666 shares of Common Stock underlying options granted, which have not yet vested, but does include 38,334 shares of Common Stock underlying options which have vested. 35 (10) Does not include 50,000 shares of Common Stock underlying options granted, but not yet vested. (11) Includes 50,000 shares pledged to Jara as described in Note 6. (12) Includes 50,000 shares of Common Stock underlying vested options. (13) Includes 25,000 shares of Common Stock underlying options granted to an officer of the Company other than a Named Executive Officer, 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 1995, except that Edward Seidner was one month late in reporting the acquisition of 4,000 shares of Common Stock in October 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. 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 of the Company until August 10, 1995 and principal stockholder of the Company as of August 26, 1995) 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 26, 1995, Mr. Seidner received approximately $360,000 of interest, severance pay, distributions and other payments from the Private Company. During the fiscal year ended August 26, 1995, Mr. Greenfield received approximately $360,000 of interest, severance pay, distributions and other payments. With the exception of 6,250 shares owned directly by Mr. Seidner, as of August 26, 1995, the shares of Common Stock directly owned by Messrs. Love and Seidner were in a voting trust, expiring October 15, 1996, 37 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 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 26, 1995 the Company and the LPs paid warehouse fees to the Private Company aggregating approximately $6,304,000. During the fiscal year ended August 26, 1995, the Private Company purchased from the Company approximately $8,584,000 of merchandise (net of discounts and allowances). Under the terms 38 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, on May 29, 1994, agreed to pay the Company $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 29, 1994, calling for payments in 36 equal monthly installments and bearing interest at 8% per annum. The Private Company made $333,333 of payments on such note during the fiscal year ended August 26, 1995, leaving $638,889 principal amount outstanding as of August 26, 1995. 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 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 26, 1995, the Company and the LPs paid $3,775,000 for freight charges and $3,804,000 for fabric protection to the Private Company. See "The Committee Report" below. The Inwood, New York warehouse facility (the "Inwood Warehouse"), which was the main facility servicing the Company's stores until such facility was sold in June 1996, was owned (subject to a ground lease) equally by two corporations, one of which was owned 33-1/3% by each of Messrs. Greenfield, Love and Seidner and the other of which was 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 December 1, 1994, the Inwood Warehouse was transferred to a corporation owned by Fred Love. On June 29, 1988, the Company acquired a 10-year option to purchase the Inwood Warehouse (subject to a ground lease with a non-affiliate expiring in February 2035) for its appraised value, as of June 1988, of $9,000,000, increasing each year of the option period by an additional $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 Inwood Warehouse. 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 was 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 were the same as for the original financing, and the Company was entitled to receive an annual guarantee fee of 1/2 of 1% of the amount guaranteed, which was $25,000 in fiscal 1995. In March 1996, as part of the Klaussner Transaction, among other things, Klaussner loaned the Private Company $1,440,000, which was used to reduce the debt guaranteed by the Company from $4,800,000 to $3,360,000 and the lender agreed that the Company's liability under the guarantee would be limited to the lesser of 60% of the debt or $2,016,000. In June 1996, in connection with the sale of the Inwood Warehouse, the mortgage was extinguished without liability to the Company. The Company also guarantees the lease for the Private Company's satellite warehouse in California. Such lease expires September 30, 1998 and the annual base rent is $133,000. Pursuant to an agreement dated September 1, 39 1993, the Company is indemnified against any liability arising under such guaranty by the Private Company. By agreement, dated May 19, 1995, between the Company and the Private Company, the parties agreed to settle a dispute 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. By agreement (the "Offset Agreement") dated November 1, 1995, the Private Company and the Company acknowledged that as of August 26, 1995 the Private Company owed the Company $9,267,962, certain licensees owed the Company $2,117,616 for merchandise purchased (of which $1,865,813 was past due) and the Company owed the Private Company $11,459,677. In addition, the Private Company agreed to assume the obligations of the licensees referred to above and to offset the amounts owed to the Company by the Private Company against the amounts owed to the Private Company by the Company. By agreement dated March 1, 1996, the Private Company and the Company agreed to continue to offset, on a monthly basis, amounts owed by the Private Company and certain licensees to the Company for purchasing, advertising, and other services and matters against amounts owed by the Company to the Private Company for warehousing services, fabric protection, freight and other services and matters. Amounts owed by the Private Company to the Company as of August 26, 1995 are reserved against in the accompanying consolidated financial statements due to uncertain collectibility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Advertising Agreement Under the advertising agreement with the Private Company, the Private Company bears an amount which approximates 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 26, 1995, the Company charged the Private Company $2,040,000 under the advertising agreement. Jennifer Living Rooms In September 1996, the Company opened two test "Jennifer Living Rooms" stores in St. Louis, Missouri. As part of its license with the Private Company, the Private Company also has the royalty free right to open "Jennifer Living Rooms" stores in New York. In October 1996, the Private Company began operating a test store in New York under the name "Jennifer Living Rooms." 40 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. During fiscal 1995, the Company reimbursed Harley J. Greenfield $493,000 for legal and accounting fees in connection with the preparation of the response to the report of such committee. JCI Related parties of JCI, which is the holder of options to purchase 1,200,000 shares of Common Stock, 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, 15 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, 21 Jennifer Convertible stores in the Detroit, St. Louis, Indianapolis, Milwaukee and Kansas City metropolitan areas. During the fiscal year ended August 26, 1995, the Company earned $621,000 of royalties from the Chicago Partnership, which are not separately shown in the financial statements due to the consolidation of the 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. Mr. Zises ultimately invested $670,000 in 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." 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 and the Private Company. The Company did not pay JISCO any fees during the fiscal year ended August 26, 1995. Investors in a number of the Company's licensees are clients of JISCO. In addition, Isabelle Silverman's brother-in-law is the 50% owner of a corporation which, until December 1, 1994, owned 50% of the Warehouse. 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. 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. 41 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, which they acquired while employees of the Private Company. Mr. Abada owned, until October 1996, a 20% interest in one corporation which owns six licensed Jennifer Convertibles stores. During the year ended August 26, 1995, such corporation incurred approximately $185,000 in royalties and $1,613,000 for merchandise purchases owed to the Company and also made principal and interest payments to the Company of approximately $23,000 in respect of a 9% secured note, due December 31, 2001, in the original principal amount of $810,000 (which principal amount was $638,000 as of August 26, 1995). 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. Mr. Abada also owned a 20% interest (until October 1996, when he acquired the remaining 80% interest in such corporations) in each of two corporations, which each own a licensed Jennifer Convertibles store. During the year ended August 26, 1995, such corporations incurred an aggregate of approximately $97,000 in royalties and $749,483 for merchandise purchases owed to the Company. Mr. Rudzin owns one licensed Jennifer Convertibles store and his father owns two licensed Jennifer Convertibles stores which during the fiscal year ended August 26, 1995 incurred approximately $109,000 (for Mr. Rudzin's stores) and $130,000 for Mr. Rudzin's father's stores) of royalties and $907,864 (for Mr. Rudzin's store) and $1,123,553 (for Mr. Rudzin's father's stores) for merchandise purchases. During the fiscal year ended August 26, 1995, Mr. Abada received $284,172 of salary, severance pay, distributions and other payments from such licensees and the Private Company and Mr. Rudzin received $167,923 of salary, distributions and other payments from such licensees and the Private Company. Amounts owed to the Company by the corporate licensees referred to above, (each of which is an Unconsolidated Licensee) have been fully reserved against in the accompanying financial statements for the 1994 and 1995 fiscal years due to uncertain collectibility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Subject to court approval of the Settlement Agreement, Mr. Abada and Mr. Rudzin have agreed, from the date of such approval forward, to personally guarantee the merchandise purchases and royalty obligations of the Unconsolidated Licensees in which they respectively have an ownership interest. The Company uses and the Private Company from time to time, also uses Wincig & Wincig, a law firm of which Bernard Wincig, a director of the Company and a stockholder, is a partner. Mr. Wincig received approximately $336,000 of legal fees from the Company and the LPs and an aggregate of approximately $412,000 fom the Private Company (representing undistributed profits accrued over several years from two Private Stores in which Mr. Wincig had a 20% interest and a payment in respect of the purchase of such 20% interest) and legal and consulting fees from the Private Company during the fiscal year ended August 26, 1995. 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. 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 42 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 with 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 "Rebate Note") for $1,000,000 representing the amount of such 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. 43 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 and $3,800,000 paid by the Company and the LPs for the years ended August 27, 1994 and August 26, 1995, respectively) 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. 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. 44 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 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. 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 Report believed to be insolvent) to grow. 45 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. 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. 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. 46 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. 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: 47 (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"). 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; - -------- 2 SFHC was created for the specific purpose of acquiring Summit. 48 (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. 49 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 26, 1995, the Company filed one Current Report on Form 8-K, dated June 13, 1995, reporting on the following: Item 5. - Other Events with respect to its results for fiscal 1994, the first half of fiscal 1995, and the initiation of a formal investigation by the Securities and Exchange Commission. (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 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) 50 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 - series of agreements with JCI Consultant L.P.) 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) 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 51 Company's Current Report on Form 8-K dated July 24, 1991 - related to series of agreements related to Limited Partnership of Jennifer Chicago L.P.) 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) 52 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 (Incorporated herein by reference to Exhibit 10.27 on Form 10-K for 1994) 10.28 - The Company's Current Report on Form 8-K dated September 20, 1994 (Incorporated herein by reference to Exhibit 10.28 to Form 10-K for 1994) 10.29 - The Company's Current Report on Form 8-K dated May 5, 1995. (Incorporated herein by reference to Exhibit 10.29 to Form 10-K for 1994) 10.30 - Credit Agreement dated August 31, 1993 by and between Jennifer Convertibles, Inc. and IBJ Schroder Bank and Trust Company (Incorporated herein by reference to Exhibit 10.30 to Form 10-K for 1994) 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) 10.32 - Purchasing Agreement, dated as of December 31, 1993, between Jennifer Convertibles, Inc. and Jara Enterprises, Inc. (Incorporated herein by reference to 53 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 and the related Rebate Note (Incorporated herein by reference to Exhibit 10.34 on Form 10-K for 1994) 10.35 - Amendment No. 1 to Purchasing Agreement, dated as of May 28, 1994, amending the Purchasing Agreement referred to in 10.30 (Incorporated herein by reference to Exhibit 10.35 on Form 10-K for 1994) 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 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 - Agreement, dated as of May 19, 1995, among Jennifer Convertibles, Inc., Jennifer Purchasing Corp., Jara Enterprises, Inc. and the licensees signatory thereto. 10.39 - Agreement, dated as of November 1, 1995, among Jennifer Convertibles, Inc., Jennifer Purchasing Corp., Jara Enterprises, Inc. and the licensees signatory thereto. 10.40 - Settlement Agreement, dated as of March 8, 1996, between Jennifer Convertibles, Inc. and Jara Enterprises, Inc. (Incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated March 18, 1996). 10.41 - Memorandum of Understanding for Settlement of Jennifer Convertibles Securities Litigation (Incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated March 18, 1996). 54 10.42 - Memorandum of Understanding for Settlement of Certain Derivative Claims (Incorporated by reference to Exhibit 2 to the Company's Current Report on Form 8-K dated March 18, 1996). 10.43 - Form of Note, dated November 1994, made by Jara Enterprises, Inc. to Harley J. Greenfield and Edward B. Seidner 10.44 - Form of Option, dated November 7, 1994 to purchase Common Stock from Fred Love, Jara Enterprises, Inc. and certain subsidiaries to Harley J. Greenfield and Fred Love 10.45 - Form of Subordination Agreement, dated as of August 9, 1996, by Harley J. Greenfield and Edward B. Seidner 10.46 - Credit and Security Agreement, dated as of March 1, 1996, among Klaussner Furniture Corp. and Jennifer Convertibles, Inc. and the other signatories thereto (Incorporated by reference to Exhibit 4 to the Company's Current Report on Form 8-K dated March 18, 1996). 10.47 - Agreement, dated as of March 1, 1996, among Jennifer Convertibles, Inc., Jennifer Purchasing Corp., Jara Enterprises, Inc. and the Licensees signatory thereto. 11.1 - Statement re: Computation of Net (Loss) Earning per share (for fiscal years ended August 26, 1995, August 27, 1994 and August 31, 1993) 22.1 - Subsidiaries of the Company (Incorporated herein by reference to Exhibit 22.1 on Form 10-K for 1994) (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. 55 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. 58 NAME POSITION DATE - ---- -------- ---- /s/ Harley J. Greenfield - ------------------------ Harley J. Greenfield Chairman of the Board, October 31, 1996 President and Chief Executive Officer (Principal Executive Officer) /s/ George J. Nadel - ------------------------ George J. Nadel Executive Vice President, October 31, 1996 Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) /s/ Edward B. Seidner - ------------------------ Edward B. Seidner Director October 31, 1996 /s/ Bernard Wincig - ------------------------ Bernard Wincig Director October 31, 1996 /s/ Edward Bohn - ------------------------ Edward Bohn Director October 31, 1996 /s/ Kevin J. Coyle - ------------------------ Kevin J. Coyle Director October 31, 1996 59 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Index to Financial Statements Independent Auditors' Disclaimer of Opinion..........................F1 Report of Management.................................................F3 Consolidated Balance Sheets at August 26, 1995 and August 27, 1994......................................................F4 Consolidated Statements of Operations for the years ended August 26, 1995, August 27, 1994 and August 31, 1993.................F5 Consolidated Statements of Stockholders' Equity (Capital Deficiency) for the years ended August 26, 1995, August 27, 1994 and August 31, 1993..................................F6 Consolidated Statements of Cash Flows for the years ended August 26, 1995, August 27, 1994 and August 31, 1993.................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 sheets of Jennifer Convertibles, Inc. (the "Company") and subsidiaries as at August 26, 1995 and August 27, 1994, and the related consolidated statements of operations, stockholders' equity (capital deficiency) and cash flows for the two years 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 he is unable to maintain internal controls over the financial data processed by the Private Company on behalf of the Company and 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 statements of operations and cash flows for the year ended August 26, 1995 and the financial statements as at and for the year ended August 27, 1994. 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 August 26, 1995 and August 27, 1994, and for the two years then ended. 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 8, 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, 8 and 12 with respect to various related party transactions. Richard A. Eisner & Company, LLP New York, New York December 22, 1995 With respect to Note 12 September 26, 1996 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 for share data) ASSETS August 26, 1995 August 27, 1994 Current assets: Cash and cash equivalents $ 7,729 $ 13,089 Merchandise inventories 9,432 10,148 Due from limited partners - 1,000 Refundable income taxes 131 2,258 Prepaid expenses 761 1,717 Accounts receivable 2,504 1,719 Other current assets 101 1,475 ------------ ---------- Total current assets 20,658 31,406 Store fixtures, equipment and leasehold improvements, at cost, net 9,771 8,701 Due from Private Company and Unconsolidated Licensees,net of reserves of $6,372 and $3,284 at August 26, 1995 and August 27, 1994. - 1,832 Deferred lease costs and other intangibles, net 1,839 1,929 Goodwill, at cost, net 586 604 Other assets (primarily security deposits) 1,017 450 ============ ========== $ 33,871 $ 44,922 ============ ========== LIABILITIES AND (CAPITAL DEFICIENCY) STOCKHOLDERS' EQUITY Current liabilities: Accounts payable, trade $ 16,108 $ 15,391 Customer deposits 9,017 9,460 Accrued expenses and other current liabilities 6,521 5,315 ------------ ---------- Total current liabilities 31,646 30,166 Deferred rent and allowances 6,171 6,494 Long-term obligations under capital leases 337 477 ------------ ---------- Total liabilities 38,154 37,137 ------------ ---------- Commitments and contingencies (Capital deficiency) 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 26, 1995 and August 27, 1994 57 57 Additional paid-in capital 22,911 22,911 Notes receivable from warrant holders (300) (300) Accumulated (deficit) (26,951) (14,883) ------------ ---------- (4,283) 7,785 ------------ ---------- $ 33,871 $ 44,922 ============ ==========
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 26, 1995 August 27, 1994 August 31, 1993 --------------- --------------- --------------- Net sales $126,074 $97,420 $64,348 -------------- -------------- ------------- Cost of sales, including store occupancy, warehousing, delivery and fabric protection (including charges from Private Company of $13,883, $28,521, and $37,085) 86,964 67,974 43,898 Selling, general and administrative expenses (including advertising charges from Private Company of $0, $3,786 and $7,158) 45,955 34,139 22,652 Termination of consulting agreement, legal and other costs 500 6,604 - Write off of purchased limited partners' interests - 3,482 - Provision for losses on amounts due from Private Company and Unconsolidated Licensees 3,088 3,284 - Loss from store closings 1,670 - - Depreciation and amortization 2,261 2,091 1,583 -------------- -------------- ------------- 140,438 117,574 68,133 -------------- -------------- ------------- Operating (loss) (14,364) (20,154) (3,785) -------------- -------------- ------------- Other income (expense) Royalty income 523 644 711 Interest income 311 473 674 Interest expense (48) (61) (640) Gain on sale of securities - 336 61 Other income, net 1,670 1,374 696 -------------- -------------- ------------- 2,456 2,766 1,502 -------------- -------------- ------------- (Loss) before income taxes (benefit) and minority interest (11,908) (17,388) (2,283) Income taxes (benefit) 160 (322) 113 -------------- -------------- ------------- (Loss) before minority interest (12,068) (17,066) (2,396) Minority interest share of losses - 2,449 2,902 -------------- -------------- ------------- Net (loss) earnings ($12,068) ($14,617) $506 ============== ============== ============= (Loss) earnings per common and common equivalent share: Net (loss) earnings per share ($2.12) ($2.56) $0.09 ============== ============== ============= Weighted average number of common and common equivalent shares 5,700,725 5,700,725 6,013,000 ============== ============== =============
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 (Capital Deficiency) Fiscal Years ended August 26, 1995, August 27, 1994 and Year ended August 31, 1993 (In thousands, except for share data) Common stock Additional Notes receivable ---------------------------- paid-in from warrant Accumulated Shares Par value capital holders (deficit) Totals ------ ---------- ------- -------------- ------------ ------ 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 Net (loss) - - - - (12,068) (12,068) ---------- ---------- -------------- --------- -------------- -------------- Balances at August 26, 1995 5,700,725 $ 57 $ 22,911 (300) $ (26,951) $ (4,283) ========== ========== ============== ========= ============== ==============
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 26, 1995 August 27, 1994 August 31, 1993 Cash flows from operating activities: Net (loss) earnings ($12,068) ($14,617) $506 Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: Depreciation and amortization 2,261 2,091 1,583 Acquisition of limited partnership interests - (3,000) - Writeoff of purchased limited partnership interests - 3,482 - Provision for losses on amounts due from Private Company and Unconsolidated Licensees 3,088 3,284 - Loss from store closings 1,670 - - Deferred rent 656 2,776 1,947 (Gain) on sale of investment securities - (336) (61) (Gain) on sale of subsidiaries - (102) (480) Minority interest - (449) 449 Changes in operating assets and liabilities: Decrease (increase) in merchandise inventories 716 (6,276) (1,538) Decrease (increase) in refundable income taxes 2,127 (1,190) (1,068) Decrease (increase) in prepaid expenses 956 (1,468) - (Increase) in accounts receivable (785) (1,390) - Decrease (increase) in other current assets 1,374 (582) (408) (Increase) decrease in due from Private Company and Unconsolidated Licensees (1,256) (5,249) 1,633 (Increase) decrease in other assets (567) 685 173 Increase in accounts payable trade 717 13,985 178 (Decrease) increase in customer deposits (443) 3,812 2,831 Increase in accrued expenses and and other current liabilities 1,206 3,565 600 ------------ ----------- ------------ Net cash (used in) provided by operating activities (348) (979) 6,345 ------------ ----------- ------------ Cash flows from investing activities: Capital expenditures (4,292) (5,021) (3,894) Deferred lease costs and other intangibles (1,580) (1,673) - Sale of investments in government securities, net - 5,431 2,904 Decrease (increase) in due from limited partners 1,000 (1,000) 985 ------------ ----------- ------------ Net cash (used in) investing activities (4,872) (2,263) (5) ------------ ----------- ------------ Cash flows from financing activities: Issuance of warrants - 211 - Exercise of stock options - 8 - Payment of debt conversion costs - - (405) Payments of obligations under capital leases (140) (70) (304) ------------ ----------- ------------ Net cash (used in) financing activities (140) 149 (709) ------------ ----------- ------------ Net (decrease)increase in cash and cash equivalents (5,360) (3,093) 5,631 Increase in cash due to consolidation of limited partnerships - - 529 Cash and cash equivalents at beginning of year 13,089 16,182 10,022 ------------ ----------- ------------ Cash and cash equivalents at end of year $7,729 $13,089 $16,182 ============ =========== ============ Supplemental disclosure of cash flow information: Income taxes paid (refunded) during the year ($2,127) $1,190 $1,171 ============ =========== ============ Interest paid $48 $61 $673 ============ =========== ============
Supplemental disclosure of noncash transactions: See Note 6 -(Capital Deficiency)/Stockholders' Equity See Note 8 -Commitments and Contingencies 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 26, 1995, August 27, 1994 and August 31, 1993 (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 and specialty retail stores that specialize in the sale of leather furniture. As at August 26, 1995, 90 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. As at August 26, 1995 and August 27, 1994, the LP's operated 68 and 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 26, 1995, the Company had made advances to such Unconsolidated Licensees aggregating $4,477, which has been reserved for in full due to the uncertainty of collection. As at August 26, 1995, 11 stores were operated by such Unconsolidated Licensees and the results of their operations are not included in the consolidated financial statements (See Notes 3 and 10). F8 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements - (Continued) August 26, 1995, August 27, 1994 and August 31, 1993 (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 redeemed 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 12). 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 financial statements have been prepared assuming the Company will continue as a going concern. The Company incurred net losses of $12,068 in the year ended August 26, 1995 and $14,617 in the year ended August 27, 1994 and operating losses have continued subsequent to those dates with the Company's equity and working capital being further 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 8, 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 8. c) As discussed in Note 8, on May 3, 1995, the Securities and Exchange Commission advised the Company that it had commenced a formal investigation into the affairs of the Company. Management has addressed the aforementioned issues, as follows: o As discussed in Note 12, 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. F9 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 26, 1995, August 27, 1994 and August 31, 1993 (In thousands except for share amounts) 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. o As discussed in Note 12, 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 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., 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 26, 1995 and August 27, 1994, total $4,000 and $6,325, respectively. F10 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 26, 1995, August 27, 1994 and August 31, 1993 (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 are physically located, as follows: 8/26/95 8/27/94 -------- --------- Showrooms $4,421 $ 4,685 Warehouses 5,011 5,463 ------ ------- $9,432 $10,148 ====== ======= Vendor discounts and allowances in respect to merchandise purchased by the Company are included as a reduction of inventory and cost of sales. 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 26, 1995 and August 27, 1994 amounted to $538 and $521, 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 $6,171 and $6,494 at August 26, 1995 and August 27, 1994, 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. Revenue Recognition Sales are recognized upon delivery of the merchandise to the customer. A minimum deposit of 50% is typically required upon placing a sales order. F11 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 26, 1995, August 27, 1994 and August 31, 1993 (In thousands except for share amounts) (Loss) Earnings Per Share (Loss) earnings per share for the years ended August 26, 1995, August 27, 1994 and August 31, 1993 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 12). 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 26, 1995 and August 27, 1994, amounts on deposit with this one bank totalled 81% and 24%, respectively, 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. (3) Related Party Transactions Prior to January 1, 1994, merchandise was purchased and warehoused for the Company and the LP's by the Private Company under a 15-year Warehousing Agreement dated November 3, 1986. In connection with this agreement, the Private Company F12 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 26, 1995, August 27, 1994 and August 31, 1993 (In thousands except for share amounts) 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 (see below). The Company and LP's pay a monthly warehousing fee based on 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 -------------------------------- 8/26/95 8/27/94 8/31/93 Included in Cost of Sales: Purchases of inventory $ - $18,230 $31,545 Freight* 3,775 2,122 - Fabric protection services 3,804 3,298 2,323 Warehousing fees 6,304 4,871 3,217 ------- ------- ------- Total $13,883 $28,521 $37,085 ----- ======= ======= ======= *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 12). 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 26, 1995 and the year ended August 27, 1994 (which only includes the period January 1, 1994 through August 27, 1994) approximately $12,500 and $7,478, respectively, of inventory was purchased by the Private Company through the Company and $3,105 and $2,350, respectively, of inventory was purchased by the 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 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 F13 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 26, 1995, August 27, 1994 and August 31, 1993 (In thousands except for share amounts) 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, and $692 was remitted for the year ended August 26, 1995. 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 and August 31, 1993, $3,786 and $7,158, respectively, was allocated 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 $2,498 and $1,718 for the years ended August 26, 1995 and August 27, 1994, respectively. 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 three years ended August 26, 1995, S.F.H.C. incurred approximately $185, $252 and $340 in royalties to the Company. Principal and interest payments of approximately $23 and $151 for the two years ended August 26, 1995 and nothing for the year ended August 31, 1993 were received in connection with the 9% secured note, due December 31, 2001. The original principal amount of $810 had been reduced to $638 as of August 26, 1995. 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 interest and is payable at prime plus 3% but has not been paid. The same executive also owns a 20% interest in two other corporations that are also part of the Unconsolidated Licensees. During the three years ended August 26, 1995, such corporations incurred approximately $97, $106 and $92 in royalties to the Company (See Note 12). Ronald Rudzin, Senior Vice President - Retail Stores of the Company, owns one licensed store and his father owns two licensed stores which, during the three years ended August 26, 1995, incurred royalties aggregating approximately $239, $283 and $294, respectively, to the Company (See Note 9). By agreement (the "Offset Agreement") dated November 1, 1995, the Private Company and the Company acknowledged that as of August 26, 1995 the Private Company owed the Company $9,268, certain Unconsolidated Licensees owed the Company $2,118 for merchandise purchased (of which $1,866 was past due) and the Company owed the Private Company $11,455 for warehousing fees, freight and fabric protection services. In addition, the Private Company agreed to assume the obligations of certain Unconsolidated Licensees in the amount of $1,866 and to offset the amounts owed to the Company by the Private Company and such licensees against the amounts owed to the Private Company by the Company. F14 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements -(Continued) August 26, 1995, August 27, 1994 and August 31, 1993 (In thousands except for share amounts) By agreement dated March 1, 1996, the Private Company and the Company agreed to continue to offset, on a monthly basis, amounts owed by the Private Company and certain Unconsolidated Licensees to the Company for purchasing, advertising and other services and matters against amounts owed by the Company to the Private Company for warehousing services, fabric protection, freight and other services and matters. The proposed settlement agreement contemplates that the Offset Agreement will be modified to provide that to the extent either party owes the other an amount in excess of $1,000 for current obligations, such excess will be paid in cash. All amounts due from the Private Company and Unconsolidated Licensees are fully reserved since these entities have losses and capital deficiencies. In connection with the uncertainty of collectibility and in consideration of the potential additional financial support that the Company may provide to the Private Company and the Unconsolidated Licensees, the Company will account for subsequent transactions with these entities on an offset basis. However, if the result of the offset is a receivable due from them, then such net amount will be generally recognized only at the time when cash is received from these entities. A reserve has been provided in the consolidated financial statements for amounts due from these entities, as follows: Unconsolidated Licensees Private (Other Than Company S.F.H.C.) S.F.H.C. Totals At August 26, 1995: Gross amount due $ 2,410 $ 1,167 $ 2,795 $ 6,372 Reserves (2,410) (1,167) (2,795) (6,372) -------- -------- -------- -------- Net Amount $ -0- $ -0- $ -0- $ -0- ======== ======== ======== ======== At August 27, 1994: 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 12 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 such 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 F15 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 26, 1995, August 27, 1994 and August 31, 1993 (In thousands except for share amounts) amount of the debt then outstanding (See Note 12 - 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 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 the fiscal years ended August 27, 1994 and August 31, 1993. 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. 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 $336 and $371 in legal fees in 1995 and 1994, respectively. Further, he owned, until May 1995, a 20% interest in each of two Private Company stores, and receives substantial economic benefits from the Private Company. (4) Store Fixtures, Equipment and Leasehold Improvements: August 26, August 27, 1995 1994 ------- ------- Automobiles $ 68 $ 88 Store fixtures and furniture 6,175 6,190 Leasehold improvements 6,398 4,850 Computer equipment 612 429 ------- ------- 13,253 11,557 Less: Accumulated depreciation and amortization 3,482 2,856 ------- ------- $ 9,771 $ 8,701 ======= ======= At August 26, 1995 and August 27, 1994, equipment cost includes $907 and $870, and accumulated depreciation and amortization includes $406 and $328 on equipment under capital leases. F16 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 26, 1995, August 27, 1994 and August 31, 1993 (In thousands except for share amounts) (5) 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 -------------------------------- 8/26/95 8/27/94 8/31/93 ------- ------- ------- Current: Federal $ - $(593) $113 State 160 271 - Deferred: Federal - - - State - - - ---- ------ ---- $160 $(322) $113 ==== ====== ==== Expected tax expense (benefit) based on the statutory rate is reconciled with actual tax expense (benefit) as follows: Percent of Pre-Tax Earnings (Loss) Year Ended ---------------------------------- 8/26/95 8/27/94 ------- ------- "Expected" tax expense (benefit) (34.0)% (34.0)% Increase (reduction) in taxes resulting from: State income tax, net of federal income tax benefit 1.4 % 1.8 % Non-deductible items .5 % 7.0 % Other (1.8)% ( 2.5)% Change in valuation allowance 35.2 % 25.5 % ------- ------- 1.3 % ( 2.2)% ======= ======= The difference in 1993 between the expected income tax expense and the actual income tax expense is due principally to the deduction of state income taxes and the deferred gain on sale of subsidiaries. F17 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 26, 1995, August 27, 1994 and August 31, 1993 (In thousands except for share amounts) The principal components of deferred tax assets, liabilities and the valuation allowance are as follows: August 26, 1995 August 27, 1994 --------------- --------------- Deferred tax assets: Federal and state net operating loss carryforwards $ 2,336 $ - Reserve for losses on loans and advances 2,926 1,314 Accrued partnership losses 2,584 2,491 Deferred rent expense 1,329 1,265 Inventory capitalization 232 216 Other expenses for financial reporting, not yet deductible for taxes 305 260 -------- ------- Total deferred tax assets, before valuation allowance 9,712 5,546 Less: Valuation allowance (7,969) (3,767) -------- ------- Total deferred tax assets $ 1,743 $ 1,779 ======== ======= Deferred tax liabilities: Difference in book and tax basis of fixed assets $ 1,473 $ 1,342 Other 270 437 -------- ------- Total deferred tax liabilities 1,743 1,779 -------- ------- Net deferred tax assets $ -0- $ -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. During the years ended August 26, 1995 and August 27, 1994, the valuation allowance increased by $4,202 and $3,767, respectively. The Company has a net operating loss carryforward of approximately $5,800 expiring in the year 2010. (6) (Capital Deficiency) / 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). F18 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 26, 1995, August 27, 1994 and August 31, 1993 (In thousands except for share amounts) 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 10), 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 10), 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 (Capital Deficiency) and were not paid in accordance with the terms of the note (See Note 12). (7) Stock Options Plans 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 ------------------------------- 1995 1994 1993 ------- ------- ------- Outstanding, beginning of year... 736,547 803,697 559,547 Granted (at $2.50 to $15.75 per share).............. 137,500 50,000 244,150 Exercised (at $2.75 per share)... - (3,000) - Canceled (at $2.75 to $15.75 per share) ( 37,500) (114,150) - -------- --------- -------- Outstanding, end of period (at $2.50 to $15.75 per share)..... 836,547 736,547 803,697 ========= ========= ========= Exercisable, end of period....... 628,051 45,053 548,931 ========= ========= ========= See Note 10 with respect to options outstanding held by JCI to purchase 1,200,000 shares of Common Stock of the Company. F19 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 26, 1995, August 27, 1994 and August 31, 1993 (In thousands except for share amounts) The number of shares of Common Stock reserved for options available for grant under the Plans was 190,453 at August 26, 1995. (8) 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 26, 1995: Year Ending August ---------------------------------------- 1996......................... $ 12,030 1997......................... 12,034 1998......................... 11,521 1999......................... 10,959 2000......................... 10,222 Thereafter................... 38,567 95,333 --------- Sub-lease income............. ( 3,003) --------- $ 92,330 ========= The Company has guaranteed the lease obligation of the California warehouse which is operated by the Private Company. The annual lease obligation for this location is $133 and the lease expires on September 30, 1998. Rental expense for all operating leases amounted to approximately $15,770, $12,456 and $7,097, net of sublease income of $301, $211 and $197 for the years ended August 26, 1995, August 27, 1994 and August 31, 1993, respectively. The Company and LP's have long-term capital leases for certain equipment. The leases are for periods of three to five years with an option to purchase at the end of the lease periods for a nominal price. The following is a schedule of future lease payments for the capital leases: Year Ending August ---------------------------------------- 1996..............................$ 194 1997.............................. 160 1998.............................. 160 1999.............................. 137 --------- 651 Amount representing interest...... ( 97) --------- Present value of minimum lease payments................... 554 Less: Current portion............ 217 --------- $ 337 ========= F20 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 26, 1995, August 27, 1994 and August 31, 1993 (In thousands except for share amounts) Accrued Expenses and Other Current Liabilities The components of accrued expenses and other current liabilities are: 8/26/95 8/27/94 ------- ------- Advertising $1,577 $ 112 Payroll 697 300 Legal 374 1,589 Accounting 936 1,365 Store closings 852 - Settlement costs 500 - Sales tax 805 592 Other 780 1,357 ------ ------ $6,521 $5,315 ====== ====== Advertising Expense Advertising expense for the years ended August 26, 1995, August 27, 1994 and August 31, 1993 aggregated $15,729, $11,357 and $7,158, respectively. 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 10) and (2) the funding of Limited Partnerships (LP's) III through V (See Note 10). 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 10) 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. F21 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 26, 1995, August 27, 1994 and August 31, 1993 (In thousands except for share amounts) 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 12). 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. F22 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 26, 1995, August 27, 1994 and August 31, 1993 (In thousands except for share amounts) (9) 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 purchasers 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: August 26, August 27, ---------- ---------- 1995 1994 ------ ------ Notes receivable $ 674 $ 810 Less: imputed interest (186) (270) ------ ----- Notes receivable, net $ 488 $ 540 ====== ===== 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 $35. (10) 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. F23 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 26, 1995, August 27, 1994 and August 31, 1993 (In thousands except for share amounts) 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. In connection with the offering of the Debentures (see Note 6), 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. F24 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 26, 1995, August 27, 1994 and August 31, 1993 (In thousands except for share amounts) 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 1995, 1994 and 1993, 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 Notes 3 and 12). 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). 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 26, 1995 and 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 Convertibles 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 fiscal year ended August 27, 1994. 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. F25 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 26, 1995, August 27, 1994 and August 31, 1993 (In thousands except for share amounts) 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 fiscal year ended August 27, 1994. 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. 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 LP'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' interest 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 interest 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 26, 1995 and 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 12). 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 years ended August 26, 1995 and August 27, 1994. $1,000 was received on December 1, 1994 for LP's IV and V (see Note 8 Conclusions of the Independent Committee and Note 12). (11) 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. F26 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 26, 1995, August 27, 1994 and August 31, 1993 (In thousands except for share amounts) 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 12). (12) 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 26, 1995, August 27, 1994 and August 31, 1993 (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 re- delivery 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 26, 1995, August 27, 1994 and August 31, 1993 (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 26, 1995, August 27, 1994 and August 31, 1993 (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 26, 1995, August 27, 1994 and August 31, 1993 (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 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 - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 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) - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 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 [TO COME] EX-10.34 7 AMENDMENT NO. 1 TO WAREHOUSING AGREEMENT [TO COME] EX-10.35 8 AMENDMENT NO. 1 TO PURCHASING AGREEMENT [TO COME] EX-10.38 9 AGREEMENT DATED MAY 19, 1995 Agreement dated May 19, 1995 between Jennifer Convertibles, Inc., a Delaware corporation ("Jennifer"), and Jara Enterprises, Inc. and its subsidiaries ("Jara"). Whereas, the parties hereto have a dispute regarding the amount of rebates, as that term is defined under Amendment No. 1, Purchasing Agreement dated as of May 28, 1994 (the "Rebates"), which are due and owing from Jara to Jennifer, as well as the timing of any future payments by Jennifer to Jara of Rebates attributable to purchases by Jara and certain retail stores managed by Jara ("Jara's Share"); and Whereas, the parties hereto have agreed to settle their differences in an amicable manner, The parties hereto agree as follows: 1. The amount of the Rebates due from Jara, and the retail stores managed by Jara, to Jennifer, from January 1, 1994, through April 30, 1995, is $473,000.00; 2. Jara hereby agrees to pay the $473,000.00 to Jennifer as follows: (a) $200,000.00 upon the execution of this agreement; (b) the remaining $273,000.00 shall be paid in five equal installments of $58,087.45, inclusive of interest, at the annual rate of 10.5%, each on or before July 1, August 1, September 1, October 1 and November 1, 1995, with interest on any installment which is overdue more than ten days, after written notice to Jara and its attorneys, to be paid at the rate of 13.5%; 3. The parties agree that, commencing with the Rebates attributable to purchases in May 1995, Jennifer will pay Jara's Share of the Rebates to Jara within 30 days from the close of each month. In the event that Jennifer fails to pay Jara's Share to Jara within thirty days from the end of each month, Jara will be entitled, among other remedies, to delay making any payment under Paragraph 2 hereof until such time as Jennifer is current in paying Jara's Share and, in addition, to receive interest at the rate of 13.5% on Jennifer's payment of Jara's Share, on any installment which is overdue more than ten days, after written notice to Jennifer and its attorneys, except that Jennifer will not be required to make any payment of Rebates to Jara while Jara is in default in making payments under paragraph 2(b) without the justification of this Paragraph 3. Jennifer Convertibles, Inc. By: /s/ Harley J. Greenfield --------------------------------- Jara Enterprises, Inc. By: /s/ Fred Love --------------------------------- Fred Love, President EX-10.39 10 AGREEMENT DATED NOVEMBER 1, 1995 AGREEMENT dated this 1st day of November 1995, by and between Jennifer Convertibles, Inc., Jennifer Purchasing Corp., LP III, LP IV, LP V, and LP VI (the "Public Company"), and South Florida Holding Corp., ("SFHC"), Jennifer Cutler Ridge, Inc., GSB Bensonhurst Inc., Great South Bay Branford Inc., Jennifer Clarkstown Inc., Annapolis-Jennifer, GSB Park Slope Inc., Rudzin 149th St. Furniture Inc., Rudzin Elmhurst Furniture Inc., Jeffifer Short Hills LIC. Inc., (collectively, the "Licensees") and Jara Enterprises, Inc., "Jara". a) WHEREAS, as of August 26, 1995, the Public Company owed Jara $11,459,677.00 pursuant to various agreements among them, (which amount does not include $393,823.00 owed by SFHC to Jara for warehousing services); b) WHEREAS, as of August 26, 1995, Jara owed the Public Company $9,267,962.00 pursuant to various agreements between them; c) WHEREAS, as of August 26, 1995, the Licensees owed the Public Company $2,117,616.00 for purchases made by the Public Company for the Licensees, of which the sum of $1,865,813.00 was past due (the "Past Due Amount"); and d) WHEREAS, the parties have decided to reduce the amounts owed by the Public Company to Jara by the Past Due Amount and the amounts owed by Jara to the Public Company. 1 IT IS HEREBY AGREED by and between the parties hereto as follows: 1. Jara hereby agrees to assume immediately the Licensees' obligations to pay to the Public Company the Past Due Amount. 2. Nothing in this agreement shall be construed as an agreement by Jara to assume any obligation of the Licensees to the Public Company above and beyond the Past Due Amount. 3. The amounts the Public Company owed Jara as of August 26, 1995 ($11,459,677.00), shall be reduced by the amount owed by Jara to the Public Company as of August 26, 1995 ($9,267,692.00), and the Past Due Amount, leaving a balance due from the Public Company to Jara as of August 26, 1995, of $325,902.00; 4. This agreement is without prejudice to the rights of the Public Company, the Licensees, and Jara to contest all sums owing among each other, except for the sums set forth in Paragraph 1 and Whereas clause (c). 2 5. This agreement shall be construed in accordance with the laws of the State of New York. JENNIFER CONVERTIBLES, INC., JARA ENTERPRISES, INC. JENNIFER PURCHASING CORP., /s/ Harley Greenfield /s/ Fred Love - ---------------------------- --------------------------- By: Harley Greenfield, Pres. By: Fred Love LP IV LP III /s/ Harley Greenfield /s/ Harley Greenfield - ----------------------------- ----------------------------- BY: HARLEY GREENFIELD BY: HARLEY GREENFIELD LP V LP VI /s/ Harley Greenfield /s/ Harley Greenfield - ------------------------------ ------------------------------ BY: HARLEY GREENFIELD BY: HARLEY GREENFIELD SOUTH FLORIDA HOLDING CORP. /s/ Rami Abada - ------------------------------- BY: RAMI ABADA, PRES. JENNIFER CUTLER RIDGE INC. GSB BENSONHURST INC. /s/ Rami Abada /s/ Ronald Rudzin - -------------------------------- ----------------------------- BY: RAMI ABADA, PRES. BY: RONALD RUDZIN, PRES. GREAT SOUTH BAY BRANFORD INC. JENNIFER CLARKSTOWN INC. /s/ Ronald Rudzin /s/ Ronald Rudzin - ---------------------------------- ------------------------------ BY: RONALD RUDZIN, PRES. BY: RONALD RUDZIN, PRES. ANNAPOLIS-JENNIFER GSB PARK SLOPE INC. /s/ Rami Abada /s/ Ronald Rudzin - ----------------------------------- ----------------------------- BY: RAMI ABADA, PRES. BY: RONALD RUDZIN, PRES. RUDZIN 149TH ST. FURNITURE INC. RUDZIN ELMHURST FURNITURE INC. - ------------------------------------ ------------------------------ BY: SANFORD RUDZIN, PRES. BY: SANFORD RUDZIN, PRES. JENNIFER SHORT HILLS LIC. INC. /s/ Rami Abada - ------------------------------------ BY: RAMI ABADA, PRES. 3 5. This agreement shall be construed in accordance with the laws of the State of New York. JENNIFER CONVERTIBLES, INC., JARA ENTERPRISES, INC. JENNIFER PURCHASING CORP., - ---------------------------- --------------------------- By: Harley Greenfield, Pres. By: Fred Love LP IV LP III - ----------------------------- ----------------------------- BY: HARLEY GREENFIELD BY: HARLEY GREENFIELD LP V LP VI - ------------------------------ ------------------------------ BY: HARLEY GREENFIELD BY: HARLEY GREENFIELD SOUTH FLORIDA HOLDING CORP. - ------------------------------- BY: RAMI ABADA, PRES. JENNIFER CUTLER RIDGE INC. GSB BENSONHURST INC. - -------------------------------- ----------------------------- BY: RAMI ABADA, PRES. BY: RONALD RUDZIN, PRES. GREAT SOUTH BAY BRANFORD INC. JENNIFER CLARKSTOWN INC. - ---------------------------------- ------------------------------ BY: RONALD RUDZIN, PRES. BY: RONALD RUDZIN, PRES. ANNAPOLIS-JENNIFER GSB PARK SLOPE INC. - ----------------------------------- ----------------------------- BY: RAMI ABADA, PRES. BY: RONALD RUDZIN, PRES. RUDZIN 149TH ST. FURNITURE INC. RUDZIN ELMHURST FURNITURE INC. /s/ Sanford Rudzin /s/ Sanford Rudzin - ------------------------------------ ------------------------------ BY: SANFORD RUDZIN, PRES. BY: SANFORD RUDZIN, PRES. JENNIFER SHORT HILLS LIC. INC. - ------------------------------------ BY: RAMI ABADA, PRES. 3 EX-10.43 11 FORM OF NOTE DATED NOVEMBER 7, 1994 EXPLANATORY NOTE: The other note to Edward Seidner is in substantially the same form. PROMISSORY NOTE $5,136,602.00 November 7, 1994 FOR VALUE RECEIVED, on or before the date which is twenty-two (22) years from the date hereof, the undersigned, JARA ENTERPRISES, INC., a New York corporation (the "Maker"), hereby promises to pay the order of HARLEY J. GREENFIELD, his successors or assigns (the "Lender"), at 1725 York Avenue, New York, New York 10128, or at such other place as the holder hereof may from time to time designate in writing, the principal sum of Five Million One Hundred Thirty-Six Thousand Six Hundred and Two Dollars ($5,136,602.00), plus interest on the principal balance thereof from time to time outstanding, from the date of this Note until the date paid, at the rate of seven and one-half percent (7.50%) per annum. From the date hereof until December 1, 2001 (the "Conversion Date"), this Note shall be payable in successive monthly installments of interest only, commencing on the first day of the first month following the date hereof and continuing on the first day of each calendar month thereafter until the Conversion Date. From and after the Conversion Date, this Note shall be payable in equal monthly installments of principal and interest, each in the amount of Forty-Seven Thousand Six Hundred and Sixteen Dollars and Ninety-Four Cents ($47,616.94), such installments to commence on the Conversion Date and continue on the first day of each calendar month thereafter until the date which is twenty-two (22) years from the date hereof, which is the maturity date of this Note, at which time the entire principal balance of this Note and all accrued and unpaid interest thereon shall be due and payable in full. Interest on this Note shall be calculated on a 360-day year and the actual number of days elapsed. All payments hereunder shall be payable in lawful currency of the United States and in immediately available funds. In the event that any payment of principal and/or interest is not actually received by the holder of this Note within ten (10) business days of the date such payment is due, Maker agrees to pay a late charge equal to three percent (3%) of the total amount of the delinquent installment. All payments received on this Note shall be applied first to late charges, if any, then to interest and then to principal. If default be made in the payment of any amount due under this Note or in the performance of any covenant or agreement set forth in the Loan Documents (hereinafter defined), then, in such event, the entire outstanding principal balance of the Note and all accrued and unpaid interest thereon shall at once become due and payable at the option of the holder of this Note. Failure to exercise this option shall not constitute a waiver of the right to exercise the same in the event of any subsequent default. This Note may be prepaid in whole or in part at any time, without premium or penalty. Any partial prepayments shall not relieve Maker of the obligation to pay periodic installments of principal and/or interest hereunder as and when the same would otherwise fall due. Each party liable under this Note in any capacity, whether as maker, endorser, surety, guarantor or otherwise: (i) waives its homestead exemption, (ii) waives presentment, demand, protest and notice of presentment, notice of protest and notice of dishonor of this debt and each and every other notice of any kind with respect to this Note, (iii) agrees that the holder of this Note, at any time or times, without notice to it or its consent, may grant extensions of time, without limit as to the number or the aggregate period of such extensions, for the payment of any principal, interest or other sums due hereunder, and (iv) to the extent not prohibited by law, waives the benefit of any law or rule of law intended for its advantage or protection as an obligor hereunder or providing for its release or discharge from liability under this Note, in whole or in part, on account of any facts or circumstances other than full and complete payment of all amounts due hereunder. Make promises to pay all costs of collection, including reasonable attorneys' fees, upon default in the payment of the principal of this Note or interest or other sums hereon when due, whether at maturity, as herein provided, or by reason of acceleration of maturity under the terms of this Note or under the terms of any of the other Loan Documents, whether suit be brought or not. In the event any one or more of the provisions contained in this Note or any of the other Loan Documents shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Note or such other Loan Document, but this Note and such other Loan Document shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein or therein. This Note may not be changed orally, but only by an agreement in writing signed by the parties against whom enforcement of any waiver, change, modification or discharge is sought. This Note is secured by a certain Security Agreement of even date herewith (the "Security Agreement"), pursuant to which Maker granted or will grant Lender a security interest in certain collateral described therein. This Note and the Security Agreement, together with all extensions, renewals and modifications thereof and substitutions therefor and all other documents or instruments executed, issued or delivered in connection with the loan evidenced hereby, are herein collectively referred to as the "Loan Documents". All of the terms, covenants, provisions, conditions, stipulations, promises and agreements contained in the Loan Documents to be kept, observed and performed by Maker pursuant to the Loan Documents are hereby made a part of this Note and incorporated herein by reference to the same extent and with the same force and effect as if they were fully set forth herein, and Maker promises and agrees to keep, observe and perform them, or cause them to be kept, observed and performed, strictly in accordance with the terms and provisions thereof. This Note is unconditionally guaranteed by Fred J. Love pursuant to the terms of a certain Guaranty of even date herewith (the "Guaranty"), which Guaranty is secured by a certain Stock Pledge and Security Agreement of even date herewith. Maker warrants and represents that the loan evidenced hereby is being made for business or investment purposes. This Note shall be governed in all respects by the laws of the State of New York and shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and assigns. Maker hereby submits to the jurisdiction of any New York State or federal court sitting in the City of New York over any suit, action or proceeding arising out of or relating to this Note. Maker hereby agrees that process may be served upon it in any suit, action or proceeding by sending the same by certified mail, return receipt requested, to Maker at the address set forth in the Security Agreement. Maker hereby agrees that any such service (i) shall be effective service of process upon it in any such suit, action or proceeding, and (ii) shall to the fullest extent enforceable under law, be held to be valid personal service upon and personal delivery to it. Each of the undersigned hereby (i) covenants and agrees not to elect a trial by jury of any issue triable of right by a jury, and (ii) waives any right to trial by jury fully to the extent that any such right shall now or hereafter exist. This waiver of right to trial by jury is separately given, knowingly and voluntarily, by each of the undersigned hereunder, and this waiver is intended to encompass individually each instance and each issue as to which the right to a jury trial would otherwise accrue. Lender is hereby authorized and requested to submit this Note to any court having jurisdiction over the subject matter and the parties hereto so as to serve as conclusive evidence of the undersigned's herein contained waiver of the right to jury trial. The undersigned hereby certifies that no representative or agent of Lender (including Lender's counsel) has represented, expressly or otherwise, to any of the undersigned that Lender will not seek to enforce this waiver of right to jury trial provision. [CORPORATE SEAL] ATTEST: JARA ENTERPRISES, INC., a New York corporation By: /s/ Fred J. Love - ----------------- ---------------------------- Name: Fred J. Love Title: President EX-10.44 12 FORM OF OPTION EXPLANATORY NOTE: THE OTHER OPTIONS AGREEMENTS ARE IN SUBSTANTIALLY THE SAME FORM OPTION AGREEMENT ---------------- This OPTION AGREEMENT (this "Agreement") dated as of November 7, 1994 by and between FRED J. LOVE ("Love") and HARLEY J. GREENFIELD (the "Optionee"). W I T N E S S E T H: WHEREAS, Love is the record and beneficial owner of 242,083 shares (the "Shares") of Common Stock, par value $0.01 per share (the "Common Stock"), of Jennifer Convertibles, Inc., a Delaware corporation (the "Company"); WHEREAS, the Optionee is a principal shareholder, the Chief Executive Officer and a director of the Company, and Love recognizes that the Optionee has made a substantial contribution to the Company's growth and success and desires to provide the Optionee with incentive to increase the value of the Company further such that both Love and the Optionee will benefit therefrom; and WHEREAS, simultaneously with the execution of this Agreement the Optionee is remitting to Love the Purchase Price (as defined in Section 2 below). NOW THEREFORE, in consideration of the premises and the mutual promises set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto intending to be legally bound hereby agree as follows: 1. GRANT OF OPTION. Love hereby grants to the Optionee an option (the "Option") to purchase up to a total of 121,042 of the Shares owned by Love (the "Optioned Stock"), at the price and on the terms set forth herein. 2. PURCHASE PRICE. Love hereby acknowledges receipt from the Optionee of $12,104.20 (the "Purchase Price") in full payment for the Option granted hereby. 3. DATE OF GRANT; TERM OF OPTION. This Option is granted as of November 7, 1994 (the "Grant Date"), and it may not be exercised later than November 7, 2004 (the "Termination Date"). 4. OPTION EXERCISE PRICE. The Option exercise price is $15.00 per Share. 5. EXERCISE OF OPTION. The Option shall be exercisable during its term only as follows: (a) RIGHT TO EXERCISE. The Option shall vest and be exercisable as of the Grant Date. (b) METHOD OF EXERCISE. The Option shall be exercisable from time to time as to all or any portion of the Optioned Stock by written notice in the form of Attachment A attached hereto (the "Notice"). The Notice shall be signed by the Optionee and shall be delivered in person or by certified mail to Love. The Notice shall be accompanied by payment of the aggregate Option exercise price. Such payment of the aggregate Option exercise price shall be by (i) cash or certified check in the full amount of the aggregate Option exercise price or (ii) cash or certified check in an amount equal to at least thirty-five percent (35%) of the aggregate Option exercise price plus an assignment to Love of a portion of the outstanding principal balance of the Note (as defined below) in amount equal to the remainder of the aggregate Option exercise price. For purposes hereof, the "Note" shall mean that certain Promissory Note of even date herewith made by Jara Enterprises, Inc., a New York corporation, and payable to the order of the Optionee in the original principal amount of $5,136,602. Any such assignment of the outstanding principal balance of the Note shall be applied to the Option exercise price on a dollar-for-dollar basis, without regard for any reduction in interest or premium, if any, effected by such assignment of principal outstanding. The certificate or certificates for the Shares as to which this Option shall be exercised shall be registered on the stock register and corporate records of the Company in the name of the Optionee. (c) RESTRICTIONS ON EXERCISE. The Option may not be exercised for a fraction of a Share. (d) EFFECT OF EXERCISE. Exercise of the Option in any manner shall result in a decrease in the number of Shares which thereafter will be available for sale under the Option by the number of Shares as to which the Option is exercised. 6. NO RIGHTS AS STOCKHOLDER. Until the Option is properly exercised in whole or in part in accordance with the terms of Section 5 hereof, the Optionee shall have no right to vote or receive dividends or any other rights as a stockholder with respect to the Optioned Stock. No adjustment shall be made for a dividend or other right for which the record date is prior to the date this Option is exercised, except as provided in Section 12 hereof. 7. ENCUMBRANCES ON SHARES. It is acknowledged and agreed that the Optioned Stock is subject to a voting trust under that certain Voting Trust Agreement dated October 15, 1986 by and between Love, the Optionee and Harley J. Greenfield, as amended on November 7, 1994 (as so amended and as amended from time to time, the "Trust Agreement"), and that the Shares as to which the Option shall be exercised shall remain subject to such voting trust in accordance with the terms of the Trust Agreement. To the extent that the Optioned Stock is subject to any lien, encumbrance or security interest as of the Grant Date (each, a "Prior Security Interest"), the Optionee shall have the right, but not the obligation, in the event of any payment default by Love or other event giving rise to the right of any holder of the relevant Prior Security Interest to foreclose on the Optioned Stock (each such payment default or other event, a 2 "Default") to make payment upon the underlying obligation or otherwise to cure such Default in accordance with the provisions of the instruments creating such Prior Security Interest. 8. TRANSFER OR FURTHER ENCUMBRANCE OF OPTIONED STOCK. After the Grant Date, the Optioned Stock may not be sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in any manner (each a "Disposition") without the prior written consent of the Optionee. Love will give notice to the Optionee of any proposed Disposition of Shares of Optioned Stock at least 30 days prior thereto, and the Optionee shall have the right to exercise the Option with respect to such Shares prior to such proposed Disposition. 9. DELIVERY OF SHARE CERTIFICATES. As soon as practicable after any proper exercise of the Option, Love shall, without transfer or issue tax to the Optionee, deliver to the Optionee a certificate or certificates representing the Shares for which the Option shall have been exercised, accompanied by a stock power or powers executed in blank. 10. TERMINATION OF OPTION. To the extent that the Option is not exercised on or before the Termination Date, the Option shall terminate. 11. NONTRANSFERABILITY OF OPTION. The Option may not be sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in any manner either voluntarily or involuntarily by operation of law, other than by will or by the laws of descent or distribution, and may be exercised during the lifetime of the Optionee only by the Optionee. Notwithstanding the foregoing, the Optionee may assign his rights to the Option to any or all of his children or to a trust or trusts for the benefit of any or all of his children. The terms of the Option shall be binding upon the executors, administrators, heirs, successors and permitted assigns of the Optionee. 12. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. Subject to any required action by the stockholders of the Company, the number of Shares covered by the Option, as well as the exercise price per Share of the Shares covered by this Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split or combination of the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company (other than stock bonuses to employees or directors); provided, however, that the conversion of any convertible securities of the Company shall not be deemed to have been effected without the receipt of consideration. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to the Option. 13. NOTICES. Any notice to be given to Love or the Optionee pursuant to this Agreement shall be delivered personally or addressed to him at the address given beneath his signature set forth below, or at such other address as Love or the Optionee may hereafter designate in writing to the other. Any such notice shall be deemed duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, registered or certified, and deposited, 3 postage and registry or certification fee prepaid, in a post office or branch post office regularly maintained by the United States Postal Service. 14. INVALID PROVISIONS. In the event that any provision of this Option is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein as invalid or unenforceable provision were not contained herein. 15. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 4 16. CONSENT TO JURISDICTION; SERVICE OF PROCESS. The parties hereto submit to the jurisdiction of any New York State or federal court sitting in the City of New York over any suit, action or proceeding arising out of relating to this Agreement. The parties agree that process may be served against either of them in any suit, action or proceeding by sending the same by certified mail, return receipt requested, to the address of the party being served set forth beneath such party's signature below. The parties agree that such service shall be deemed to be effective service of process and, to the fullest extent enforceable under law, to be valid personal service and personal delivery. /s/ Fred J. Love --------------------------------- Fred J. Love 9 Martha Drive Melville, New York 11747 /s/ Harley J. Greenfield --------------------------------- Harley J. Greenfield 1725 York Avenue New York, New York 10128 ATTACHMENT A ------------ NOTICE OF EXERCISE OF STOCK OPTION ---------------------------------- I, Edward B. Seidner (the "Optionee"), hereby agree, represent and warrant to Fred J. Love as follows: 1. I was granted a Stock Option (the "Option") on November 7, 1994 (the "Option Grant Date"). 2. Pursuant to the Option, I was granted the right to purchase 121,041 shares of the common stock of Jennifer Convertibles, Inc. (the "Company") owned by you (the "Optioned Shares"). 3. I am eligible to exercise the Option. 4. I hereby elect to exercise the Option to purchase ______ of such Optioned Shares (the "Shares") in accordance with the Stock Optioned Agreement evidencing said Option (the "Agreement") at $15.00 per share, for an aggregate Option exercise price of $_______. 5. This Notice of Exercise is accompanied by payment in full for the Shares in the form of: (a) cash in the amount of $_____. (b) a certified check in the amount of $______. (c) executed instruments required to effect the assignment of a portion of the outstanding principal balance of the Note (as defined in the Agreement) in the amount of $______. 6. In connection with my exercise of the Option, I have received a copy of the Company's Prospectus relating to the shares of the Company's common stock issuable under the Option. Dated: _______________, [199_] [200_] OPTIONEE - ----------------- Signature:__________________ Social Security Number Address:____________________ ____________________________ ________________________________________________________________________________ Received on _______________, [199_] [200_] Signature: _______________ Fred J. Love 5 ACKNOWLEDGMENT - -------------- The Optionee hereby accepts this Option subject to all of the terms and provisions hereof. Date: November __, 1994 ________________________________ Harley J. Greenfield THIS OPTION HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE OR TRANSFER MAY BE EFFECTED OTHER THAN BY WILL OR BY THE LAWS OF DESCENT OR DISTRIBUTION. 6 16. CONSENT TO JURISDICTION; SERVICE OF PROCESS. The parties hereto submit to the jurisdiction of any New York State or federal court sitting in the City of New York over any suit, action or proceeding arising out of or relating to this Agreement. The parties agree that process may be served against either of them in any suit, action or proceeding by sending the same by certified mail, return receipt requested, to the address of the party being served set forth beneath such party's signature below. The parties agree that such service shall be deemed to be effective service of process and, to the fullest extent enforceable under law, to be valid personal service and personal delivery. JENNIFER ADVERTISING, INC., a New York corporation By: /s/ Fred J. Love --------------------------------- Name: Fred J. Love Title: President 245 Roger Avenue Inwood, New York 11696 /s/ Edward B. Seidner --------------------------------- Edward B. Seidner 125 Rodeo Drive Oyster Bay Cove, New York 11791 Attachment A NOTICE OF EXERCISE OF STOCK OPTION I, Edward B. Seidner (the "Optionee"), hereby agree, represent and warrant to Jennifer Advertising, Inc. as follows: 1. I was granted a stock option (the "Option") on November 7, 1994 (the "Option Grant Date"). 2. Pursuant to the Option, I was granted the right to purchase 17,500 shares of the common stock of Jennifer Convertibles, Inc. (the "Company") owned by you (the "Optioned Shares"). 3. I am eligible to exercise the Option. 4. I hereby elect to exercise the Option to purchase ______ of such Optioned Shares (the "Shares") in accordance with the Stock Option Agreement evidencing said Option (the "Agreement") at $15.00 per share, for an aggregate Option exercise price of $________. 5. This Notice of Exercise is accompanied by payment in full for the Shares in the form of: (a) cash in the amount of $_______; (b) a certified check in the amount of $_______; (c) authorization to Jara Enterprises, Inc. to reduce the outstanding principal balance of the Note (as defined in the Agreement) in the amount of $_______. 6. In connection with my exercise of the Option, I have received a copy of the Company's Prospectus relating to the shares of the Company's common stock issuable under the Option. Dated: __________, [199 ] [200 ] OPTIONEE ______________________ Signature: ________________ Social Security Number Address: __________________ ___________________________ - ------------------------------------------------------------------------------ Received on behalf of Jennifer Advertising, Inc. on __________, [199 ] [200 ]. Signature:_________________ Name: Title: EX-10.45 13 FORM OF SUBORDINATION AGREEMENT August 9, 1996 Jennifer Convertibles, Inc. 419 Crossways Drive Westbury, New York 11797 Gentlemen: Subject to the terms and conditions set forth below, I hereby agree to subordinate the payment of any and all amounts now due and owing, or which may, prior to January 1, 1999, become currently due and owing, to me by Jara Enterprises Inc. (the "Debtor") pursuant to certain Promissory Notes, dated November 7, 1994, in the principal amount of $5,136,602 (the "Subordinated Indebtedness") to the payment in full of all cash debts which may become currently due and owing by the Debtor to you prior to January 1, 1999 pursuant to the Definitive Agreements contemplated by the Settlement Agreement dated March ___, 1996 between Jennifer Convertibles, Inc. ("Jennifer") and the Debtor (the "Senior Indebtedness"). Subject to the court approvals and execution of the mutual releases upon which the Settlement Agreement is dependent, so long as Debtor is in default on any payment due and owing to you under the Senior Indebtedness after giving effect to the Offset Agreement, I agree not (a) to accept any payment of principal or interest in whole or in part in respect of the Subordinated Indebtedness that is now due and owing, or that becomes due and owing prior to January 1, 1999; and (b) to discount, sell, transfer, assign, pledge, hypothecate or otherwise encumber the same. This agreement shall not be applicable to any offset by the Debtor of any indebtedness owing by me to the Debtor prior to the date hereof. Jennifer Convertibles, Inc. August , 1996 Page 2 For purpose of this agreement, you shall declare a default only by a majority vote of the members of the Jennifer Board of Directors, with written notice thereof to me and to the Debtor. In the event of a dispute between us over the fact or amount of any such default, the Debtor shall deposit all funds otherwise due to me into an interest bearing escrow account with a financial institution upon which you and I shall agree. Such funds shall remain in such account until the matter is resolved by agreement or by arbitration as set forth below. I further agree that upon any distribution of all or substantially all of the assets of the Debtor prior to January 1, 1999, whether by reason of sale, extension, composition, reorganization, liquidation, dissolution, arrangement, bankruptcy, receivership, assignment for the benefit of creditors on foreclosure, you shall be entitled to receive payment in full of the Senior Indebtedness prior to the payment of any part of the Subordinated Indebtedness. Nothing herein shall be deemed or construed to alter in any respect any subordination agreement involving the Subordinated indebtedness between me and any person or entity other than you. This agreement shall expire on January 1, 1999, except for the arbitration provisions hereinbelow set forth. This agreement cannot be changed or terminated orally and shall be binding upon my heirs, executors, administrators, successors and assigns and shall inure to the benefit of your successors and assigns. All questions as to the interpretation of this agreement shall be resolved in accordance with the laws of the State of New York. All disputes arising under or in connection with, or relating to, this agreement shall be resolved by arbitration in New York City under the auspices of the American Arbitration Association. Jennifer Convertibles, Inc. August , 1996 Page 3 Notice of the acceptance of this agreement or consent thereto is hereby waived. This will also confirm that this agreement is being given to you by me solely as an accommodation to you and is not in any respect being given to you as consideration for execution of the Settlement Agreement by you or by the Debtor. Please signify your agreement to and acknowledgement of the matters set forth above, including the matters set forth in the immediately preceding sentence, by signing a copy of this letter in the space provided below and returning it to me. Very truly yours, /s/ Harley Greenfield /s/ Edward Seidner Jennifer Convertibles, Inc. August , 1996 Page 4 Agreed to and Acknowledged: JENNIFER CONVERTIBLES, INC. By: /s/ Harley Greenfield _______________________ Debtor hereby acknowledges notice of the foregoing subordination and agrees to be bound by all of the terms, provisions and conditions thereof. The amount of Subordinated Indebtedness stated therein is hereby acknowledged to be due and owing as of the date hereof. JARA ENTERPRISES INC. By: _________________________ Jennifer Convertibles, Inc. August , 1996 Page 4 Agreed to and Acknowledged: JENNIFER CONVERTIBLES, INC. By: /s/ Harley Greenfield _______________________ Debtor hereby acknowledges notice of the foregoing subordination and agrees to be bound by all of the terms, provisions and conditions thereof. The amount of Subordinated Indebtedness stated therein is hereby acknowledged to be due and owing as of the date hereof. JARA ENTERPRISES INC. By: _________________________ EX-10.47 14 AGREEMENT BETWEEN JENNIFER CONVERTIBLES, INC. AND JENNIFER PURCHASING CORP. AGREEMENT dated this 1st day of March 1996, by and between Jennifer Convertibles, Inc. and Jennifer Purchasing Corp. and their wholly-owned subsidiaries (The "Public Company"), Jara Enterprises, Inc. and its wholly-owned subsidiaries ("Jara"), Southeastern Florida Holding Corp., ("SFHC"), and Jennifer Cutler Ridge, Inc., GSB Bensonhurst, Inc., Great South Bay Branford, Inc., Jennifer Clarkstown, Inc., Jennifer Convertibles Annapolis, Inc., GSB Park Slope, Inc., Rudzin 149th St. Furniture, Inc., Rudzin Elmhurst Furniture, Inc., Jennifer Short Hills LIC., Inc., (collectively the "Managed Stores"). a) WHEREAS, from time to time, the Public Company, for itself and on behalf of Jennifer Chicago LP, LP III, LP IV, LP V, and LP VI, has become and may become indebted to Jara for warehousing services including fabric protection, freight, and other services and matters; b) WHEREAS, from time to time, SFHC has become and may become indebted to Jara for warehousing services including fabric protection, freight, and other services and matters; c) WHEREAS, from time to time, Jara has become and may become indebted to the Public Company for purchases, advertising, and other services and matters; d) WHEREAS, from time to time, the Managed Stores have become and may become indebted to the Public Company for purchases and royalties; and e) WHEREAS, the Public Company and Jara have decided to off-set, on a monthly basis, commencing September 1, 1995, the amounts of their respective indebtedness to each other, the amounts due and owing by The Managed Stores to the Public Company, and the indebtedness of SFCH to Jara, all under Whereas clauses (a), (b), (c), and (d) above, except that such off-set will not be applied in connection with any royalties owing to the Public Company by the Managed Stores, prior to September 1, 1995. NOW, IT IS HEREBY AGREED as follows: 1. On a monthly basis, commencing September 1, 1995, any indebtedness of the Public Company to Jara and the indebtedness of SFHC to Jara will be off-set by any indebtedness of Jara to the Public Company and any amounts due and owing from The Managed Stores to the Public Company, all in accordance with the terms of the whereas clauses (a), (b), (c), (d), and (e) above. 2. This agreement is without prejudice to the rights of the Public Company, SFHC, the Managed Stores, and Jara to contest all sums owing among each other. 3. An executed, faxed copy of this agreement will constitute an original for all purposes. 4. This agreement shall be construed in accordance with the laws of the State of New York. JENNIFER CONVERTIBLES, INC. and JARA ENTERPRISES, INC. JENNIFER PURCHASING CORP., and its wholly-owned subsidiary /s/ Harley Greenfield /s/ Fred Love - ---------------------------- --------------------------- BY: HARLEY GREENFIELD, PRES. BY FRED LOVE, PRES. JENNIFER CUTLER RIDGE, INC. GSB BENSONHURST,INC. /s/ Rami Abada /s/ Ronald Rudzin - -------------------------------- ----------------------------- BY: RAMI ABADA, PRES. BY: RONALD RUDZIN, PRES. GREAT SOUTH BAY BRANFORD, INC. JENNIFER CLARKSTOWN, INC. /s/ Ronald Rudzin /s/ Ronald Rudzin - ---------------------------------- ------------------------------ BY: RONALD RUDZIN, PRES. BY: RONALD RUDZIN, PRES. ANNAPOLIS-JENNIFER GSB PARK SLOPE, INC. /s/ Rami Abada /s/ Ronald Rudzin - ----------------------------------- ----------------------------- BY: RAMI ABADA, PRES. BY: RONALD RUDZIN, PRES. RUDZIN 149TH ST. FURNITURE, INC. RUDZIN ELMHURST FURNITURE,INC. /s/ Sanford Rudzin /s/ Sanford Rudzin - ------------------------------------ ------------------------------ BY: SANFORD RUDZIN, PRES. BY: SANFORD RUDZIN, PRES. JENNIFER SHORT HILLS LIC., INC. SOUTHEASTERN FLORIDA HOLDING CORP. /s/ Rami Abada /s/ Rami Abada - ------------------------------------ ------------------------------ BY: RAMI ABADA, PRES. BY: RAMI ABADA, PRES. EX-11.1 15 STATEMENT RE: COMPUTATION OF NET (LOSS) PER SHARE EXHIBIT 11.1
JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES STATEMENT RE: COMPUTATION OF NET (LOSS) EARNINGS PER SHARE YEARS ENDED AUGUST 26, 1995, AUGUST 27, 1994 AND AUGUST 31, 1993 (in thousands, except per share data) 1995 1994 1993 ----- ---- ---- Fully Fully Fully Primary Diluted Primary Diluted Primary Diluted ---------- ---------- --------- ----------- --------- ---------- Adjusted net (loss) earnings: Net (loss) earnings ($12,068) ($12,068) ($14,617) ($14,617) $506 $506 Interest adjustments - - - - (1) 44 (1) 426 ---------- ---------- --------- ----------- --------- ---------- Adjusted net (loss) earnings ($12,068) ($12,068) ($14,617) ($14,617) $550 $932 ========== ========== ========= =========== ========= ========== Weighted average common and common equivalent shares outstanding: Weighted average common shares outstanding 5,701 5,701 5,701 5,701 5,078 5,078 Weighted average common equivalents - - - - (1) 935 (1) 1,555 ---------- ---------- --------- ----------- --------- ---------- Weighted average common and common equivalent shares outstanding 5,701 5,701 5,701 5,701 6,013 6,633 ========== ========== ========= =========== ========= ========== Net (loss) earnings per common and common equivalent shares ($2.12) ($2.12) ($2.56) ($2.56) $0.09 $0.14 ========== ========== ========= =========== ========= ==========
(1) Calculated based on modified treasury stock method. EX-22.1 16 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-----