-----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, Fekx4TBPc9Y4eCMCjOw6pe4W2UhuS4mM6d0N8OuHVqYPvPshtgq4CFHZwx7cQU1+ 3gPAYkYSNZU+Jzb+ZiWHvQ== 0001019056-97-000351.txt : 19971216 0001019056-97-000351.hdr.sgml : 19971216 ACCESSION NUMBER: 0001019056-97-000351 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970830 FILED AS OF DATE: 19971212 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: 0830 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09681 FILM NUMBER: 97737645 BUSINESS ADDRESS: STREET 1: 419 CROSSWAYS PK DR CITY: WOODBURY STATE: NY ZIP: 11797 BUSINESS PHONE: 5164961900 MAIL ADDRESS: STREET 1: 419 CROSSWAYS PARK DR 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 30, 1997 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 [X] No [ ] 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 14, 1997: $12,826,631 Shares of Common Stock outstanding as of November 14, 1997: 5,700,725 DOCUMENTS INCORPORATED BY REFERENCE NONE PART I Item 1. BUSINESS 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 122 Jennifer Convertibles(R) stores located on the Eastern seaboard, in the Midwest, on the West Coast and in the Southwest as of August 30, 1997. As of August 30, 1997, the Company also operated 36 "Jennifer Leather" ("Jennifer Leather") stores. Of the Jennifer Convertibles(R) stores, as of August 30, 1997, 48 were owned by the Company and 74 were licensed by the Company. 2
NUMBER OF STORES IN OPERATION AS OF AUGUST 30, 1997 ====================================================================================== TOTAL LPS AND OTHER PRIVATE TOTAL CONVERTIBLES LEATHER COMPANY LICENSEES(1) COMPANY(2) STORES -------------------------------------------------------------------------------------- REGION TRI-STATE AREA NEW YORK 6 11 17 3 22 42 NEW JERSEY 9 8 17 4 21 CONNECTICUT 4 1 5 2 7 -------------------------------------------------------------------------------------- SUBTOTAL 19 20 39 9 22 70 ARIZONA 3 3 CALIFORNIA 4 4 22 26 FLORIDA 4 4 9 13 GEORGIA 4 4 ILLINOIS 14 14 INDIANA 3 3 3 KANSAS 1 1 1 MARYLAND 3 1 4 3 7 MASSACHUSETTS 7 5 12 12 MICHIGAN 6 6 6 MISSOURI 4 4 4 NEVADA 2 2 NEW HAMPSHIRE 2 2 2 OHIO 4 4 PENNSYLVANIA 4 4 VIRGINIA 2 1 3 3 WASHINGTON, D.C. 1 1 2 2 -------------------------------------------------------------------------------------- TOTAL 48 36 84 74 22 180 ======================================================================================
(1) These include certain limited partnership licensees ("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 22 stores are not owned and do not pay royalties to the Company. They operate in New York (the "Private Stores") and 20 of such stores are owned by a company (the "Private Company") that, is 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. Also, in December 1996, the Private Company purchased the limited partnership interests in LPS owning 49 of the licensed stores. 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 two stores 3 are sublicensees of the Private Company and one of such stores is owned by the father of an executive officer of the Company. The Private 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 high-end merchandise to relatively inexpensive models. Each store has a kiosk devoted to mattress sales. The Jennifer Leather stores specialize in the retail sale of leather livingroom furniture. In fiscal 1997, the Company also opened two test Jennifer Living Room stores which sell a broad range of livingroom furniture, including furniture of the type sold in Jennifer Convertibles and Jennifer Leather stores. 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 ------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Company-owned stores open at end of period (1)(2)(3)(4)(5) 84 86 90 55 34 33 33 39 42 31 13 Licensed stores open at end of period 74 75 79 113 87 42 15 0 0 0 0 --- --- --- --- --- --- --- --- --- --- --- Total stores open at end of period 158 161 169 168 121 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. (4) For fiscal 1996, includes 36 Jennifer Leather stores. (5) For fiscal 1997, includes 36 Jennifer Leather stores and two Jennifer Living Room stores. 4 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 the Company's stores 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 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 $299 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 $599 to $5,000. The Company generally features attractive price incentives to promote the purchase of merchandise. In addition to offering merchandise by brand name manufacturers, the Company offers merchandise at its Jennifer Convertibles and Jennifer Leather stores under the "Jennifer" brand name for sofabeds and under the "Bellissimo Collection" brand name for leather merchandise. 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 2,000 different colors and fabrics are available on selected items for an additional charge. To maximize the use of the Company's real estate and to offer its customers greater selection and value, the Company, as is common in the mattress industry, sells various sizes of sofabeds with various sizes of mattresses but displays only one size of sofabed at its stores. 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 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 within two weeks. Customers who place orders for items, colors or fabrics not in inventory ("special orders") must generally wait four to six 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. 5 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 district managers throughout the United States. The district managers supervise store management and monitor stores within their assigned district to ensure compliance with operating procedures. District managers report to and coordinate operations in their district with 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 stocked at the Private Company's warehouse facilities (described below.) The Company and its licensees typically (except in the case of certain financed sales) require a minimum cash, check or credit card deposit of 50% of the purchase price when a sales order is given, with the balance, if any, payable in cash or 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, radio 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 $10,893,000, or 11.1% of sales, in the fiscal year ended August 30, 1997 as compared to approximately $12,265,000, or 11.6% of sales, in the prior year. The Company creates advertising campaigns for use by the Company's stores which also may be used by the Private Stores. The Private Company bears a share of advertisement costs in New York. 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. 6 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. Stores may be freestanding or part of a strip shopping center. In fiscal 1997, the Company and the LPS closed an aggregate of three stores. The Company will continue to selectively close stores where the economics so dictate and it may 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 to 90 day terms. The Company also purchases from overseas manufacturers on varying 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 Industries, Inc. ("Klaussner"), which was recently granted a license to manufacture furniture under the Sealy(R) brand name, and Ellis Home Furnishings, Inc. ("Ellis"). 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 is the largest sofabed specialty retailer and the largest Sealy(R) sofabed dealer in the United States. During the fiscal year ended August 30, 1997, the 7 Company purchased approximately 81% of its merchandise from Klaussner and approximately 11% of its merchandise from Ellis. 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. In addition, in December 1997, Klaussner purchased $5,000,000 of the Company's convertible preferred stock ("the Klaussner Investment"). In fiscal 1997, Klaussner also gave the Company certain vendor credits for advertising and repairs. See "Certain Relationships and Related Transactions" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a fuller description of the Klaussner Transaction, the Klaussner Investment and other transactions with Klaussner. Licensing Arrangements The Company's arrangements with its licensees typically involve providing the licensee with a license, bearing a royalty of 5% of sales, to use the name Jennifer Convertibles(R). The Company's existing licensing arrangements are not uniform and vary from licensee to licensee. Generally, however, the Company either manages the licensed stores or, if the licensee is a partnership, has a subsidiary act as general partner of such partnership, in each case, for 1% of the licensees' profits. The arrangements generally have a term ranging between 10 and 20 years (and may include options on the licensee's part to extend the license for additional periods) and involve the grant of exclusivity as to defined territories. In some cases, the Company also has an option to purchase the licensee or the licensed stores for a price based on an established formula or valuation method. Investors in certain licensees have, in certain circumstances (including a change of control of the Company), the right to put their investments to the Company for a price based upon an established formula or valuation method. The Private Company currently provides warehousing, fabric protection and other services to licensees on substantially the same basis as such services are provided to the Company and 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, per annum. As of August 30, 1997, the Company was owed an aggregate of $16,200,000 for royalties, advances and merchandise by its licensees, a substantial portion of which was overdue. Of such amount, $9,487,000 due from the LPS is eliminated in the Company's financial statements as a result of the consolidation of the LPS and $6,713,000 due from Unconsolidated Licensees was reserved against in such financial statements due to doubts as to collectibility. Most of the investors in the licensees have other relationships with the Company or its current or former management and, in December 1996, the Private Company acquired the limited partnership interests in LPS owning an aggregate of 49 licensed stores. See "Certain Relationships and Related Transactions." As set forth under "Legal Proceedings," the Memoranda of Understanding ("MOUS") and related documents as to the settlement of certain class and derivative litigation contemplate that, subject to court approval of such Settlement Agreement, the Company will receive the limited partnership interests or stock in licensees which now own 55 licensed stores, representing all but 19 of the royalty bearing licensed stores, in connection with the settlement of certain litigation. 8 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 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"). The Warehouse Facilities service Company-owned stores, 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) delivered from the Warehouse Facilities to customers of the Company-owned stores plus 5% of the retail selling price of all merchandise delivered from the Warehouse 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 fabric protection and warranty services. In addition to the Warehouse Fee, the Company pays the Private Company a portion (approximately one-third) of fabric protection revenues from its customers. The Company also pays the Private Company for freight charges based on quoted freight rates. See "Certain Relationships and Related Transactions." 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 on 9 January 1, 1999. In contemplation of the settlement, in August 1996, the Company began to take over certain functions, including customer service, cash processing, order processing and store support. Trademarks The trademarks Jennifer Convertibles(R), Jennifer Leather(R), Jennifer House(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. An application has been filed for a trademark for "Jennifer Living Rooms" and "Bellissimo Collection." 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 30, 1997, the Company had 452 employees, including seven executive officers. The Company trains personnel to meet its expansion needs by having its most effective managers and salespersons train others and evaluate their progress and potential for the Company. The Company believes that its employee relations are satisfactory. None of the Company's employees are represented by a collective bargaining unit. The Company has never experienced a strike or other material labor dispute. Competition The Company competes with other furniture specialty stores, major department stores, individual furniture stores, discount stores and chain stores, some of which have been established for a long time in the same geographic areas as the Company's stores (or areas where the Company or its licensees may open stores). The Company believes that the principal areas of competition with respect to its business are store image, price, delivery time, selection and service. The Company believes that it competes effectively with such retailers because its stores offer a broader assortment of convertible sofabeds than most of its competitors and, as a 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. 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 30, 1997, the Company and the LPS lease all of their store locations pursuant to leases which expire between 1998 and 2009. During fiscal 1998, eight leases will expire, although the lessee has an option to renew each such lease. The leases are usually for a base term of at least five years. For additional information concerning the leases, see Note 9 of "Notes to Consolidated Financial Statements." 10 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 is to be funded entirely by insurance company proceeds. The stock portion of the settlement is to 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. 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. 11 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. In January 1997, documents reflecting the settlement terms set forth in the Class Action MOU were filed in the United States District Court in the Eastern District of New York. At that time, Judge Hurley of that court signed an order providing, INTER ALIA, for notice of the terms of the settlement to the class, a deadline for the filing of objections by class members, and a date for the hearing on the fairness of the settlement. No objections to the settlement were filed by any member of the class. However, the hearing as to the fairness of the settlement has not yet been held, and the settlement has not yet been approved, as a result of the pendency of the unresolved objections to the proposed settlement of the derivative litigation, as is more fully set forth below. 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) - -------- 1 Each of these individuals and entities is named as a defendant in at least one action. 12 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. 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. In February 1997, definitive agreements reflecting the terms of the Derivative Litigation MOU were submitted to the United States District Court for the Eastern District of New York. The Settlement Agreement and the related agreements, although signed, provide that they too are subject to and dependent upon Court approval of the settlement of the Derivative Litigation. The Settlement Agreement and the related agreements are 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 and the related agreements contemplate, INTER ALIA, as follows: 1. From the effective date 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 did not achieve sales of $135,000,000 in calendar 13 1996 and, accordingly, it will be liable for the Shortfall Payments if the settlement is approved as contemplated. Provisions of $520,000 and $130,000 have been made in the financial statements in the fiscal years ended August 31, 1996 and August 30, 1997, respectively. The Shortfall Payments described above are being credited to the Private Company under the Offset Agreement currently in anticipation of Court approval of the settlement. The Company also agreed to give the Private Company a credit under the Offset Agreement (as defined below) equal to the amount obtained by multiplying the warehouse fee then in effect by the amount, if any, by which the Company's sales for each of the 12 months ending December 31, 1997 and 1998 are less than $106,500,000. Such credit is to be estimated and paid monthly based on target sales for each month and will be reconciled and adjusted quarterly. Sales in excess of $106,500,000 in 1997 will be carried over to 1998 and sales in 1998 in excess of $106,500,000 will be carried back to 1997, if necessary. No provision is currently being made with respect to such credit. 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, New York warehouse (the "Inwood Warehouse"). The Inwood Warehouse was sold in 1996. 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 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 acquired the interest of the limited partners in the LPS known as Jennifer, LP III, Jennifer, LP IV, Jennifer, LP V (the "Partnerships") on December 31, 1996. The Private Company will also purchase the stock of the shareholders of Southeastern Florida Holding Co., Inc. ("S.F.H.C.") upon approval of the settlement. The Private Company will assign its Partnership interests and stock to the Company at no cost (except as described below). As of March 5, 1996, S.F.H.C. and the Partnerships owned an aggregate of 55 licensed Jennifer Convertibles stores which, after such assignment, will be wholly-owned by the 14 Company. Upon approval of the settlement, the current shareholders of S.F.H.C. 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, was extended for 10 years. The extended notes bear interest at a rate of 7.12% per annum, and 10% of the principal amount of such notes is due each year. Such notes are 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, is to cancel a proportionate number of Original Warrants. 7. Commencing January 1, 1999, 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 the date of the sale or whether the sale was made by the Private Company or the Company), provided, that, as to such claims made as to merchandise sold by the Private Company, the Company may bill the Private Company for outside parts and labor directly expended in connection therewith. 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. In contemplation of the settlement, the Company and the Private Company are 15 currently operating under the terms of this offset agreement with respect to cash payments of current amounts due in excess of $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, KPMG Peat Marwick ("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 previously described in the Company's Annual Reports on Form 10-K for the fiscal years ended August 27, 1994, August 26, 1995 and August 31, 1996 and as discussed in Note 9 to the Financial Statements included herein); (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. In February 1997, documents reflecting the terms of the Derivative MOU were submitted to the United States District Court in the Eastern District of New York. At that time, Judge Hurley signed an order which, INTER ALIA, provided for notice to the shareholders of the Company of the settlement, a deadline for shareholders of the Company to object to the terms of the settlement and a proposed hearing date as to the fairness of the proposed settlement of the derivative litigation. A group of shareholders claiming to own approximately 8.5% of the outstanding shares of the Company have filed (as a group) objections to the fairness of the settlement. This group has requested deposition and document discovery in advance of any hearing on the fairness of the settlement, and the 16 Company has provided some document and deposition discovery voluntarily. However, the group of objectors has made a motion for additional discovery which the Company has opposed. The motion is still pending. The Company anticipates that once the Court decides on what additional discovery, if any, to give the objectors, it will also schedule a hearing date to determine the fairness of the derivative and class action settlements. C. SEC Investigation ----------------- On May 3, 1995, the Securities and Exchange Commission commenced a formal investigation as to the Company. In connection therewith, subpoenas were 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. 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. Management does not believe the outcome of such litigations will be material to the Company's financial position. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable 17 PART II Item 5: Market For Registrant's Common Equity and Related Stockholder Matters. ------------------------------------------------- The principal market for the Common Stock during the two fiscal years ended August 30, 1997 and August 31,1996 was the NASDAQ Bulletin Board. The following table sets forth, for the fiscal periods indicated, the high and low bid prices of the Common Stock on the Bulletin Board. 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 1996: 1st Quarter..................... $ 3 3/4 $ 1 13/16 2nd Quarter..................... 3 3/8 2 3rd Quarter..................... 3 1/4 2 1/16 4th Quarter..................... 3 1/4 2 High Low ---- --- Fiscal Year 1997: 1st Quarter..................... $ 2 5/8 $ 1 7/8 2nd Quarter..................... 2 9/16 1 3/4 3rd Quarter..................... 2 1/2 1 3/4 4th Quarter..................... 2 15/16 2 3/16 As of November 14, 1997, there were approximately 244 holders of record and approximately 4,600 beneficial owners for the Common Stock. On November 14, 1997, the closing bid and asked prices of the Common Stock as reported on the NASDAQ Bulletin Board were $2 5/16 and $2 1/8, 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. 18 Item 6. SELECTED FINANCIAL DATA The following table presents certain selected financial data for Jennifer Convertibles, Inc. and subsidiaries:
(in thousands, except share data) ----------------------------------------- OPERATIONS DATA: Year Ended Year Ended Year Ended Year Ended Year Ended 8/30/97 8/31/96 8/26/95 8/27/94 8/31/93 ----------- ----------- ----------- ----------- ----------- Net sales $ 97,789 $ 106,041 $ 126,074 $ 97,420 $ 64,348 ----------- ----------- ----------- ----------- ----------- Cost of sales, including store occupancy, warehousing, delivery and fabric protection 67,114 72,708 86,964 67,974 43,898 Selling, general and administrative expenses 32,904 37,618 45,955 34,139 22,652 Depreciation and amortization 1,840 1,852 2,261 2,091 1,583 Termination of consulting agreement, legal and other costs -- -- 500 6,604 -- Write off of purchased limited partners' interests -- -- -- 3,482 -- (Recovery) provision for losses on amounts due from Private Company and Unconsolidated Licensees (426) 952 3,088 3,284 -- Loss from store closings 55 191 1,670 -- -- ----------- ----------- ----------- ----------- ----------- 101,487 113,321 140,438 117,574 68,133 ----------- ----------- ----------- ----------- ----------- Operating (loss) (3,698) (7,280) (14,364) (20,154) (3,785) ----------- ----------- ----------- ----------- ----------- Other income (expense) Royalty income 374 375 523 644 711 Interest income 67 195 311 473 674 Interest expense (28) (47) (48) (61) (640) Gain on sale of securities -- -- -- 336 61 Other income, net 319 880 1,670 1,374 696 ----------- ----------- ----------- ----------- ----------- 732 1,403 2,456 2,766 1,502 ----------- ----------- ----------- ----------- ----------- (Loss) before income taxes (benefit) and minority interest (2,966) (5,877) (11,908) (17,388) (2,283) Income taxes (benefit) 95 146 160 (322) 113 ----------- ----------- ----------- ----------- ----------- (Loss) before minority interest (3,061) (6,023) (12,068) (17,066) (2,396) Minority interest share of losses -- -- -- 2,449 2,902 ----------- ----------- ----------- ----------- ----------- Net (loss) earnings ($3,061) ($6,023) ($12,068) ($14,617) $ 506 =========== =========== =========== =========== =========== Net (loss) earnings per share ($0.54) ($1.06) ($2.12) ($2.56) $ 0.09 =========== =========== =========== =========== =========== Weighted average number of common shares 5,700,725 5,700,725 5,700,725 5,700,725 6,013,000 =========== =========== =========== =========== =========== Cash Dividends -- -- -- -- -- =========== =========== =========== =========== =========== Store data: 8/30/97 8/31/96 8/26/95 8/27/94 8/31/93 - ----------- ----------- ----------- ----------- ----------- ----------- Company-owned stores open at end of period 84 86 90 55 34 Consolidated licensed stores open at end of period 63 64 68 99 73 Licensed stores not consolidated open at end of period 11 11 11 14 14 ----------- ----------- ----------- ----------- ----------- Total stores open at end of period 158 161 169 168 121 =========== =========== =========== =========== =========== BALANCE SHEET DATA: 8/30/97 8/31/96 8/26/95 8/27/94 8/31/93 - ------------------- ----------- ----------- ----------- ----------- ----------- Working capital (deficiency) ($17,258) ($15,757) ($10,988) $ 1,240 $ 11,573 Total assets 22,998 25,435 33,871 44,922 37,488 Long-term obligations 421 230 337 477 118 Total liabilities 36,365 35,741 38,154 37,137 15,305 (Capital deficiency) stockholders' equity (13,367) (10,306) (4,283) 7,785 22,183 (Capital deficiency) stockholders' equity per share ($2.34) ($1.81) ($0.75) $1.37 $3.69
19 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE U.S. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, AS AMENDED. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS OR OUTCOMES TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO RISK FACTORS SUCH AS UNCERTAINTY AS TO THE OUTCOME OF THE LITIGATION CONCERNING THE COMPANY, FACTORS AFFECTING THE FURNITURE INDUSTRY GENERALLY, SUCH AS THE COMPETITIVE AND MARKET ENVIRONMENT, AND MATTERS WHICH MAY AFFECT THE COMPANY'S SUPPLIERS OR THE PRIVATE COMPANY. IN ADDITION TO STATEMENTS WHICH EXPLICITLY DESCRIBE SUCH RISKS AND UNCERTAINTIES, INVESTORS ARE URGED TO CONSIDER STATEMENTS LABELED WITH THE TERMS "BELIEVES," "BELIEF," "EXPECTS," "INTENDS," "PLANS" OR "ANTICIPATES" TO BE UNCERTAIN AND FORWARD-LOOKING. OVERVIEW 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, 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, 1995, 1996 and 1997 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. 20 The operating losses in excess of capital contributions of the LP's that are included in the consolidated financial statements are as follows:
Years Ended ------------------------------------ (In Thousands) 8/26/95 8/31/96 8/30/97 ------- ------- -------- Total operating losses before capital contributions of LP's $(7,288) $(4,206) $(4,234) ------- ------- ------- Total capital contributions -- -- -- ------- ------- ------- Net operating losses $(7,288) $(4,206) $(4,234) ======= ======= =======
Prior to fiscal 1996, the Company relied 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 provided 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. Starting in fiscal 1996, the Company has been assuming these responsibilities. 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 19 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. RESULTS OF OPERATIONS: FISCAL YEAR ENDED AUGUST 30, 1997 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1996: Net sales decreased by 7.8% to $97,789,000 for the fiscal year ended August 30, 1997 as compared to $106,041,000 for the fiscal year ended August 31, 1996. This decrease is mainly attributable to the closing of three stores since the prior year period and a decline in net sales of the Jennifer Leather division of $6,366,000. This decline is partly attributable to an inability to obtain inventory due to an overseas supplier's production problems. Additionally, the current fiscal year included 52 weeks as compared to 53 weeks in the prior year. Comparable store sales (those open for a full year in each period) decreased by 5.7%. 21 Cost of sales decreased 7.7% to $67,114,000 for the fiscal year ended August 30, 1997 from $72,708,000 for the fiscal year ended August 31, 1996. The dollar decrease of $5,594,000 is primarily attributable to: 1) lower net sales which resulted in lower purchases for the year of approximately $3,900,000; 2) lower occupancy costs due to closed stores of $508,000; 3) higher net home delivery income of $511,000; and 4) higher costs for customer repairs were offset by vendor allowances from the Company's principal supplier of $1,166,000 which resulted in a net decline of $506,000 for total repairs. Cost of sales as a percentage of sales was 68.6% in fiscal 1997, unchanged from the prior year because the higher costs of merchandise due to a change in the product mix offset the items described above. Additionally, warehouse expenses of $5,021,000 and fabric protection services of $2,543,000 provided by the Private Company in fiscal 1997 decreased from $5,822,000 and $2,972,000, respectively, from the previous year due to the lower sales volume in the 1997 fiscal year and reduced warehouse fee "shortfall" payments. Selling, general and administrative expenses were $32,904,000 (33.6% as a percentage of sales) for the fiscal year ended August 30, 1997 as compared to $37,618,000 (35.5% as a percentage of sales) for the fiscal year ended August 31, 1996, a decrease of $4,714,000 or 12.6% from the prior year. This decrease was due principally to reductions in salaries and related benefits of $1,287,000 (principally because of the lower sales volume which generated lower commissions, as well as fewer stores in operation during the current fiscal year) and lower legal fees of $610,000. Legal fees were $1,275,000 in the prior year (see "Liquidity and Capital Resources" below). Accounting fees declined by $72,000 to $241,000 for the year in part as the result of improved controls installed during the current fiscal year. Additionally, during the fiscal year ended August 30, 1997, selling, general and administrative expenses were reduced for adjustments related to cancelled customer orders of $817,000, which adjustments ($344,000) in the prior year were classified in other income. Additionally, advertising expenses declined by $1,372,000 to $10,893,000 (11.1% as a percentage of sales) as compared to $12,265,000 (11.6% as a percentage of sales) in the prior year. Although the Company spent approximately the same amount on advertising in both fiscal years, the fiscal 1997 amount is net of an advertising allowance of $1,075,000 the Company received from its principal supplier. The Company's receivables from the Private Company ($2,335,000), the Unconsolidated Licensees (other than S.F.H.C.) ($2,355,000) and S.F.H.C. ($2,208,000) decreased in the aggregate by $426,000 in the fiscal year ended August 30, 1997 to $6,898,000 which resulted in income of $426,000 from cash collections. These entities have losses and/or capital deficiencies and, accordingly, the Company had fully reserved for all amounts due from the Private Company, the Private Licensees and S.F.H.C. in prior years which totalled $7,324,000 at August 31, 1996. In connection with the uncertainty of collectibility and the relationship between the Company, the Private Company, the Private Licensees and S.F.H.C., the Company accounts for transactions with these entities on an offset basis. 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. 22 Interest income decreased by $128,000 to $67,000 for the fiscal year ended August 30, 1997 as compared to the prior year. The decrease reflects the generally lower level of investments throughout the fiscal year. Other income decreased to $319,000 in the fiscal year ended August 30, 1997 from $880,000 in the prior year. This decrease is primarily attributable to adjustments related to cancelled customer orders which have been offset against selling, general and administrative expenses starting in the current fiscal year (as described above). Net (loss) in the fiscal year ended August 30, 1997 was $(3,061,000) as compared to a net (loss) of $(6,023,000) in the prior year, a decrease of loss of $2,962,000. The primary reason for the decreased loss was due to expense reductions, credits received from vendors, as discussed above, together with lower store closing costs and a recovery of amounts due from the Private Company and Unconsolidated Licensees which had previously been recorded as losses. FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED TO FISCAL YEAR ENDED AUGUST 26, 1995: Net sales decreased by 15.9% to $106,041,000 for the fiscal year ended August 31, 1996 as compared to $126,074,000 for the year ended August 26, 1995. This decrease is mainly attributable to the closing of eight stores since the prior year period, a physical split of 14 Jennifer Convertibles stores into both a Jennifer Convertibles store and a Jennifer Leather store (thereby cannibalizing sales), a reduction in the number of credit promotions that the Company has been able to offer customers to stimulate business and an industry-wide softness. Comparable store sales (those open for a full year in each period) decreased by 16.3% partially as a result of the physical split described above. Cost of sales decreased 16.4% to $72,708,000 for the year ended August 31, 1996 from $86,964,000 for the fiscal year ended August 26, 1995. The dollar decrease of $14,256,000 is attributable to the lower sales and lower occupancy costs due to the closed stores, while the decrease in the cost of sales as a percentage of sales to 68.6% from 69.0% is essentially due to lower costs of merchandise. Warehouse expenses of $5,822,000 and fabric protection services of $2,972,000 provided by the Private Company decreased from $6,304,000 and $3,804,000, respectively, from the previous year due to the lower sales volume in the current fiscal year. Selling, general and administrative expenses were $37,618,000 (35.5% as a percentage of sales) for the fiscal year ended August 31, 1996 as compared to $45,955,000 (36.5% as a percentage of sales) for the fiscal year ended August 26, 1995, a decrease of $8,337,000 or 18.1% over the prior year. This decrease was due principally to reductions in salaries and related benefits of $3,586,000 (principally because of the lower sales volume which generated lower commissions as well as fewer stores in operation during the current fiscal year) and lower advertising expenses of $3,464,000. Legal fees increased in the current fiscal year by $403,000 to $1,275,000 primarily because of the new Credit and Security Agreement signed with Klaussner (see "Liquidity and Capital Resources" below). Accounting fees declined by $421,000 to $313,000 for the year in part as the result of improved controls installed during the current fiscal year. Various other store expense categories were reduced due to the implementation of the Company's cost reduction programs. 23 The Company's receivables from the Private Company, the Private Licensees and S.F.H.C. increased by $952,000 in the fiscal year ended August 31, 1996 to $7,324,000. These entities have losses and/or capital deficiencies and, accordingly, 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 $952,000. In prior years, the Company had reserved the full amounts due which totalled $6,372,000 at August 26, 1995. 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. Interest income decreased by $116,000 to $195,000 for the fiscal year ended August 31, 1996 as compared to the prior year. The decrease reflects the generally lower level of investments throughout the fiscal year. Other income decreased to $880,000 in the fiscal year ended August 31, 1996 from $1,670,000 in the prior year. This decrease is primarily attributable to adjustments related to cancelled customer orders. Net (loss) in the fiscal year ended August 31, 1996 was $(6,023,000) compared to a net (loss) of $(12,068,000) in the prior year, a decrease of loss of $6,045,000. The primary reason for the decreased loss was due to expense reductions and operating efficiencies the Company was able to achieve as discussed above together with lower store closing costs and a substantially lower provision for losses from the Private Company and Unconsolidated Licensees reflecting the reduced increase in such amount over the prior year. LIQUIDITY AND CAPITAL RESOURCES: As of August 30, 1997, the Company and LP's had an aggregate working capital deficiency of $17,258,000 compared to a deficiency of $15,757,000 at August 31, 1996 and had available cash and cash equivalents of $3,405,000 compared to $3,600,000 at August 31, 1996. 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. The Company's receivables from the Private Company, the Unconsolidated Licensees, and S.F.H.C., which had been fully reserved for in prior years, decreased by $426,000 which has been reflected in income. These entities have operating losses and capital deficiencies and there can be no assurance that the total receivables of $6,898,000 at August 30, 1997 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, other than S.F.H.C.. 24 In March 1996, the Company executed a Credit and Security Agreement ("Agreement") with its principal supplier, Klaussner which effectively extended the payment terms for merchandise shipped from 60 days to 81 days. At various times during the current fiscal year, the Company exceeded terms by no more than 21 days with such extended amounts owing totalling no more than $2,650,000. As of August 30, 1997, the amount owed that exceeded terms was $1,990,000 for 14 days. Klaussner has waived the default provisions in the Agreement as to such violations. 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 (all of which has been paid at August 30, 1997) to be used to pay down the mortgage balance on the warehouse property. This paydown also reduced the Company's guarantee to the mortgagee. On December 11, 1997, the Company sold to Klaussner 10,000 shares of Series A Convertible Preferred Stock ("Preferred Stock"), convertible into 1,424,500 shares of the Company's Common Stock for $5,000,000. These shares are non-voting, have a liquidation preference of $5,000,000 and do not pay dividends (except if declared on the Common Stock). The Preferred Stock is not convertible until September 1, 1999, or earlier under certain circumstances (e.g. if another person or group acquires 12.5% or more of the Common Stock or there are certain changes in management or the Board of Directors), and has other rights associated with it. In addition, the Credit and Security Agreement with Klaussner was modified to include a late fee of .67% per month for invoices the Company pays beyond the normal 60 day terms. See "Certain Relationships and Related Transactions." 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. The Company does not currently have any traditional bank financing and there can be no assurance such financing will be available in the future. 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. If approved, 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 fiscal 1996 and 1995, the Company and the LP's closed an aggregate of 40 stores. In fiscal 1997, three additional stores were closed. 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. 25 The Company anticipates losses for fiscal 1998. However, as a result of the Credit and Security Agreement with Klaussner and the $5,000,000 sale of Preferred Stock to Klaussner on December 11, 1997, the Company, in the opinion of management, will have adequate cash flow to fund its operations for the next fiscal year. For the year ended August 30, 1997 and fiscal year ended August 31, 1996, the Company and the LP's spent $206,000 and $989,000, respectively, for capital expenditures. The Company currently anticipates capital expenditures totalling no more than $500,000 during fiscal 1998. INFLATION: There was no significant impact on the Company's operations as a result of inflation during the fiscal year ended August 30, 1997. 26 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. ----------------------------------------------------------------------- None 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 December 2, 1997 are as follows: Position(s) with the Name Age Company ---- --- ----------------------------- Harley J. Greenfield 53 Chairman of the Board and Chief Executive Officer Edward G. Bohn 52 Director Kevin J. Coyle 53 Director Edward B. Seidner 45 Director and Executive Vice President Bernard Wincig 66 Director George J. Nadel 55 Executive Vice President, Chief Financial Officer and Treasurer Rami Abada 38 President, Chief Operating Officer and Director Ronald E. Rudzin 35 Senior Vice President - Retail Stores Leslie Falchook 37 Vice President - Administration Kevin Mattler 40 Vice President - Store Operations The Company's directors are elected at the Annual Meeting of stockholders and hold office until their successors are elected and qualified. The Company's officers are appointed by the Board of Directors and serve at the pleasure of the Board of Directors. The Company currently has no compensation or nominating committees. The Board of Directors held six meetings during the 1997 fiscal year. None of the directors attended fewer than 75% of the number of meetings of the Board of Directors or any committee of which he is a member, held during the period in which he was a director or a committee member, as applicable. The Board of Directors has a Stock Option Committee, which as of August 30, 1997, consisted of Messrs. Greenfield and Seidner. The Stock Option Committee had one meeting during the 1997 fiscal year. The Stock Option Committee is authorized to administer the Company's stock option plans. 27 The Board of Directors has an Audit Committee, which during the fiscal year ended August 30, 1997, consisted of Harley Greenfield, Bernard Wincig, Edward Bohn and Kevin Coyle. During such fiscal year, the Audit Committee held three 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. The Company also has a Monitoring Committee consisting of Edward Bohn, Kevin Coyle and Bernard Wincig to monitor transactions between the Company and the Private Company. Set forth below is a biographical description of each director and executive officer of the Company as of December 2, 1997. HARLEY J. GREENFIELD Mr. Greenfield has been the Chairman of the Board and Chief Executive Officer of the Company since August 1986 and was the Company's President from August 1986 until December 1997. 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. From March 1995 to May 1997, he was 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 28 is a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants. 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 25 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. 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 President and a director of the Company on December 2, 1997 and has been the Chief Operating Officer since April 12, 1994. Mr. Abada was the Executive Vice President of the Company from April 12, 1994 to December 2, 1997. Prior to joining the Company, Mr. Abada had been employed by the Private Company since 1982. Mr. Abada is also a director of CCA Industries, Inc., a public company engaged in the manufacture and distribution of health and beauty aid products. 29 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 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. 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." 30 Item 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table sets forth compensation paid for the fiscal years ended August 30, 1997, August 31, 1996 and August 26, 1995 (or such shorter period as such employees were employed by the Company) of those persons who were (i) the chief executive officer at August 30, 1997 and (ii) the four other most highly compensated executive officers of the Company at August 30, 1997 whose total annual salary and other compensation exceeded $100,000 (collectively, the "Named Executive Officers").
ANNUAL LONG-TERM COMPENSATION COMPENSATION ------------ ------------- SECURITIES NAME AND UNDERLYING ALL OTHER PRINCIPAL POSITION FISCAL YEAR SALARY ($) OPTIONS (#) COMPENSATION - ------------------ ----------- ---------- ----------- ------------ Harley J. Greenfield, 1997 $320,000 0 0 Chairman of the Board, Chief 1996 352,307 0 0 Executive Officer and President 1995 400,000 0 0 Edward B. Seidner, 1997 $240,000 0 0 Executive Vice President 1996 264,231 0 0 1995 300,000 0 0 George J. Nadel 1997 $225,000 50,000(1) 0 Executive Vice President and 1996 250,000 0 0 Chief Financial Officer 1995 202,083 50,000(2) 0 Leslie Falchook, 1997 $116,000 50,000(3) 0 Vice President - Administration 1996 127,712 0 0 1995 144,670 0 0 Rami Abada 1997 $120,000 100,000(4) 0 Executive Vice President and 1996 132,115 0 0 Chief Operating Officer 1995 150,000 0 Ronald E. Rudzin 1997 $120,000 100,000(5) 0 Senior Vice President Retail 1996 132,115 0 0 Stores 1995 150,000 0 0
31 - --------------------- (1) On May 6, 1997, Mr. Nadel was granted options to purchase 50,000 shares of Common Stock at $2.00 per share, the market value on the date of grant, in exchange for the cancellation of the options referred to in Note (2) below. (2) 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. (3) On May 6, 1997, Mr. Falchook was granted options to purchase 50,000 shares of Common Stock at $2.00 per share, the market value on the date of grant, in exchange for the cancellation of options to purchase 20,000 shares of Common Stock at $13.125 per share which were granted in 1993. (4) On May 6, 1997, Mr. Abada was granted options to purchase 100,000 shares of Common Stock at $2.00 per share, the market value on the date of grant. (5) On May 6, 1997, Mr. Rudzin was granted options to purchase 100,000 shares of Common Stock at $2.00 per share, the market value on the date of grant. Non-employee directors currently receive a fee of $10,000 per year, plus $500 per meeting attended (an aggregate of $78,000 in fiscal 1997). 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), 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, Rami Abada - $120,000, Ronald E. Rudzin - $120,000, Leslie Falchook - $116,000 and Kevin Mattler - $96,000. 32 STOCK OPTION PLANS The Company has Incentive and Non-Qualified Stock Option Plans (the "Plans"), pursuant to which, as of August 30, 1997, options to purchase an aggregate of 837,047 shares of Common Stock were outstanding and under which options to purchase an aggregate of 9,953 shares of Common Stock were available for grant. In addition, options granted outside of the Plans to purchase an additional 392,000 shares of Common Stock (not including options to purchase 1,200,000 shares of Common Stock owned by JCI Consultants, L.P.) were outstanding as of August 30, 1997 and options to purchase an additional 100,000 shares of Common Stock outside of the Plans were granted in December 1997. The Plans are administered by a Stock Option Committee (the "Committee") consisting of two persons appointed by the Board of Directors. As of August 30, 1997, 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 equaled or exceeded the market value of the underlying shares on the date of grant. 1997 STOCK OPTION PLAN On May 6, 1997 the Board of Directors adopted the 1997 Stock Option Plan (the "1997 Plan"). The Stockholders will be asked to approve the 1997 Plan at the 1997 Annual Meeting of Stockholders. The purpose of the 1997 Plan is to attract and retain the services or advice of selected employees, directors, agents, consultants and independent contractors of the Company or any parent or subsidiary. The 1997 Plan provides for the grant of options to acquire a maximum of 500,000 shares of the Common Stock, and permits the granting of qualified incentive stock options ("ISOs") or nonqualified stock options ("NSOs"), at the discretion of the administrator of the 1997 Plan (the "Plan Administrator"). The Board of Directors has appointed the Committee as the Plan Administrator. Subject to the terms of the 1997 Plan, the Plan Administrator determines the terms and conditions of options granted under the 1997 Plan. Options granted under the 1997 Plan are evidenced by written agreements which contain such terms, conditions, limitations and restrictions as the Plan Administrator deems advisable and which are not inconsistent with the 1997 Plan. 33 ISOs may be granted to individuals who, at the time of grant, are employees of the Company or its affiliates. NSOs may be granted to directors, employees, consultants, agents or other independent contractors of the Company or its affiliates. The 1997 Plan provides that the Plan Administrator must establish an exercise price for ISOs that is not less than the fair market value per share of the Common Stock at the date of grant and an exercise price for NSOs of not less than the par value per share of the Common Stock at the date of grant. Each ISO must expire within ten years of the date of grant. However, if ISOs are granted to persons owning more than 10% of the voting stock of the Company, the 1997 Plan provides that the exercise price may not be less than 110% of the fair market value per share at the date of grant and that the term of such ISOs may not exceed five years. Unless otherwise provided by the Plan Administrator, options granted under the 1997 Plan vest at a rate of 25% per year over a four-year period, but vesting is accelerated in the event of a change of control. An optionee whose relationship with the Company or any related corporation ceases for any reason (other than termination for cause, death or total disability, as such terms are defined in the 1997 Plan) may exercise options in the three-month period following such cessation (unless such options terminate or expire sooner by their terms), or in such longer period determined by the Plan Administrator in the case of NSOs. Unexercised options granted under the 1997 Plan terminate upon a merger (other than a stock merger), reorganization or liquidation of the Company; however, immediately prior to such a transaction, optionees may exercise such options without regard to whether the vesting requirements have been satisfied. The option exercise price must be paid in full at the time the notice of exercise of the option is delivered to the Company and must be tendered in cash, by bank certified or cashier's check or by personal check. Options may also be exercised in "cashless exercises" (delivery of such shares of stock of the Company having a fair market value equal to the exercise price). Unless otherwise provided by the Plan Administrator, options are nontransferable. The Board of Directors has certain rights to suspend, amend or terminate the 1997 Plan provided shareholder approval is obtained. 34 OPTION GRANTS IN LAST FISCAL YEAR Pursuant to the 1991 Amended and Restated Incentive and Non-Qualified Stock Option Plan, in May 1997, options for an aggregate of 425,000 shares of Common Stock were granted at an exercise price of $2.00 per share, the market value on the date of grant, to certain employees of the Company, including Mr. Falchook (50,000 shares), Mr. Nadel (50,000 shares), Mr. Abada (100,000 shares) and Mr. Rudzin (100,000 shares). Also in May 1997, options for an aggregate 307,000 shares of Common Stock were granted not pursuant to any plan at an exercise price of $2.00 per share, the market value on the date of grant, to certain employees of the Company, certain employees of the Private Company (subject to their joining the Company if offered comparable positions) and certain consultants of the Company. In exchange for certain of such grants, options for an aggregate of 264,500 shares of Common Stock, which had exercise prices ranging from $2.50 to $13.125, were canceled, including options which had been granted to Mr. Falchook (20,000 shares) and Mr. Nadel (50,000 shares). In December 1997, in connection with his appointment as President and a director of the Company, Mr. Abada received options to purchase 100,000 shares of Common Stock at $2.44 per share, the market value of the Common Stock on the date of grant.
Potential Realizable Value at Assumed Annual Rate of Stock Price Appreciation for Individual Grants Option Term -------------------------------------------------------------- ----------------------------- NUMBER OF PERCENT OF SECURITIES TOTAL OPTIONS EXERCISE UNDERLYING GRANTED TO OR BASE OPTIONS EMPLOYEES IN PRICE EXPIRATION NAME GRANTED(1) FISCAL YEAR ($/SHARE) DATE 5% 10% - ---- ---------- ------------ --------- ---------- -- --- George J. Nadel 50,000 11.76% $2.00 5/6/07 $62,889 $159,374 Leslie Falchook 50,000 11.76% $2.00 5/6/07 $62,889 $159,374 Rami Abada 100,000 23.53% $2.00 5/6/07 $125,779 $318,748 Ronald E. Rudzin 100,000 23.53% $2.00 5/6/07 $125,779 $318,748
---------- (1) ALL OPTIONS WERE GRANTED AT AN EXERCISE PRICE EQUAL TO THE FAIR MARKET VALUE OF THE COMMON STOCK ON THE DATE OF GRANT. 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 30, 1997 August 30, 1997(1) Shares Acquired on Value Name Exercise (#) Realized Unexercisable Exercisable Unexercisable Exercisable ---------------------- ------------ -------- ------------- ----------- ------------- ----------- Harley J. Greenfield (2)(4) N/A N/A 0 297,047 $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 25,000 0 Leslie Falchook(4)(5) N/A N/A 50,000 0 25,000 0 Rami Abada N/A N/A 100,000 0 50,000 0 Ronald E. Rudzin N/A N/A 100,000 0 50,000 0
35 - ------------------- (1) Amount reflects the market value of the underlying shares of Common Stock as reported on the Bulletin Board on August 29, 1997 (a bid price of $2.50) 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, and (iii) 25,000 options granted on January 25, 1993 at an exercise price of $13.125 per share. (3) Includes 50,000 options granted on May 6, 1997 to Mr. Nadel at an exercise price of $2.00 per share in exchange for cancellation of 25,000 options previously granted on August 1, 1995 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. (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 50,000 options granted on May 6, 1997 to Mr. Falchook at an exercise price of $2.00 per share in exchange for the cancellation of 20,000 options granted on January 25, 1993 to Mr. Falchook at an exercise price of $13.125 per share. (6) Includes 100,000 options granted on May 6, 1997 to Mr. Abada at an exercise price of $2.00 per share. (7) Includes 100,000 options granted on May 6, 1997 to Mr. Rudzin at an exercise price of $2.00 per share. Item 12. Security Ownership of Certain Beneficial Owners and Management. --------------------------------------------------------------- The following table sets forth, as of December 12, 1997, 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. Information as to David A. Belford and the Pacchia, Grossman, Shaked, Wexford group is based on Schedules 13D filed by such person and group: 36 Amount and Nature Percent (%) of Class of Beneficial Outstanding as of Beneficial Owner Ownership(1) December 12, 1997 ---------------- ----------------- -------------------- Harley J. Greenfield 835,336 (2)(3) 13.9% 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 JCI Consultants, L.P 1,200,000 (3)(7) 17.4 David A. Belford 329,000 (8) 5.8 Pacchia, Grossman, Shaked, Wexford Group 482,100 (9) 8.5 Bernard Wincig 144,573 (10) 2.5 Edward G. Bohn 16,667 (11) 0.3 Kevin J. Coyle 17,917 (11) 0.3 Leslie Falchook 25,000 (12) 0.4 George J. Nadel 0 (13) 0.0 Rami Abada 53,000 (14) 1.0 Ronald E. Rudzin 12,500 (15) 0.2 Hans J. Klaussner and Klaussner 2,510,123 (17) 35.2 All directors and executive 1,658,907 (2)(3)(4)(5)(6) 27.4 officers as a group (10)(11)(12)(13) (ten (10) persons) (14)(15)(16) -------------------- * Less than 0.1% (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 is One Ames Court, Plainview, New York 11803. Mr. Greenfield and Mr. Love are brothers-in-law. See "Certain Relationships and Related Transactions." The shares of Common Stock owned by Messrs. Greenfield, Seidner and Love and the Private Company were pledged to Klaussner as part of the Klaussner Transaction. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) Includes (a) 292,831 shares underlying options granted to Mr. Greenfield by Mr. Love (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 (b) 297,047 shares of Common Stock underlying vested options granted to Mr. Greenfield by the Company, with respect to which shares Mr. Greenfield would have sole voting and dispositive power 37 upon exercise of such options. See "Executive Compensation." Does not include 1,200,000 shares of Common Stock underlying options which became exercisable on April 1, 1996 and which are owned by JCI Consultant, L.P. ("JCI"). Mr. Greenfield does not have the power to cause the exercise of such options by JCI. However, Mr. Greenfield would be the voting trustee for the shares of Common Stock upon exercise of such options and would have, subject to certain exceptions, the right to vote the shares issued upon such exercise. See "Certain Relationships and Related Transactions." (4) Includes 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 343,579 shares of Common Stock owned by the Private Company, over which Mr. Love has sole voting and dispositive power, which are subject to the Greenfield Option and the Seidner Option (the "Options") granted to Messrs. Greenfield and Seidner, respectively (the "Optionees"), and which may not be disposed of without the consent of the relevant Optionee. (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 is One Ames Court, Plainview, New York 11803. 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. (7) Represents 1,200,000 shares of Common Stock underlying exercisable options referred to in footnote (3). (8) The address of David A. Belford is 2097 S. Hamilton Road, Suite 200, Columbus, Ohio 43232. (9) Represents the shares of Common Stock owned by a group which was formed to object to the proposed settlement of the derivative litigation referred to in "Legal Proceedings." The group consists of the following persons and entities, each of which has the sole and shared power to vote and dispose, and total beneficial ownership, of the shares of Common Stock set forth opposite such persons' or entity's name: (1) Anthony J. Pacchia ("Pacchia") - sole 11,000, shared 20,700, total 31,700; (2) F&Co., Inc. as Custodian for Pacchia under IRA Account - sole 16,000, shared 15,700, total 31,700; (3) Anthony J. Pacchia, P.C., (Money Purchase) fbo Pacchia - sole 2,500, shared 29,200, total 31,700; (4) Sandra Pacchia Custodian for Lee Pacchia - sole 1,100, shared 30,600, total 31,700; (5) Sandra Pacchia Custodian for Tom Pacchia - sole 1,100, shared 30,600, total 31,700; (6) Anthony T. Pacchia and Gloria Pacchia - sole 1,000, shared 15,000, total 16,000; (7) Anthony T. Pacchia, IRA Rollover - sole 15,000, shared 1,000, total 16,000; (8) Kenneth S. Grossman Trustee, Profit Sharing Plan DLJSC - 38 Custodian fbo Kenneth S. Grossman - sole 96,400, shared 3,500, total 99,900; (9) Kenneth S. Grossman - 3,500, sole 96,400 shared, total 99,900; (10) IRA fbo Patricia Berger, DLJSC as custodian - sole 3,500, shared 0, total 3,500, (11) Ellen Grossman, Custodian for Andrew Grossman UGMA/ NY - sole 5,000, shared 0, total 5,000; (12) IRA fbo Howard Berger, DLJSC as custodian - sole 3,500, shared 0, total 3,500; (13) IRA fbo Jill Berger, DLJSC as custodian, Rollover Account - sole 3,500, shared 0, total 3,500; (14) IRA fbo Herbert Berger, DLJSC as custodian - sole 5,000, shared 0, total 5,000; (15) Marilyn Levy - sole 5,000, shared 0, total 5,000; (16) Ellen Grossman, Custodian for Joshua Grossman UGMA/NY - sole 5,000, shared 0, total 5,000; (17) Amir Shaked ("Shaked") - sole 37,700, shared 1,300, total 39,000; (18) IRA fbo Shaked - sole 1,300, shared 37,700, total 39,000; (19) Wexford Special Situations 1996, L.P. - sole 0, shared 142,783, total 142,783; (20) Wexford Special Situations 1996 Institutional L.P. - sole 0, shared 25,764, total 25,764; (21) Wexford Special Situations 1996 Limited - sole 0, shared 7,859, total 7,859; (22) Wexford-Euris Special Situations 1996, L.P. - sole 0, shared 36,094, total 36,094; (23) Wexford Management LLC - sole 0, shared 212,500, total 212,500; (24) IRA fbo Zachery Goldwyn - sole 52,500, shared 0, total 52,500. The address for group members (a) 1-5 is 602 Orchard Street, Cranford, New Jersey 07106, (b) 6 and 7 is 31 Center Board Drive, Bayville, New Jersey 08721, (c) 8-9, 11, 16, 17 and 18 is 620 Fifth Avenue, 7th Floor, New York, New York 10020, (d) 10 and 14 is 31 Wisconsin Avenue, N. Massapequa, New York 11578, (e) 12 and 13 is 58 Alpine Way, Dix Hills, New York 11746, (f) 15 is 155 East 76th Street, New York, New York 10022, (g) 19-21 and 23-24 is 411 West Putnam Avenue, Greenwich, Connecticut 06830, and (h) 22 is c/o Hemisphere Fund Managers Ltd., Harbour Centre, Georgetown, Grand Cayman Islands, B.W.I. (10) Includes 8,800 shares of Common Stock owned by Mr. Wincig's wife and 25,000 shares of Common Stock underlying exercisable options. Does not include 4,000 shares of Common Stock underlying options which have not yet vested. (11) Includes, as to each individual, 16,667 shares of Common Stock underlying exercisable options, but does not include, as to each individual, 8,333 shares of Common Stock underlying options granted, which options have not yet vested. (12) Does not include 50,000 shares of Common Stock underlying options which are not currently exercisable. (13) Does not include 50,000 shares of Common Stock underlying options which are not currently exercisable. (14) Does not include 200,000 shares of Common Stock underlying options which are not currently exercisable. 39 (15) Does not include 100,000 shares of Common Stock underlying options which are not currently exercisable. (16) Does not include 50,000 shares of Common Stock underlying options granted to an officer of the Company other than a Named Executive Officer, which options are not yet vested. (17) Represents shares pledged to Klaussner by Messrs. Greenfield, Seidner and Love and Jara as part of the Klaussner Transaction and 1,424,500 shares underlying convertible preferred stock issued to Klaussner in connection with the Klaussner Investment. The pledged shares secure a guarantee by the pledgors of approximately $1,000,000 owed to Klaussner by the Private Company as of August 30, 1997. The preferred stock is not convertible until September 1, 1999, except that such convertibility will be accelerated upon the occurrence of certain events, including acquisitions of 12.5% or more of the Company's voting stock by third parties, commencement of a proxy solicitation or tender offer, mergers, asset sales, certain changes in the constitution of the Company's Board of Directors or if Harley Greenfield is no longer the Company's Chief Executive Officer and similar events. See "Certain Relationships and Related Transactions." Based on information contained in the Schedule 13D filed by Hans J. Klaussner and Klaussner, Hans J. Klaussner is the sole stockholder of the parent of Klaussner and, accordingly, may be deemed the beneficial owner of shares owned by Klaussner. The principal address of Klaussner is 405 Lewallen Street, Asheboro, North Carolina 27203. Hans J. Klaussner's address is 7614 Gegenbach, Germany. 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 1997. Item 13. Certain Relationships and Related Transactions. ----------------------------------------------- The Private Company ------------------- Until November 1994 when Messrs. Greenfield and Seidner sold their interests in the Private Company for a long-term note (the "Jara Notes") and options to purchase the Common Stock owned by Mr. Love, Mr. Greenfield's brother-in-law 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 30, 1997) 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 40 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. During the fiscal year ended August 30, 1997, Mr. Greenfield and Mr. Seidner each received approximately $310,000 of interest on the Jara Notes from the Private Company. Beginning in April 1997, each of Mr. Greenfield and Mr. Seidner agreed to a $10,000 a month deferral of the amounts paid to them under the Jara Notes. The shares of Common Stock owned by Messrs. Greenfield, Love, and Seidner and Jara were pledged to Klaussner as part of the Klaussner transaction. In November 1994, Mr. Greenfield and Mr. Seidner sold their interests in the Private Company in exchange for 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 (although, as described above, a portion of such interest is being deferred on a month-to-month basis) 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. 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. 41 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) 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 on substantially the same terms as it was receiving from the Private Company prior to 1994. However, the Private Company continued to provide warehousing and handling services as described above. During the fiscal year ended August 30, 1997 the Company and the LPS paid warehouse fees under the Offset Agreement (as defined below) to the Private Company aggregating approximately $5,021,000. During the fiscal year ended August 30, 1997, the Private Company purchased from the Company approximately $10,081,000 of merchandise (net of discounts and allowances), which was paid under the Offset Agreement. Under the terms of the Warehousing Agreement, however, the Company was not obligated to use the Private Company's warehouse facilities or purchase through the Private Company. As part of the transfer of the purchasing function, the Private Company, 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 the final payments of $305,555 on such note during the fiscal year ended August 30, 1997. 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 and warranty services. The Private Company is reimbursed by the Company and its licensees for freight charges on deliveries to the Warehouse Facilities at predetermined freight rates. 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 30, 1997, the Company and the LPS paid under the Offset Agreement $2,827,000 for freight charges and $2,543,000 for fabric protection to the Private Company. See "The Committee Report" below. 42 The Company 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, 1993, the Company is indemnified against any liability arising under such guaranty by the Private Company. THE OFFSET AGREEMENT By 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 (consisting of the Unconsolidated Licensees other than S.F.H.C. and hereinafter referred to as the "Private 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 Private 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 "Offset Agreement"), the Private Company and the Company agreed to continue to offset, on a monthly basis, amounts owed by the Private Company and the Private 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. In contemplation of the settlement, the parties are currently operating under the terms of the offset agreement to become effective upon court approval of the settlement which provides for cash payments of current amounts due in excess of $1,000,000. The Private Company paid for all current charges under the Offset Agreement during fiscal 1997. Amounts owed by the Private Company and certain licensees to the Company as of August 30, 1997 (consisting of unpaid amounts from fiscal 1996 and prior years) 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 a share of all advertising production costs and costs of publication of promotional advertising material within the New York area. During the fiscal year ended August 30, 1997, the Company charged the Private Company $1,800,000 in respect of the Private Company and the Private Licensees and charged S.F.H.C. $418,000 for advertising. 43 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." 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 1997, the Company paid legal fees for Harley J. Greenfield of $24,298 in connection with these matters. JCI Related parties of JCI, which is the holder of options to purchase 1,200,000 shares of Common Stock, also own the limited partnership interest in Jennifer Chicago, L.P. (the "Chicago Partnership"), an LP which operates, pursuant to a license agreement with the Company, 14 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 30, 1997, the Company earned $485,000 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. OTHER MATTERS In January 1994, Rami Abada, the Company's President and Chief Operating Officer, joined the Company. Mr. Abada owns interests in certain licensed Jennifer Convertibles stores, which he acquired when he was an employee of the Private Company. As of October 1996, Mr. Abada owned a 20% interest in S.F.H.C., which owns six licensed Jennifer Convertibles stores, and owned a 20% interest in each of two corporations which each own a licensed Jennifer Convertibles store. In October 1996, Mr. Abada entered into an agreement pursuant to which he exchanged his 20% interest in S.F.H.C. for the remaining 80% interest in the two corporations referred to above. During the year ended August 30, 1997, S.F.H.C. incurred and paid approximately $166,000 in royalties and $1,565,000 for merchandise purchases to the Company. Such entity did not make any payments to the Company in respect of a 9% 44 secured note, due December 31, 2001, in the original principal amount of $810,000 (which principal amount was $637,743 as of August 30, 1997). 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. As of August 30, 1997, S.F.H.C. also owed the Company $1,069,842 for advertising and merchandise purchases. During the year ended August 30, 1997, the two corporations wholly-owned by Mr. Abada incurred and paid under the Offset Agreement an aggregate of approximately $74,000 in royalties and $678,000 for merchandise purchases owed to the Company. Such corporations have received financing from the Private Company (with a balance of $323,174 as of August 30, 1997) and, by a letter agreement dated March 14, 1997 among the Private Company, the Company and the two corporations, all amounts owed by the two corporations to the Company incurred subsequent to September 1, 1996 were paid through the allocation of amounts to be credited to the Private Company under the Offset Agreement. During the fiscal year ended August 30, 1997, Mr. Abada received $312,448 of salary, severance pay, distributions and other payments from such licensees and the Private Company. In January 1994, Ronald Rudzin, the Company's Senior Vice President - Retail Stores, joined the Company. Mr. Rudzin also owns interests in stores acquired while an employee of the Private 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 30, 1997 incurred and paid under the Offset Agreement approximately $36,000 (for Mr. Rudzin's stores) and $95,000 (for Mr. Rudzin's father's stores) of royalties and $336,000 (for Mr. Rudzin's store) and $876,000 (for Mr. Rudzin's father's stores) for merchandise purchases. Mr. Rudzin received approximately $214,983 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 a Private Licensee) have been fully reserved against in the accompanying financial statements for the 1995, 1996 and 1997 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. Rudzin has agreed, to personally guarantee the merchandise purchases and royalty obligations incurred after the date of such approval of the Private Licensees in which he has an ownership interest. Mr. Abada has entered into a similar agreement as to the Private Licensees owned by him effective upon court approval, termination of the Offset Agreement and prior written notification. 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 $164,000 of legal fees from the Company and the LPS and an aggregate of approximately $55,131 from the Private Company during the fiscal year ended August 30, 1997. On December 11, 1997, Klaussner purchased 10,000 shares of the Company's Series A Convertible Preferred Stock (the "Preferred Stock") for $5,000,000. In connection with such purchase, Klaussner waived 45 any defaults under the Credit and Security Agreement and approximately $2,965,650 of the proceeds of such investment were used to pay all balances due to Klaussner which had been billed and outstanding for more than 60 days. The Preferred Stock is non-voting and is convertible, commencing on September 1, 1999 (subject to acceleration as described below), into 1,424,500 shares of Common Stock (an effective conversion price of $3.51 per share), subject to adjustment for stock splits, stock dividends and similar events. The Common Stock underlying the Preferred Stock represents approximately 19.9% of the outstanding Common Stock as of December 11, 1997, after giving effect to such conversion. The Preferred Stock has a liquidation preference of $5,000,000. No cash dividends are to be paid on the Common Stock unless the holders of the Preferred Stock receive the same dividend on the Preferred Stock on an "as-converted" basis. The convertibility of the Preferred Stock can be accelerated under certain circumstances, including (i) if any person or group (other than Harley J. Greenfield, Edward B. Seidner, Fred Love or Jara Enterprises, Inc.) becomes the beneficial owner of 12.5% or more of the Company's voting stock, (ii) the execution of an agreement providing for the acquisition of the Company or substantially all of its assets or the acquisition of a subsidiary or subsidiaries which generate in excess of 10% of the Company's revenues, (iii) if Harley Greenfield is no longer the Company's Chief Executive Officer or if the Continuing Directors (as defined) do not constitute a majority of the Board of Directors, (iv) the commencement by a third party of a tender or exchange offer for the Common Stock, (v) the adoption of a plan of liquidation, or (vi) if any person commences a proxy solicitation without the approval of the Company's Board of Directors. In connection with the Klaussner Investment, Klaussner received the right of first refusal (the "Right"), if the Company sells Common Stock or Common Stock equivalents (such as options or convertible securities) at a price (or an effective price in the case of equivalents) of less than $3.51 per share to purchase of Common Stock (or equivalents such as options or convertible securities). Klaussner will have the Right so long as it owns at least 10% of the outstanding Common Stock (on an as converted basis). Klaussner also received certain demand registration rights to require the Company, at the Company's expense, to register the shares of Common Stock underlying the Preferred Stock and any shares it acquires upon exercise of the Right. In connection with the Klaussner Investment, the Credit and Security Agent was modified to provide a late payment fee at a rate of .67% per month for invoices the Company pays later than 60 days. In fiscal 1997, Klaussner gave the Company $1,075,000 of vendor allowances for advertising and $1,166,000 of allowances for a repair program and in December 1997, Klaussner made the Klaussner Investment. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and also see "Business- Sources of Supply" for other transactions with Klaussner. 46 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 30, 1997, the Company did not file Current Reports on Form 8-K. (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 - Certificate of Designations, Preferences and Rights of Series A Preferred Stock. 3.3 - By-Laws of the Company. (Incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended August 26, 1995). 4.1 - Form of Underwriter's Warrant for the purchase of shares of Common Stock (Incorporated herein by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-2 - File No. 33-47871 (the "Registration Statement on Form S-2")). 10.1 - Incentive and Non-Qualified Stock Option Plan, as amended (Incorporated herein by reference to Exhibit 10.4 to the Registration Statement). 10.2 - 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). 47 10.3 - 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). 10.4 - 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). 10.5 - Agreement of Limited Partnership of Jennifer Chicago, L.P. (the "Partnership"), dated July 24, 1991 (Incorporated herein by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated July 24, 1991 - related to series of agreements related to Limited Partnership of Jennifer Chicago L.P.). 10.6 - 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). 10.7 - 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). 10.8 - 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). 10.9 - 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). 10.10 - 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). 10.11 - Letter Agreement dated February 25, 1992 among the Company, JCI and Harley J. Greenfield, amending a Voting Trust Agreement (Incorporated herein by 48 reference to Exhibit 2 to the Company's Current Report on Form 8-K dated February 25, 1992). 10.12 - 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). 10.13 - 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). 10.14 - Purchasing Agreement, dated as of December 31, 1993, between Jennifer Convertibles, Inc. and Jara Enterprises, Inc. (Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ending February 26, 1994). 10.15 - 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). 10.16 - 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 to the Company's Annual Report on Form 10-K for the fiscal year ended August 27, 1994). 10.17 - 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 to the Company's Annual Report on Form 10-K for the fiscal year ended August 27, 1994). 10.18 - 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). 49 10.19 - Letter Agreement with JCI Consultant, L.P. (Incorporated herein by reference to the Company's Current Report on Form 8-K dated August 1, 1994). 10.20 - Agreement, dated as of May 19, 1995, among Jennifer Convertibles, Inc., Jennifer Purchasing Corp., Jara Enterprises, Inc. and the licensees signatory thereto. (Incorporated herein by reference to Exhibit 10.38 to the Company's Annual Report on Form 10-K for the fiscal year ended August 26, 1995.) 10.21 - Agreement, dated as of November 1, 1995, among Jennifer Convertibles, Inc., Jennifer Purchasing Corp., Jara Enterprises, Inc. and the licensees signatory thereto. (Incorporated herein by reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K the for fiscal year ended August 26, 1995.) 10.22 - 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). 10.23 - 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). 10.24 - 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). 10.25 - Form of Note, dated November 1994, made by Jara Enterprises, Inc. to Harley J. Greenfield and Edward B. Seidner. (Incorporated herein by reference to Exhibit 10.43 to the Company's Annual Report on Form 10-K for the fiscal year ended August 26, 1995.) 10.26 - 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. (Incorporated herein by reference to Exhibit 10.44 to the Company's Annual Report on Form 10-K for the fiscal year ended August 26, 1995.) 10.27 - Form of Subordination Agreement, dated as of August 9, 1996, by Harley J. Greenfield and Edward B. Seidner. (Incorporated herein by reference to Exhibit 50 10.45 to the Company's Annual Report on Form 10-K for the fiscal year ended August 26, 1995.) 10.28 - Credit and Security Agreement, dated as of March 1, 1996, among Klaussner Furniture Industries, Inc. ("Klaussner") 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). 10.29 - 1997 Stock Option Plan 10.30 - Stock Purchase Agreement, dated December 11, 1997, between Klaussner and the Company. 10.31 - Registration Rights Agreement, dated December 11, 1997 between Klaussner and the Company. 10.32 - Waiver and Modification Agreement, dated December 11, 1997, between Klaussner and related entities and Jennifer Purchasing Corp., Jennifer Convertibles, Inc., Jennifer Convertibles Licensing Corp., and Jennifer L.P. III. 11.1 - Statement re computation of Net (Loss) Per Share (for fiscal years ended August 30, 1997, August 31, 1996 and August 26, 1995). 22.1 - Subsidiaries of the Company. (Incorporated herein by reference to Exhibit 22.1 on the Company's Annual Report on Form 10-K for fiscal year ended August 27, 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. 51 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.
NAME POSITION DATE ---- -------- ---- /S/ HARLEY J. GREENFIELD - -------------------------------------- Harley J. Greenfield Chairman of the Board and Chief Executive December 11, 1997 Officer (Principal Executive Officer) /S/ GEORGE J. NADEL - --------------------------------------- Executive Vice President, Chief Financial December 11, 1997 George J. Nadel Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) /S/ EDWARD B. SEIDNER ------------------------------------- Edward B. Seidner Director December 11, 1997 /S/ BERNARD WINCIG Director December 11, 1997 ---------------------------------- Bernard Wincig /S/ EDWARD BOHN Director December 11, 1997 ---------------------------------- Edward Bohn /S/ KEVIN J. COYLE Director December 11, 1997 ---------------------------------- Kevin J. Coyle /S/ RAMI ABADA President and Director December 11, 1997 ---------------------------------- Rami Abada
52 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Index to Financial Statements Independent Auditors' Report.........................................F1 Consolidated Balance Sheets at August 30, 1997 and August 31, 1996 ...................................................F3 Consolidated Statements of Operations for the years ended August 30, 1997, August 31, 1996 and August 26, 1995.................F4 Consolidated Statements of Stockholders' Equity (Capital Deficiency) for the years ended August 30, 1997, August 31, 1996 and August 26, 1995..................................F5 Consolidated Statements of Cash Flows for the years ended August 30, 1997, August 31, 1996 and August 26, 1995.................F6 Notes to the Consolidated Financial Statements.......................F7 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Jennifer Convertibles, Inc. Woodbury, New York We have audited the accompanying consolidated balance sheets of Jennifer Convertibles, Inc. (the "Company") and subsidiaries as at August 30, 1997 and August 31, 1996, and the related consolidated statements of operations, stockholders' equity (capital deficiency) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jennifer Convertibles, Inc. and subsidiaries at August 30, 1997 and August 31, 1996, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. We were also engaged to audit the accompanying consolidated statements of operations, stockholders' equity (capital deficiency) and cash flows of the Company for the year ended August 26, 1995. These financial statements are the responsibility of the Company's management. 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 Notes 1 and 3, a company owned by three officers of the Company (the "Private Company") performed certain services (including purchasing, warehousing and inventory control, distribution, fabric protection, advertising and data processing) on behalf of the Company for all or part of the year ended August 26, 1995. 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 for the year ended August 26, 1995. The Company did not have an adequate system of internal accounting control over the financial information processed for the Company by the Private Company prior to August 26, 1995. Further, the chief financial officer of the Company has stated that he was unable to maintain internal controls over the financial data processed by the Private Company on behalf of the Company and that the Company was seriously deficient regarding the adequacy of internal controls that support its operations prior to August 26, 1995. As a result of this lack of control, the chief financial officer has stated that he was unable to provide certain representations we requested regarding the Company's statements of operations and cash flows for the year ended August 26, 1995. F1 Because of the matters discussed in the preceding three paragraphs, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on the results of operations, and cash flows for the year ended August 26, 1995. As discussed in Note 9, in December 1994 and January 1995, the Company and certain of its officers became defendants in class and derivative actions. The Company is attempting to settle the above litigations and has agreed to terms which, subject to the 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. Attention is directed to Note 1 with respect to various operational problems which the Company has experienced in the past three years and management's plans for contending with these problems. Attention is also directed to Notes 1, 3 and 9 with respect to various related party transactions. Richard A. Eisner & Company, LLP New York, New York November 21, 1997 Except for the second paragraph of Note 12, December 11, 1997 F2
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except for share data) ASSETS (SEE NOTE 5) AUGUST 30, 1997 AUGUST 31, 1996 --------------- --------------- Current assets: Cash and cash equivalents $ 3,405 $ 3,600 Accounts receivable 1,149 1,588 Merchandise inventories 7,943 8,221 Refundable income taxes 0 23 Prepaid expenses and other current assets 477 454 -------- -------- Total current assets 12,974 13,886 Store fixtures, equipment and leasehold improvements, at cost, net 7,669 8,739 Due from Private Company and Unconsolidated Licensees, net of reserves of $6,898 and $7,324 at August 30, 1997 and August 31, 1996 -- -- Deferred lease costs and other intangibles, net 1,001 1,317 Goodwill, at cost, net 553 568 Other assets (primarily security deposits) 801 925 -------- -------- $ 22,998 $ 25,435 ======== ======== LIABILITIES AND (CAPITAL DEFICIENCY) Current liabilities: Accounts payable, trade $ 16,614 $ 15,746 Customer deposits 8,841 8,875 Accrued expenses and other current liabilities 4,777 5,022 -------- -------- Total current liabilities 30,232 29,643 Deferred rent and allowances 5,712 5,868 Long-term obligations under capital leases 421 230 -------- -------- Total liabilities 36,365 35,741 -------- -------- Commitments and contingencies (Capital deficiency) 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 30, 1997 and August 31, 1996 57 57 Additional paid-in capital 22,911 22,911 Notes receivable from warrant holders (300) (300) Accumulated (deficit) (36,035) (32,974) -------- -------- (13,367) (10,306) -------- -------- $ 22,998 $ 25,435 ======== ========
Attention is directed to the foregoing Accountants' Report and to the accompanying Notes to the Consolidated Financial Statements. F3
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except share data) Year ended Year ended Year ended August 30, 1997 August 31, 1996 August 26, 1995 --------------- --------------- --------------- (52 Weeks) (53 Weeks) (52 Weeks) Net sales $ 97,789 $ 106,041 $ 126,074 ----------- ----------- ----------- Cost of sales, including store occupancy, warehousing, delivery and fabric protection (including charges from Private Company of $10,390, $11,836, and $13,883) 67,114 72,708 86,964 Selling, general and administrative expenses 32,904 37,618 45,955 Depreciation and amortization 1,840 1,852 2,261 Provision for litigation settlement costs -- -- 500 (Recovery) provision for losses on amounts due from Private Company and Unconsolidated Licensees (426) 952 3,088 Loss from store closings 55 191 1,670 ----------- ----------- ----------- 101,487 113,321 140,438 ----------- ----------- ----------- Operating (loss) (3,698) (7,280) (14,364) ----------- ----------- ----------- Other income (expense): Royalty income 374 375 523 Interest income 67 195 311 Interest expense (28) (47) (48) Other income, net 319 880 1,670 ----------- ----------- ----------- 732 1,403 2,456 ----------- ----------- ----------- (Loss) before income taxes (2,966) (5,877) (11,908) Income taxes 95 146 160 ----------- ----------- ----------- Net (loss) ($3,061) ($6,023) ($12,068) =========== =========== =========== Net (loss) per common share ($0.54) ($1.06) ($2.12) =========== =========== =========== Weighted average number of common shares 5,700,725 5,700,725 5,700,725 =========== =========== ===========
Attention is directed to the foregoing Accountants' Report and to the accompanying Notes to the Consolidated Financial Statements. F4
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Capital Deficiency) Fiscal Years ended August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands, except for share data) Notes Common Stock Additional Receivable ------------------------- paid-in from warrant Accumulated Shares Par value capital holders (deficit) Totals ------ --------- ------- ------- --------- ------ 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) Net (loss) -- -- -- -- (6,023) (6,023) --------- -------- --------- --------- --------- --------- Balances at August 31, 1996 5,700,725 57 22,911 (300) (32,974) (10,306) Net (loss) -- -- -- -- (3,061) (3,061) --------- -------- --------- --------- --------- --------- Balances at August 30, 1997 5,700,725 $ 57 $ 22,911 $ (300) $ (36,035) $ (13,367) ========= ======== ========= ========= ========= ========= Attention is directed to the foregoing Accountants' Report and to the accompanying Notes to the Consolidated Financial Statements. F5
JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) Year Ended Year Ended Year Ended August 30, 1997 August 31, 1996 August 26, 1995 --------------- --------------- --------------- (52 Weeks) (53 Weeks) (52 Weeks) ---------- ---------- ---------- Cash flows from operating activities: Net (loss) ($ 3,061) ($ 6,023) ($12,068) Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,840 1,852 2,261 (Recovery) provision for losses on amounts due from Private Company and Unconsolidated Licensees (426) 952 3,088 Loss from store closings 40 191 1,670 Deferred rent (62) 246 656 Provision for warranty costs 204 -- -- Changes in operating assets and liabilities: Decrease in merchandise inventories 278 1,211 716 Decrease in refundable income taxes 23 108 2,127 (Increase) decrease in prepaid expenses (30) 315 956 Decrease (increase) in accounts receivable 439 916 (785) Decrease in other current assets 7 93 1,374 Decrease (increase) in due from Private Company and Unconsolidated Licensees 426 (952) (1,256) Decrease (increase) in other assets 124 46 (567) Increase (decrease) in accounts payable trade 868 (362) 717 (Decrease) in customer deposits (34) (142) (443) (Decrease) increase in accrued expenses and and other current liabilities (501) (1,499) 1,206 -------- -------- -------- Net cash provided by (used in) operating activities 135 (3,048) (348) -------- -------- -------- Cash flows from investing activities: Capital expenditures (206) (989) (4,292) Deferred lease costs and other intangibles 64 15 (1,580) Decrease in due from limited partners -- -- 1,000 -------- -------- -------- Net cash (used in) investing activities (142) (974) (4,872) -------- -------- -------- Cash flows from financing activities: Payments of obligations under capital leases (188) (107) (140) -------- -------- -------- Net cash (used in) financing activities (188) (107) (140) -------- -------- -------- Net (decrease) in cash and cash equivalents (195) (4,129) (5,360) Cash and cash equivalents at beginning of year 3,600 7,729 13,089 -------- -------- -------- Cash and cash equivalents at end of year $ 3,405 $ 3,600 $ 7,729 ======== ======== ======== Supplemental disclosure of cash flow information: Income taxes paid (refunded) during the year $ 95 $ 108 ($ 2,127) ======== ======== ======== Interest paid $ 28 $ 47 $ 48 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS: Acquisition of equipment through capital lease financing $ 379 -- -- ======== ======== ======== See Note 9 - Commitments, Contingencies and other Matters Attention is directed to the foregoing Accountants' Report and to the accompanying Notes to the Consolidated Financial Statements. F6
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 30, 1997, August 31, 1996 and August 26, 1995 (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 domestic 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 30, 1997 and August 31, 1996, 84 and 86 Company-owned stores operated under the Jennifer Convertibles, Jennifer Leather and Jennifer Living Rooms 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 $6,660. All of the LP's have had losses since inception and the Company has made advances to them to fund such losses. The Company has control of the LP's and, as a result, consolidates the accounts of the LP's in its financial statements. Included in the Company's Consolidated Statement of Operations are the losses of the LP's in excess of the limited partners' capital contributions. As at August 30, 1997 and August 31, 1996, the LP's operated 63 and 64 stores under the Jennifer Convertibles name. 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 at August 30, 1997 and August 31, 1996, 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 9). Also not included in the consolidated financial statements are the results of operations of 22 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 9). 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. Further, the Company had made advances to the Private Company and the Unconsolidated Licensees which have been reserved for in full due to uncertainty of collection. 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. F7 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company incurred net losses in each of the last three fiscal years ended August 30, 1997. In addition, at such date, the Company has both a working capital deficiency of $17,258 and a capital deficiency of $13,367. Further, at such date, the Company is in default of the provisions of a Credit and Security Agreement with its largest supplier and has obtained a waiver of such default. Operating losses have continued subsequent to that date through October 1997, resulting in increases in the deficiencies. Additionally, as more fully discussed in Note 9, the Company is involved in the following unresolved matters which may have a significant impact on the Company's operations and financial condition: a) Potential claims by the Company to recover damages recommended in 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. b) Litigation consisting of 11 class action complaints and six derivative action lawsuits. c) A formal investigation into the affairs of the Company commenced on May 3, 1995 by the Securities and Exchange Commission. Management has addressed certain of the aforementioned issues, as follows: o As discussed in Note 9, the Company has agreed to terms which, subject to court approval, would not only settle the class action and derivative litigations but change its operating relationship with the Private Company and resolve outstanding disputes relating to transactions between the Company and the Private Company. o Approximately 40 unprofitable stores have been closed in 1995 and 1996 and expense reduction plans have been implemented throughout all operational areas of the Company. o As discussed in Note 5, the Company has entered into a credit and security agreement with its largest supplier, Klaussner Furniture Industries, Inc. ("Klaussner") (which accounts for approximately 81% 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. Additionally, allowances of $2,241 were obtained from Klaussner for fiscal 1997 of which $1,166 reduced cost of goods sold and $1,075 reduced selling, general and administrative expenses. o As discussed in Note 12, the Company sold to Klaussner 10,000 shares of convertible preferred stock for $5,000. F8 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) (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 The Company has adopted a fiscal year ending on the last Saturday in August which would be either 52 or 53 weeks long. 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. 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: 8/30/97 8/31/96 ------- ------- Showrooms $4,271 $ 3,963 Warehouses 3,672 4,258 ------ ------- $7,943 $ 8,221 ====== ======= 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 30, 1997 and August 31, 1996 amounted to $574 and $556, respectively. F9 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) 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 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 $5,712 and $5,868 at August 30, 1997 and August 31, 1996, 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 non-financed sales order. (LOSS) PER SHARE (Loss) per share for the years ended August 30, 1997, August 31, 1996 and August 26, 1995 were computed by dividing the net (loss) by the weighted average number of shares of Common Stock outstanding. Options and warrants outstanding are not included because their effect is anti-dilutive. ADVERTISING Advertising costs are expensed as incurred. WARRANTIES Estimated warranty costs are expensed in the same period that sales are recognized. CONCENTRATION OF RISKS The Company purchases 92% of its inventory from two suppliers (81% and 11%, respectively) under normal or extended trade terms. The larger supplier, Klaussner, has executed a Credit and Security Agreement with the Company (See Note 5). 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 30, 1997 and August 31, 1996, amounts on deposit with this one bank totalled 76% and 86%, respectively, of total cash. F10 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) 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. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments include accounts receivable, accounts payable and customer deposits. The carrying amount of these instruments approximate fair value due to their short-term nature. RECENT PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share". SFAS 128 established new standards for computing and presenting earnings per share. SFAS 128 is effective for periods ending after December 15, 1997. The above pronouncement will not have an effect on the net (loss) per share information presented in the consolidated financial statements. (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 also provided services relating to purchasing, distribution, customer service, data entry processing and other related services. All such services have been transferred to the direct control of the Company's management except for distribution, inventory control reporting and its data processing. The Company and LP's pay a monthly warehousing fee (unchanged since 1986) based on 5% of the retail sales prices and a portion of fabric protection revenue collected from customers. Additionally, the Private Company provides fabric protection, lifetime 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 ----------------------------- 8/30/97 8/31/96 8/26/95 ------- ------- ------- INCLUDED IN COST OF SALES: Freight $ 2,827 $ 3,042 $ 3,775 Fabric protection services 2,543 2,972 3,804 Warehousing fees at 5% 4,890 5,302 6,304 Additional warehouse fees (Note 9) 130 520 -- ------- ------- ------- TOTAL $10,390 $11,836 $13,883 ----- ======= ======= ======= The Company has negotiated new operating arrangements with the Private Company, subject to court approval of the settlement of various class and derivative actions (See Note 9). F11 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) 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. During the years ended August 30, 1997, August 31, 1996 and August 26, 1995, approximately $10,671, $10,471 and $12,500, respectively, of inventory at cost (before rebates) was purchased by the Private Company through the Company and $1,883, $1,900 and $3,105, respectively, of inventory at cost (before rebates) 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 certain accrued discounts, the Private Company executed a promissory note in the amount of $1,000. This note, which bears interest at 8% per annum, is payable in equal monthly installments over three years commencing August 1, 1994 and was repaid in full in the year ended August 30, 1997. 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 year ended August 26, 1995, an amount equal to $692 was credited to the Private Company on account of discounts for such period, $583 was credited for the year ended August 31, 1996 and $590 was credited for the year ended August 30, 1997. Prior to January 1, 1994, the Company was party to Advertising Agreements with the Private Company. 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 a share of advertising costs. Such charges aggregated $2,218, $2,374 and $2,498 for the years ended August 30, 1997, August 31, 1996 and August 26, 1995, 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, owned a 20% interest (until October 1996) in Southeastern Florida Holding Corp. ("S.F.H.C.") which owns six licensed stores. During the years ended August 30, 1997, August 31, 1996 and August 26, 1995, S.F.H.C. incurred approximately $166, $160 and $185, respectively, in royalty expense to the Company. The same executive also owned (until October 1996) a 20% interest in two other corporations that are also part of the Unconsolidated Licensees. During the years ended August 30, 1997, August 31, 1996 and August 26, 1995, such corporations incurred approximately $74, $81 and $97, respectively, in royalty expense to the Company. Ronald Rudzin, Senior Vice President - Retail Stores of the Company, owns one licensed store and his father owns two licensed stores which, during the years ended August 30, 1997, August 31, 1996 and August 26, 1995 incurred royalty expense aggregating approximately $131, $134 and $239, respectively, to the Company (See Note 10). In October 1996, Rami Abada transferred his 20% interest in S.F.H.C. to individuals who are also limited partners in LP's III, IV and V (see Note 11). In turn, he received the remaining 80% equity interest in the two corporate Unconsolidated Licensees, described in the preceding paragraph, that were owned by such individuals. F12 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) 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. 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/or 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 30, 1997: Gross amount due $ 2,335 $ 2,355 $ 2,208 $ 6,898 Reserves (2 335) (2,355) (2,208) (6,898) ------- ------- ------- ------- Net Amount $ -0- $ -0- $ -0- $ -0- ======= ======= ======= ======= AT AUGUST 31, 1996: Gross amount due $ 2,486 $ 2,537 $ 2,301 $ 7,324 Reserves (2,486) (2,537) (2,301) (7,324) ------- ------- ------- ------- Net Amount $ -0- $ -0- $ -0- $ -0- ======= ======= ======= ======= 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- ======= ======= ======= =======
F13 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) The Private Company has stated that, if the settlement described in Note 9 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. 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. Such amounts were reduced, effective February 1, 1996 to $320 and $240 per annum, respectively. In addition, they receive substantial economic benefits from the Private Company (see Note 3). 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. Such amounts were reduced, effective February 1, 1996 to $120 each per annum. In addition, they receive substantial economic benefits from the Private Company and certain Unconsolidated Licensees. Another director (and stockholder) of the Company received approximately $164, $188 and $336 in legal fees in the fiscal years ended in 1997, 1996 and 1995, respectively. Further, he owned, until May 1995, a 20% interest in each of two Private Company stores and receives economic benefits from the Private Company. (4) STORE FIXTURES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS August 30, August 31, 1997 1996 ---------- ---------- Automobiles $ 68 $ 68 Store fixtures and furniture 6,097 6,129 Leasehold improvements 6,498 6,434 Computer equipment 1,446 1,026 -------- -------- 14,109 13,657 Less: Accumulated depreciation and amortization (6,440) (4,918) -------- -------- $ 7,669 $ 8,739 ======== ======== At August 30, 1997 and August 31, 1996, equipment cost includes $1,286 and $907, and accumulated depreciation and amortization includes $608 and $465 on equipment under capital leases. F14 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) (5) CREDIT AND SECURITY AGREEMENT WITH KLAUSSNER: On March 5, 1996, the Company and Klaussner executed a Credit and Security Agreement that provides that Klaussner effectively extended the payment terms for merchandise shipped from 60 days to 81 days and was provided with 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 license agreement to operate the Company's business in the event of default and non-payment. At August 30, 1997, the Company owed Klaussner $10,677, of which $1,990 exceeds the extended payments terms referred to above. On December 11, 1997, Klaussner formally waived the default. In addition, Klaussner loaned $1,440 to the Private Company. The $1,440 was used to pay down the mortgage obligation on the warehouse owned by the Private Company. The $1,440 (all of which has been paid at August 30, 1997) is in addition to $3,500 (outstanding balance $1,000 at August 30, 1997) loaned to the Private Company by Klaussner prior to January 1, 1994. (6) INCOME TAXES Components of income tax expense are as follows: Year Ended ----------------------------------- 8/30/97 8/31/96 8/26/95 ------- ------- ------- Current: Federal $ -- $ -- $ -- State 95 146 160 Deferred: Federal -- -- -- State -- -- -- ---- ---- ---- $ 95 $146 $160 ==== ==== ==== 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 ---------------------------------- 8/30/97 8/31/96 8/26/95 ------- ------- ------- "Expected" tax (benefit) ( 34.0)% (34.0)% (34.0)% Increase (reduction) in taxes resulting from: State income tax, net of federal income tax benefit 2.0% 1.6 % 1.4 % Non-deductible items 1.7% 1.0 % .5 % Other 2.0% (2.7)% (1.8)% Increase in valuation allowance 31.3% 36.6 % 35.2 % ------ ------- ------- 3.0% 2.5 % 1.3 % ====== ======= =======
F15 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) The principal components of deferred tax assets, liabilities and the valuation allowance are as follows:
August 30, 1997 August 31, 1996 --------------- --------------- Deferred tax assets: Federal and state net operating loss carryforwards $ 6,160 $ 5,378 Reserve for losses on loans and advances 2,759 2,928 Accrued partnership losses 1,420 1,385 Deferred rent expense 1,235 1,326 Inventory capitalization 198 216 Other expenses for financial reporting, not yet deductible for taxes 656 578 -------- -------- Total deferred tax assets, before valuation allowance 12,428 11,811 Less: Valuation allowance (11,073) (10,113) -------- -------- Total deferred tax assets $ 1,355 $ 1,698 ======== ======= Deferred tax liabilities: Difference in book and tax basis of fixed assets $ 1,295 $ 1,571 Other 60 127 -------- -------- Total deferred tax liabilities 1,355 1,698 -------- -------- 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 30, 1997, August 31, 1996 and August 26, 1995, the valuation allowance increased by $960, $2,144 and $4,202, respectively. As of August 30, 1997, the Company has a net operating loss carryforward of approximately $15,000, expiring $6,000 in the year 2010, $7,000 in the year 2011 and $2,000 in the year 2012. Federal income tax returns filed for the 1993 and 1994 tax years are being examined by the Internal Revenue Service. In managements' opinion, the outcome of these examinations are not expected to have a material effect on the Company's financial position. F16 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) (7) WARRANTS In the fiscal year ended August 27, 1994, under the terms of the limited partnership agreements for LP III, LP IV and LP V (see Note 11), the three limited partners each purchased for $170 five-year warrants to purchase 60,000 shares of the Company's Common Stock at an exercise price of $15.625 per share. Each of the limited partners paid approximately $70 in 1994 and issued a $100 term note to the Company as payment for the warrants. These notes bear interest at a rate of 7.12% per annum and are payable over ten years (with 10% of principal due annually). For each annual principal payment which is not made, 10,564 of the warrants shall be cancelled. The notes receivable from warrant holders are recorded in (Capital Deficiency). (8) 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. Additional information with respect to the Company's stock options under and outside the Plans is as follows:
Options Exercisable Options --------------------------- --------------------------- Weighted Weighted Average Average Exercise Exercise Number of Price Number of Price Shares Per Share Shares Per Share --------- --------- --------- --------- Outstanding at 8/27/94 736,547 $ 7.73 545,053 $ 6.83 ======= ====== Granted 137,500 $ 3.43 Cancelled ( 37,500) $10.67 ---------- ------ ------- ------ Outstanding at 8/26/95 836,547 $ 6.89 628,051 $ 7.01 ---------- ------ ======= ====== Granted - $ - Cancelled ( 25,000) $ 2.75 ---------- ------ ------- ------ Outstanding at 8/31/96 811,547 $ 6.80 706,883 $ 7.07 ---------- ------ ======= ====== Granted 732,000 $ 2.00 Cancelled ( 264,500) $ 8.00 Expired ( 50,000) $ 2.75 - - ---------- ------ ------- ------ Outstanding at 8/30/97 1,229,047 $ 3.99 480,381 $ 7.07 ========== ====== ======= ======
F17 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) See Note 11 with respect to options outstanding held by JCI to purchase 1,200,000 shares of Common Stock of the Company. The number of shares of Common Stock reserved for options available for grant under the Plans was 9,953 at August 30, 1997. The weighted average remaining contractual life of the outstanding options is 7.6 years. In May 1997, the Company adopted the 1997 Stock Option Plan (the "1997 Plan") under which 500,000 shares of common stock were reserved for issuance. The 1997 Plan is subject to shareholder approval. The Company applies APB No. 25 in accounting for its stock option plan, which requires the recognition of compensation expense for the difference between the fair value of the underlying common stock and the grant price of the option at the grant date. Had the compensation expense been determined based upon the fair value at the grant date, as prescribed under SFAS No. 123, the Company's net loss for the year ended August 30, 1997 would have been as follows: Net (Loss): As reported $(3,061) Pro forma under SFAS 123 $(3,141) (Loss) per share: As reported $( .54) Pro forma under SFAS 123 $( .55) The fair value of each option granted is estimated at $1.22 on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: Risk-free interest rate 6.95% Expected life of options 5 Expected stock price volatility 69% Expected dividend yield 0% The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. F18 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) (9) COMMITMENTS, CONTINGENCIES AND OTHER MATTERS LEASES The Company and LP's lease retail store locations under operating leases for varying periods through 2009 which generally are renewable at the option of the lessee. Certain leases contain provisions for additional rental payments based on increases in certain indexes. Future minimum lease payments and future minimum sublease rentals for all noncancelable leases with initial terms of one year or more consisted of the following at August 30, 1997: YEAR ENDING AUGUST -------------------------------------- 1998......................... $ 11,570 1999......................... 11,293 2000......................... 10,779 2001......................... 10,042 2002......................... 9,344 Thereafter................... 19,795 -------- $ 72,823 ======== 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 $13,657, $14,166 and $15,770, net of sublease income of $166, $170 and $301, for the years ended August 30, 1997, August 31, 1996 and August 26, 1995, 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 at August 30, 1997: YEAR ENDING AUGUST ---------------------------------------- 1998.............................. $ 286 1999.............................. 261 2000.............................. 42 ----- 589 Amount representing interest...... ( 24) ----- Present value of minimum lease payments................... 565 Less: Current portion............ 144 ----- $ 421 ===== F19 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES The components of accrued expenses and other current liabilities are: 8/30/97 8/31/96 ------- ------- Advertising $1,419 $ 958 Payroll 809 744 Legal 162 216 Accounting 217 356 Store closings 248 455 Settlement costs 500 500 Sales tax 424 778 Warranty 204 -- Other 794 1,015 ------ ------ $4,777 $5,022 ====== ====== ADVERTISING EXPENSE Advertising expense for the years ended August 30, 1997, August 31, 1996 and August 26, 1995 aggregated $10,893, $12,265 and $15,729, 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 11) and (2) the funding of Limited Partnerships (LP's) III through V (See Note 11). The letter essentially detailed the flow of funds from the Private Company, certain Unconsolidated Licensees and the Company to S.F.H.C. and its subsidiary ("Summit"). 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. F20 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (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 ultimate outcome of these matters is not presently determinable (see below). PROPOSED 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 final court approval. In accordance with FASB Statement No. 5, the $130 value of the Preferred Stock has been accrued in the fiscal year ended August 31, 1995 as part of estimated settlement costs. A group of shareholders claiming to own approximately 8.5% of the outstanding shares of the Company have filed (as a group) objections to the fairness of the settlement in the Derivative Memorandum. The group has requested deposition and document discovery in advance of any hearing on the fairness of the settlement, and the Company has provided some document and deposition discovery voluntarily. However, the group of objectors has made a motion for additional discovery which the Company has opposed. The motion is still pending. PROPOSED 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 that settlement of the class action litigation is contingent upon final court approval of the proposed settlement of the derivative litigation referred to above. F21 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) 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 in the fiscal year ended 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. PROPOSED SETTLEMENT WITH THE PRIVATE COMPANY The Company signed an agreement ("Settlement Agreement") with the Private Company subject to 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. 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% (see B below). 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 up to $650 related to the calendar year 1996 because the total retail sales of the Company were less than $135 million. Of such amount, $520 was expensed during the year ended August 31, 1996 and $130 was expensed during the year ended August 30, 1997. 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 calendar 1997 and 1998, if an annual sales level of $140 million is achieved, the Private Company will pay back 50% of the additional warehouse fee described above in each of such years. To the extent such additional fee is not so repaid in full, starting on January 1, 1999, the Private Company will repay the balance of such additional fee over seven years without interest. The Company believes the effective date of such changes will be the date court approval is obtained. The Private Company has stated that the effective date is March 1996. The Company believes this claim is without merit and has not provided for any losses that may accrue as a result of this assertion which could approximate $1,200. 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. F22 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) On June 30, 1996, the Private Company sold the Inwood, New York warehouse which has been the principal warehouse in the distribution system. In connection with this sale, the Settlement Agreement contemplates that 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. C) (Warehouse Services to the Private Company): Commencing January 1, 1999 through December 31, 2005, 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 Settlement Agreement contemplates that the Private Company will purchase the limited partnership interests of the limited partnerships known as LP III, LP IV and LP V and the equity interest of the shareholders of S.F.H.C. and assign these interests to the Company. (On December 31, 1996, the purchase of these limited partnership interests was completed by the Private Company and the purchase of S.F.H.C. will occur upon court approval of the settlement.) 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 S.F.H.C. The former shareholders of S.F.H.C. will receive new ten year warrants to purchase an aggregate of 180,000 shares of Common Stock at $7.00 per share. F) (Inter-Company Accounts): The Settlement Agreement contemplates that commencing January 1, 1999, 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. F23 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) 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 Settlement Agreement contemplates that 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 Settlement 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. The Company, the Private Company and the Unconsolidated Licensees have been accounting for current obligations in this manner since the start of the fiscal year ended August 26, 1995. On February 21, 1997, the Company and the Private Company entered into a Shortfall and Old Account Agreement (Shortfall Agreement) which will become effective upon court approval. This Shortfall Agreement grants a credit to the Private Company under previous offset agreements of the amount, if any, by which the Company's consolidated sales (including the consolidated sales of S.F.H.C.) in any month commencing January 1, 1997 to December 31, 1998 are less than the target sales for such month times the warehousing fee percentage (presently 5%). Actual sales in excess of target sales may be carried over (and back) and added to actual sales of succeeding or preceding months. As of August 30, 1997, the Company (including the consolidated sales of S.F.H.C.), was $1,948 short of target sales which, at the 5% warehouse fee, would equate to a $97 payment. K) (Royalties): The Settlement Agreement contemplates that 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. L) (Subordination): 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. F24 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) SECURITIES AND EXCHANGE COMMISSION INVESTIGATION On December 9, 1994, the Company was advised that the Securities and Exchange Commission (SEC) was conducting an inquiry of the Company's affairs "to determine whether there have been violations of the federal securities laws". The SEC requested that the Company voluntarily provide certain documents in connection with its December 2, 1994 press release "concerning the adjustment in the valuation of certain subsidiaries on the Company's balance sheet". Since that date, the SEC has also requested the Final Report of Counsel to the Independent Committee of the Board of Directors and the November 22, 1994 letter from a director of the Company to the President (as more fully described above). Additionally, the SEC requested the "responses" to these documents and the Company furnished them with the "Response of Harley Greenfield to the January 26, 1995 Final Report of Counsel to the Independent Committee" dated March 10, 1995 and the "Response of Jerome I. Silverman to the letter dated November 22, 1994 from Michael Colnes to Harley Greenfield" dated April 3, 1995. On May 3, 1995 the SEC commenced a formal investigation into the affairs of the Company. Subpoenas have been issued to the Company and certain of its current and former management to furnish various contracts and accounting records which have been complied with. The outcome of the SEC investigation is not presently determinable. NASDAQ DELISTING Effective April 17, 1995, the NASDAQ Listing Qualifications Committee (the "Qualifications Committee") reviewed the request of the Company for an extension of its current exception to the filing requirements for continued listing on the NASDAQ National Market. The Qualifications Committee determined to deny the Company's request and accordingly, the Company's Common Stock was delisted from the NASDAQ stock market. (10) SALE OF SUBSIDIARIES In September 1990, the Company sold two of its stores to a licensee of a New York store, and effective December 27, 1990, the Company sold four of its stores for the assumption of certain liabilities and $10 in cash per store to the same licensee. During the fiscal year ended 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). F25 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) 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. The balance of the notes, net of imputed interest at the rate of 8%, which have been reserved for in full in the consolidated financial statements, are as follows: August 30, August 31, ---------- ---------- 1997 1996 ---- ---- Notes receivable $ 434 $ 554 Less: imputed interest ( 67) (120) ----- ----- Notes receivable, net $ 367 $ 434 ===== ===== (11) OTHER AGREEMENTS JCI CONSULTING AGREEMENT On July 29, 1994, the Company reached an agreement with JCI Consultant, L.P. ("JCI") to terminate a February 25, 1992 consulting agreement with JCI pursuant to which, among other things, JCI rendered advice on the establishment and financing of Company-owned and licensed stores. JCI 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 became exercisable on April 1, 1996. 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 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. 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. F26 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) 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, as general partner, made a capital contribution of $10. Under the Partnership Agreement, allocations and distributions shall, subject to certain exceptions, be made 99% to the limited partner and 1% to the General Partner. The Company has consolidated and recorded the operating losses of the Partnership in excess of the limited partner's capital contributions in the Consolidated Statements of Operations (see Note 1). Under a Purchase Option Agreement, the Company has the right 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 partner can put its interest 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. LP III, LP IV AND LP V In 1992, the Company entered into three additional Limited Partnership Agreements (the "Agreements") establishing LP's III, IV and V which required the limited partners to invest $1,000 in each partnership. The Agreements called for the opening of 25 Jennifer Convertible stores in each partnership. Under the terms of the Agreements, the Company was 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). 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 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 ("Original 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 30, 1997, the limited partners have paid approximately $210 and signed ten year notes to pay $300 as payment for these warrants (See Note 7). In connection with the proposed settlement with the Private Company (see Note 9), on December 31, 1996, the Private Company acquired the limited partners' interest in these partnerships. (12) SUBSEQUENT EVENTS In September and November 1997, the Company opened letters of credit in favor of an Italian supplier of leather furniture aggregating $1,350 by depositing these funds into an interest bearing money market account. The supplier draws down on these letters of credit as shipments are made. These letters of credit expire over various dates to June 30, 1998. As of November 20, 1997, $850 of these credits remain outstanding. F27 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) August 30, 1997, August 31, 1996 and August 26, 1995 (In thousands except for share amounts) On December 11, 1997, the Company sold to Klaussner 10,000 shares of Series A Preferred Stock ("Preferred Stock"), convertible into 1,424,500 shares of the Company's common stock for $5,000. These shares are non-voting, have a liquidation preference of $5,000 and do not pay dividends (except if declared on the common stock). The preferred stock is not convertible until September 1, 1999, or earlier under certain circumstances (e.g. if another person or group acquires 12.5% or more of the common stock or there are certain changes in management or the Board of Directors), and has other rights associated with it. In addition, the Credit and Security Agreement with Klaussner was modified to include a late fee of .67% per month for invoices the Company pays beyond the normal 60 day terms. F28 EX-3.2 2 CERTIFICATE OF DESIGNATIONS CERTIFICATE OF DESIGNATIONS, PREFERENCES, AND RIGHTS OF SERIES A PREFERRED STOCK (ADOPTED BY JENNIFER CONVERTIBLES, INC.) CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF SERIES A PREFERRED STOCK OF JENNIFER CONVERTIBLES, INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware JENNIFER CONVERTIBLES, INC., a Delaware corporation (the "CORPORATION"), certifies that pursuant to the authority contained in Article Fourth of its Certificate of Incorporation, and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, its Board of Directors has adopted the following resolution creating a series of its Preferred Stock, par value $0.01 per share, designated as Series A Preferred Stock: RESOLVED, that a series of the class of authorized Preferred Stock, par value $0.01 per share, to be known as "SERIES A PREFERRED STOCK", of the Corporation be hereby created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: A. DESIGNATION AND AMOUNT. The shares of this series shall be designated as "Series A Preferred Stock" (the "SERIES A PREFERRED STOCK") and the number of shares constituting such series shall be 10,000. B. Terms of Series A Preferred Stock. ---------------------------------- 1. Dividends --------- So long as any shares of Series A Preferred Stock shall be outstanding, the Corporation shall not declare or pay any dividend, or order or make any other distribution, upon any Junior Stock or Liquidation Parity Stock (other than a dividend payable in such 1 Junior Stock or Liquidation Parity Stock) unless the Corporation shall first pay, or simultaneously therewith declare and set apart a sum sufficient for the payment of, a dividend upon the Series A Preferred Stock in a per share amount at least equal to the per share amount of such dividend or other distribution upon such Junior Stock or Liquidation Parity Stock and, in connection therewith, each share of Series A Preferred Stock shall be deemed to be that number of shares of Common Stock into which it is then convertible as provided in Section 4 hereof, rounded to the nearest whole number. The Company shall not make any distributions on its Common Stock other than in the form of cash or additional shares of Common Stock and all such distributions shall be made in accordance with the terms hereof. 2. Liquidation Preference. ----------------------- In the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Corporation, the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, shall be distributed in the following order of priority: The holders of Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution to the holders of any Junior Stock but PARI PASSU with any distribution to the holder of any Liquidation Parity Stock, an amount per share equal to the Series A Preferred Original Issuance Price (subject to appropriate adjustment upon the occurrence of any stock split, stock dividend or combination of the outstanding shares of Series A Preferred Stock) and, in addition, an amount equal to any dividends declared but unpaid on the Series A Preferred Stock. If the assets of the Corporation available for distribution to the holders of Series A Preferred Stock shall be insufficient to permit the payment of the full preferential amount set forth herein, then the holders of shares of Series A Preferred Stock shall share ratably in any distribution of the assets of the Corporation (A) as to any Liquidation Parity Stock, in proportion to the respective liquidation preferences of the Series A Preferred Stock and such Liquidation Parity Stock and (B) as to the other holders of the Series A Preferred Stock, in proportion to their respective number of shares of Series A Preferred Stock. The Corporation shall not authorize the issuance of any preferred stock senior to the Series A Preferred Stock unless required in connection with the settlement of the class action and derivative action described in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996; provided, further, that notwithstanding the foregoing, the liquidation preference of any such senior preferred stock shall not exceed an aggregate of $1,000,000. 3. Voting Rights. -------------- 2 Except as may otherwise be provided by law or in the Certificate of Incorporation or By-laws of the Corporation, the holders of shares of Series A Preferred Stock shall have no voting rights. 4. Conversion. ----------- (a) The shares of Series A Preferred Stock shall not be convertible until the earlier of September 1, 1999 or the date on which an "Acceleration Event" occurs (an "Event of Conversion"). An Acceleration Event is defined as the occurrence of any of the following: (i) when any "person" as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as used in Section 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act, but excluding the Corporation or any subsidiary or any affiliate of the Corporation or any employee benefit plan sponsored or maintained by the Corporation or any subsidiary of Corporation (including any trustee of such plan acting as trustee) or Harley Greenfield, Fred Love, Edward Seidner or Jara Enterprises, Inc., becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Corporation representing 12.5% or more of the combined voting power of the Corporation's then outstanding securities; or (ii) the execution of an agreement providing for the acquisition of the Corporation or for the acquisition of all or substantially all of its assets or for the acquisition of all or substantially all of the stock or assets of any subsidiary or subsidiaries of the Corporation which generate in excess of 10% of the consolidated revenues of the Corporation, individually or in the aggregate, by an entity other than the Corporation or a subsidiary or an affiliated company of the Corporation through the purchase of stock or assets, by consolidation, merger, or otherwise; or (iii) any time Harley Greenfield shall no longer be the Chief Executive Officer of the Corporation or the Continuing Directors shall not constitute a majority of the Board of Directors of the Corporation. "Continuing Director" means at any date a member of the Corporation's Board of Directors (A) who is a member of such Board as of the date hereof or (B) who was nominated or elected by at least two-thirds of the directors who were Continuing Directors at the time of such nomination or election of whose election to the Corporation's Board of Directors was recommended or endorsed by at least two-thirds of the directors who were Continuing Directors at the time of such election; or (iv) commencement of a tender or exchange offer for shares of the Corporation's Common Stock other than a tender or exchange offer by the Corporation on its own behalf; or 3 (v) the adoption of any plan of liquidation; or (vi) solicitation of any proxy without the approval of the Corporation's Board of Directors. (b) Upon the occurrence of an Event of Conversion, the holder of any shares of Series A Preferred Stock shall have the right to convert such Series A Preferred Stock into such whole number of fully paid and nonassessable shares of Common Stock as is equal the quotient obtained by dividing (A) the product obtained by multiplying the Series A Preferred Original Issuance Price by the number of shares of Series A Preferred Stock being converted, by (B) the Series A Preferred Conversion Price, as last adjusted and then in effect, by surrender of the certificates representing the shares of Series A Preferred Stock so to be converted in the manner provided in Section 4(c) hereof. The holder of any shares of Series A Preferred Stock exercising the aforesaid right to convert such shares into shares of Common Stock shall be entitled to payment of any dividends declared but unpaid with respect to such shares of Series A Preferred Stock. (c) The holder of any shares of Series A Preferred Stock may exercise the conversion right pursuant to Sections 4(a) and (b) hereof as to any part thereof by delivering to the Corporation during regular business hours, at the office of the Corporation or any transfer agent of the Corporation for the Series A Preferred Stock as may be designated by the Corporation, the certificate or certificates for the shares to be converted, duly endorsed or assigned in blank or to the Corporation (if required by it), accompanied by written notice stating that the holder elects to convert such shares and stating the name or names (with address) in which the certificate or certificates for the shares of Common Stock are to be issued. Conversion shall be deemed to have been effected on the date when the aforesaid delivery is made (the "Conversion Date"). As promptly as practicable thereafter, the Corporation shall issue and deliver to or upon the written order of such holder, to the place designated by such holder, a certificate or certificates for the number of full shares of Common Stock to which such holder is entitled and a check or cash in respect of any fractional interest in a share of Common Stock as provided in Section 4(d) hereof and a check or cash in payment of all dividends declared but unpaid, if any (to the extent permissible under law), with respect to the shares of Series A Preferred Stock so converted. The Person in whose name the certificate or certificates for Common Stock are to be issued shall be deemed to have become a holder of record of Common Stock on the applicable Conversion Date unless the transfer books of the Corporation are closed on that date, in which event he shall be deemed to have become a holder of record of Common Stock on the next succeeding date on which the transfer books are open, but the Series A Preferred Conversion Price shall be that in effect on the Conversion Date. Upon conversion of only a portion of the number of shares covered by a certificate representing shares of Series A Preferred Stock surrendered for conversion, the Corporation shall issue and deliver to or upon the written order of the holder of the certificate so surrendered for conversion, at the expense of the Corporation, a new certificate covering the number of shares of Series A 4 Preferred Stock representing the unconverted portion of the certificate so surrendered, which new certificate shall entitle the holder thereof to dividends on the shares of Series A Preferred Stock represented thereby to the same extent as if the portion of the certificate theretofore covering such unconverted shares had not been surrendered for conversion. (d) No fractional shares of Common Stock or scrip shall be issued upon conversion of shares of Series A Preferred Stock. If more than one share of Series A Preferred Stock shall be surrendered for conversion at any one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series A Preferred Stock so surrendered. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of any shares of Series A Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to the then Current Market Price of a share of Common Stock multiplied by such fractional interest. Fractional interests shall not be entitled to dividends, and the holders of fractional interests shall not be entitled to any rights as stockholders of the Corporation in respect of such fractional interest. (e) The Series A Preferred Conversion Price shall be subject to adjustment from time to time as follows: (i) If, at any time after the Series A Preferred Original Issuance Date, the number of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, following the record date fixed for the determination of holders of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Series A Preferred Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Series A Preferred Stock shall be increased in proportion to such increase in outstanding shares. (ii) If, at any time after the Series A Preferred Original Issuance Date, the number of shares of Common Stock outstanding is decreased by a combination of the outstanding shares of Common Stock, then, following the record date for such combination, the Series A Preferred Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of Series A Preferred Stock shall be decreased in proportion to such decrease in outstanding shares. (iii) In case, at any time after the Series A Preferred Original Issuance Date, of any capital reorganization, or any reclassification of the stock of the Corporation (other than a change in par value or from par value to no par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), or the consolidation or merger of the Corporation 5 with or into another Person (other than a consolidation or merger in which the Corporation is the continuing company and which does not result in any change in the Common Stock) or of the sale or other disposition of all or substantially all the properties and assets of the Corporation as an entirety to any other Person, each share of Series A Preferred Stock shall, after such reorganization, reclassification, consolidation, merger, sale or other disposition, be convertible into the kind and number of shares of stock or other securities or property of the Corporation or of the company resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold or otherwise disposed to which the holder of the number of shares of Common Stock deliverable (immediately prior to the time of such reorganization, reclassification, consolidation, merger, sale or other disposition) upon conversion of such share of Series A Preferred Stock would have been entitled upon such reorganization, reclassification, consolidation, merger, sale or other disposition. The provisions of this Section 4 shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales or other dispositions. (f) Whenever the Series A Preferred Conversion Price shall be adjusted as provided in Section 4(e) hereof, the Corporation shall forthwith file, at the office of Corporation or any transfer agent designated by the Corporation for the Series A Preferred Stock, a statement, signed by its Chief Financial Officer, showing in detail the facts requiring such adjustment and the Series A Preferred Conversion Price then in effect. The Corporation shall also cause a copy of such statement to be sent by first-class certified mail, return receipt requested, postage prepaid, to each holder of shares of Series A Preferred Stock at his or its address appearing on the Corporation's records. Where appropriate, such copy may be given in advance and may be included as part of a notice required to be mailed under the provisions of Section 4(g) hereof. (g) In the event the Corporation shall propose to take any action of the types described in clauses (i), (ii) or (iii) of Section 4(e) hereof, the Corporation shall give notice to each holder of shares of Series A Preferred Stock, in the manner set forth in Section 4(f) above, which notice shall specify the record date, if any, with respect to any such action and the date on which such action is to take place. Such notice shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Series A Preferred Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable or purchasable upon the occurrence of such action or deliverable upon conversion of shares of Series A Preferred Stock. In the case of any action which would require the fixing of a record date, such notice shall be given at least ten (10) days prior to the date so fixed, and in case of any other action, such notice shall be given at least fifteen (15) days prior to the taking of such proposed action. Failure to give such notice, or any defect therein, shall not affect the legality or validity of any such action. 6 (h) The Corporation shall pay all documentary, stamp or other transactional taxes attributable to the issuance or delivery of shares of Common Stock upon conversion of any shares of Series A Preferred Stock, but shall not be responsible for any transfer taxes. (i) The Corporation shall reserve, free from preemptive rights, out of its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to provide for the conversion of all outstanding shares of Series A Preferred Stock. (j) All shares of Common Stock which may be issued in connection with the conversion provisions set forth herein will, upon issuance by the Corporation, be validly issued, fully paid and nonassessable, with no personal liability attaching to the ownership thereof, and free from all taxes, liens or charges with respect thereto. (k) The Corporation shall not amend its Certificate of Incorporation or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, for the purpose of avoiding or seeking to avoid, or which would have the effect of avoiding, the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but shall at all times in good faith assist in carrying out all such action as may be reasonably necessary or appropriate in order to protect the conversion rights of the holders of the Series A Preferred against impairment. (1) Notwithstanding the foregoing, the Series A Preferred Stock shall not be convertible unless and until any required regulatory approvals to such conversion are obtained. The Corporation shall use its best efforts to cooperate with the holders of the Series A Preferred Stock to obtain any required approvals. 5. DEFINITIONS. As used herein, the following terms shall have the following meanings: (a) The term "COMMON STOCK" shall mean the Corporation's common stock, $0.01 par value per share. (b) The term "CURRENT MARKET PRICE" shall mean, as of the day in question, the fair market value of a share of Common Stock on such date, as determined in good faith by the Board of Directors of the Corporation. (c) The term "JUNIOR STOCK" shall mean the Common Stock and any class or series of capital stock of the Corporation ranking, as to payment of dividends or distribution of assets, junior to the Series A Preferred Stock. (d) The term "LIQUIDATION PARITY STOCK" shall mean any class or series of 7 capital stock of the Corporation ranking, as to distribution of assets, PARI PASSU to the Series A Preferred Stock. (e) The term "Person" shall mean any corporation, individual, partnership, limited liability company, association, trust, joint venture, unincorporated organization or other entity, and any government, governmental department or agency or political subdivision thereof. (f) The term "Series A Preferred Conversion Price" shall mean $3.51 as adjusted from time to time pursuant to the provisions of Section 4(e) hereof. (g) The term "Series A Preferred Original Issue Date" shall mean the date on which the first share of Series A Preferred Stock has been issued. (h) The term "Series A Preferred Original Issuance Price" shall mean $500 per share of Series A Preferred Stock. IN WITNESS WHEREOF, said JENNIFER CONVERTIBLES, INC. has caused this Certificate of Designations, Preferences and Rights of Series A Preferred Stock to be duly executed by its President and attested to by its Secretary and has caused its corporate seal to be affixed hereto, this tenth day of December, 1997. JENNIFER CONVERTIBLES, INC. By: /s/ Harley J. Greenfield ------------------------------- President (Corporate Seal) ATTEST: /s/ George J. Nadel - ------------------- Secretary 8 EX-10.29 3 STOCK OPTION PLAN JENNIFER CONVERTIBLES, INC. 1997 STOCK OPTION PLAN SECTION 1. PURPOSE. The purpose of the Jennifer Convertibles, Inc. 1997 Stock Option Plan (this "Plan") is to provide a means whereby selected employees, officers, directors, agents, consultants and independent contractors of Jennifer Convertibles, Inc., a Delaware corporation (the "Company"), or of any parent or subsidiary (as defined in subsection 5.7 and referred to hereinafter as "related corporations") thereof, may be granted incentive stock options and/or non-qualified stock options to purchase the Common Stock (as defined in Section 3) of the Company, in order to attract and retain the services or advice of such employees, officers, directors, agents, consultants and independent contractors and to provide added incentive to them by encouraging stock ownership in the Company. SECTION 2. ADMINISTRATION. (a) This Plan shall be administered by the Board of Directors of the Company (the "Board"), except to the extent the Board delegates its authority to a committee of the Board to administer this Plan. The administrator of this Plan shall hereinafter be referred to as the "Plan Administrator." (b) For so long as the Company's Common Stock is registered under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), no Option shall be granted to a director or officer (subject to Section 16 of the Exchange Act) of the Company by the Board unless (i) approved in advance by the Board or the Plan Administrator in accordance with the provisions of Rule 16b-3(d)(1) under the Exchange Act (where the Plan Administrator, if not the entire Board, is a committee of the Board composed solely of two or more non-employee directors who satisfy the requirements of Rule 16b-3(b)(3) under the Exchange Act), or (ii) approved in advance, or subsequently ratified by, the stockholders in accordance with the provisions of Rule 16b-3(d)(2) under the Exchange Act, except that an option may be granted absent such approval if the option provides that no officer or director of the Company may sell shares received upon the exercise of such option during the six-month period immediately following the grant of such option. 2.1 PROCEDURES. The Board shall designate one of the members of the Plan Administrator as chairman. The Plan Administrator may hold meetings at such times and places as it shall determine. The acts of a majority of the members of the Plan Administrator present at meetings at which a quorum exists, or acts reduced to or approved in writing by all Plan Administrator members, shall be valid acts of the Plan Administrator. 2.2 RESPONSIBILITIES. Except for the terms and conditions explicitly set forth in this Plan, the Plan Administrator shall have the authority, in its discretion, to determine all matters relating to the options to be granted under this Plan, including selection of the individuals to be granted options, the number of shares to be subject to each option, the exercise price, and all other terms and conditions of the options, including the designation of such options as an incentive stock option or non-qualified stock option. Grants under this Plan need not be identical in any respect, even when made simultaneously. The interpretation and construction by the Plan Administrator of any terms or provisions of this Plan or any option issued hereunder, or of any rule or regulation promulgated in connection herewith, shall be conclusive and binding on all interested parties, so long as such interpretation and construction with respect to incentive stock options corresponds to the requirements of Internal Revenue Code (the "Code") Section 422, the regulations thereunder, and any amendments thereto. 2.3 SECTION 16(B) COMPLIANCE AND BIFURCATION OF PLAN. It is the intention of the Company that this Plan comply in all respects with Section 16(b) and Rule 16b-3 under the Exchange Act, to the extent applicable, and, if any Plan provision is later found not to be in compliance with such Section or Rule, as the case may be, the provision shall be deemed null and void, and in all events the Plan shall be construed in favor of its meeting the requirements of Section 16(b) and Rule 16b-3 under the Exchange Act. Notwithstanding anything in the Plan to the contrary, the Board, in its absolute discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan to participants who are officers and directors or other persons subject to Section 16(b) of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other participants. SECTION 3. STOCK SUBJECT TO THIS PLAN. The stock subject to this Plan shall be the Company's Common Stock, par value $.01 per share (the "Common Stock"), presently authorized but unissued or subsequently acquired by the Company. Subject to adjustment as provided in Section 7 hereof, the aggregate amount of Common Stock to be delivered upon the exercise of all options granted under this Plan shall not exceed 500,000 shares as such Common Stock was constituted on the effective date of this Plan. If any option granted under this Plan shall expire, be surrendered, exchanged for another option, canceled or terminated for any reason without having been exercised in full, the unpurchased shares subject thereto shall thereupon again be available for purposes of this Plan, including for replacement options which may be granted in exchange for such surrendered, canceled or terminated options. SECTION 4. ELIGIBILITY. An incentive stock option may be granted only to any individual who, at the time the option is granted, is an employee of the Company or any related corporation. A nonqualified stock option may be granted to any director, employee, officer, agent, consultant or independent contractor of the Company or any related corporation, whether an individual or an entity. Any party to whom an option is granted under this Plan shall be referred to hereinafter as an "Optionee". SECTION 5. TERMS AND CONDITIONS OF OPTIONS. Options granted under this Plan shall be evidenced by written agreements which shall contain such terms, conditions, limitations and restrictions as the Plan Administrator shall deem advisable and which are not inconsistent with this Plan (the "Option Agreement"). Notwithstanding the foregoing, options shall include or incorporate by reference the following terms and conditions: 5.1 NUMBER OF SHARES AND PRICE. The maximum number of shares that may be purchased pursuant to the exercise of each option and the price per share at which such option is exercisable (the "exercise price") shall be as established by the Plan Administrator, provided that the Plan Administrator shall act in good faith to establish the exercise price which shall be not less than the fair market value per share of the Common Stock at the time the option is granted with respect to incentive stock options and not less than the par value per share of the Common Stock at the time the option is granted with respect to nonqualified stock options and also provided that, with respect to incentive stock options granted to greater than 10% stockholders, the exercise price shall be as required by Section 6. 5.2 TERM AND MATURITY. Subject to the restrictions contained in Section 6 with respect to granting incentive stock options to greater than 10% stockholders, the term of each incentive stock option shall be as established by the Plan Administrator and, if not so established, shall be 10 years from the date it is granted but in no event shall the term of any incentive stock option exceed 10 years. The term of each nonqualified stock option shall be as established by the Plan Administrator and, if not so established, shall be 10 years from the date it is granted. To ensure that the Company or related corporation will achieve the purpose and receive the benefits contemplated in this Plan, any option granted to any Optionee hereunder shall, unless the condition of this sentence is waived or modified in the agreement evidencing the option or by resolution adopted by the Plan Administrator, be exercisable, subject to acceleration upon a "Change of Control" as set forth below, according to the following schedule: Period of Optionee's Continuous Relationship With the Company or Related Corporation From the Date Portion of Total Option the Option is Granted Which is Exercisable --------------------- ----------------------- after 1 year 25% after 2 years 50% after 3 years 75% after 4 years 100% Notwithstanding the foregoing, all option shares shall become immediately exercisable in the event there is a "Change of Control of the Company." A "Change of Control" of the Company shall be deemed to have occurred if (1) any change occurs which would be required to be reported under item 1 on Form 8-K, promulgated under the Securities Exchange Act of 1934, (2) the Company is merged with or consolidated into any other entity, other than one controlled by the Optionee, or (3) all or substantially all of the assets of the Company are sold, leased, exchanged or otherwise transferred to another entity, other than one controlled by the Optionee. 5.3 EXERCISE. Subject to any vesting schedule described in subsection 5.2 above, each option may be exercised in whole or in part; provided, however, that no fewer than 100 shares (or the remaining shares then purchasable under the option, if less than 100 shares) may be purchased upon any exercise of an option hereunder and that only whole shares will be issued pursuant to the exercise of any option. Options shall be exercised by delivery to the Company of notice of the number of shares with respect to which the option is exercised, together with payment of the exercise price. 5.4 PAYMENT OF EXERCISE PRICE. Payment of the option exercise price shall be made in full at the time the notice of exercise of the option is delivered to the Company and shall be in cash, bank certified or cashier's check or personal check (unless at the time of exercise the Plan Administrator in a particular case determines not to accept a personal check) for the Common Stock being purchased. The Plan Administrator can determine at the time the option is granted for incentive stock options, or at any time before exercise for nonqualified stock options, that additional forms of payment will be permitted. To the extent permitted by the Plan Administrator and applicable laws and regulations (including, but not limited to, federal tax and securities laws and regulations and state corporate law), an option may be exercised by: (a) delivery of shares of stock of the Company held by an Optionee having a fair market value equal to the exercise price, such fair market value to be determined in good faith by the Plan Administrator; (b) delivery of a properly executed exercise notice, together with irrevocable instructions to a broker, all in accordance with the regulations of the Federal Reserve Board, to promptly deliver to the Company the amount of sale or loan proceeds necessary to pay the exercise price and any federal, state or local withholding tax obligations that may arise in connection with the exercise; or (c) delivery of a properly executed exercise notice together with instructions to the Company to withhold from the shares that would otherwise be issued upon exercise that number of shares having a fair market value equal to the option exercise price. 5.5 WITHHOLDING TAX REQUIREMENT. The Company or any related corporation shall have the right to retain and withhold from any payment of cash or Common Stock under the Plan the amount of taxes required by any government to be withheld or otherwise deducted and paid with respect to such payment. At its discretion, the Company may require an Optionee receiving shares of Common Stock to reimburse the Company for any such taxes required to be withheld by the Company and withhold such shares in whole or in part until the Company is so reimbursed. In lieu thereof, the Company, at its option in its sole discretion, shall (a) have the right to withhold from any other cash amounts due or to become due from the Company to the Optionee an amount equal to such taxes or (b) retain and withhold a number of shares having a market value not less than the amount of such taxes required to be withheld by the Company to reimburse the Company for any such taxes and cancel (in whole or in part) any such shares so withheld. If required by Section 16(b) of the Exchange Act, the election to pay withholding taxes by delivery of shares held by any person who at the time of exercise is subject to Section 16(b) of the Exchange Act, shall be made either six months prior to the date the option exercise becomes taxable or at such other times as the Company may determine as necessary to comply with Section 16(b) of the Exchange Act. 5.6 ASSIGNABILITY AND TRANSFERABILITY OF OPTION. Options granted under this Plan and the rights and privileges conferred hereby may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than (i) by will or by the applicable laws of descent and distribution, (ii) pursuant to a qualified domestic relations order as defined in Section 414(p) of the Code, or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder or (iii) as otherwise determined by the Plan Administrator and set forth in the applicable Option Agreement. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any option under this Plan or of any right or privilege conferred hereby, contrary to the Code or to the provisions of this Plan, or the sale or levy or any attachment or similar process upon the rights and privileges conferred hereby shall be null and void. The designation by an Optionee of a beneficiary does not, in and of itself, constitute an impermissible transfer under this Section. 5.7 TERMINATION OF RELATIONSHIP. If the Optionee's relationship with the Company or any related corporation ceases for any reason other than death or total disability, and unless by its terms the option sooner terminates or expires, then the Optionee may exercise, for a three-month period, that portion of the Optionee's option which is exercisable at the time of such cessation, but the Optionee's option shall terminate at the end of the three-month period following such cessation as to all shares for which it has not theretofore been exercised, unless, in the case of a nonqualified stock option, such provision is waived in the agreement evidencing the option or by resolution adopted by the Plan Administrator within 90 days of such cessation. If, in the case of an incentive stock option, an Optionee's relationship with the Company or related corporation changes (i.e., from employee to non-employee, such as a consultant), such change shall constitute a termination of an Optionee's employment with the Company or related corporation and the Optionee's incentive stock option shall become a non-qualified stock option. If an Optionee's relationship with the Company or any related corporation ceases because of a total disability, the Optionee's option shall not terminate or, in the case of an incentive stock option, cease to be treated as an incentive stock option until the end of the 12-month period following such cessation (unless by its terms it sooner terminates and expires). As used in this Plan, the term "total disability" refers to a mental or physical impairment of the Optionee which is expected to result in death or which has lasted or is expected to last for a continuous period of 12 months or more and which causes the Optionee to be unable, in the opinion of the Company and two (if more than one is required by the Company in its sole discretion) independent physicians, to perform his or her duties for the Company and to be engaged in any substantial gainful activity. Total disability shall be deemed to have occurred on the first day after the Company and the two (if more than one is required by the Company in its sole discretion) independent physicians have furnished their opinion of total disability to the Plan Administrator. For purposes of this subsection 5.7, a transfer of relationship between or among the Company and/or any related corporation shall not be deemed to constitute a cessation of relationship with the Company or any of its related corporations. For purposes of this subsection 5.7, with respect to incentive stock options, employment shall be deemed to continue while the Optionee is on military leave, sick leave or other bona fide leave of absence (as determined by the Plan Administrator). The foregoing notwithstanding, employment shall not be deemed to continue beyond the first 90 days of such leave, unless the Optionee's reemployment rights are guaranteed by statute or by contract. As used herein, the term "related corporation", when referring to a subsidiary corporation, shall mean any corporation (other than the Company) or other entity in, at the time of the granting of the option, an unbroken chain of corporations ending with the Company, if stock or other interests possessing 50% or more of the total combined voting power of all classes of stock or other interests of each of the corporations or other entities other than the Company is owned by one of the other corporations or other entities in such chain. When referring to a parent corporation or other entity, the term "related corporation" shall mean any corporation or other entity in an unbroken chain of corporations or other entities ending with the Company if, at the time of the granting of the option, each of the corporations or other entities other than the Company owns stock or other interests possessing 50% or more of the total combined voting power of all classes of stock or other interests in one of the other corporations or other entities in such chain. 5.8 DEATH OF OPTIONEE. If an Optionee dies while he or she has a relationship with the Company or any related corporation or within the three-month period (or 12-month period in the case of totally disabled Optionees) following cessation of such relationship, any option held by such Optionee to the extent that the Optionee would have been entitled to exercise such option, may be exercised within one year after his or her death by the personal representative of his or her estate or by the person or persons to whom the Optionee's rights under the option shall pass by will or by the applicable laws of descent and distribution. 5.9 STATUS OF STOCKHOLDER. Neither the Optionee nor any party to which the Optionee's rights and privileges under the option may pass shall be, or have any of the rights or privileges of, a stockholder of the Company with respect to any of the shares issuable upon the exercise of any option granted under this Plan unless and until such option has been exercised. 5.10 CONTINUATION OF EMPLOYMENT. Nothing in this Plan or in any option granted pursuant to this Plan shall confer upon any Optionee any right to continue in the employ of the Company or of a related corporation, or to interfere in any way with the right of the Company or of any such related corporation to terminate his or her employment or other relationship with the Company at any time. 5.11 MODIFICATION AND AMENDMENT OF OPTION. Subject to the requirements of Code Section 422 with respect to incentive stock options and to the terms and conditions and within the limitations of this Plan, the Plan Administrator may modify or amend outstanding options granted under this Plan. The modification or amendment of an outstanding option shall not, without the consent of the Optionee, impair or diminish any of his or her rights or any of the obligations of the Company under such option. Except as otherwise provided in this Plan, no outstanding option shall be terminated without the consent of the Optionee. Unless the Optionee agrees otherwise, any changes or adjustments made to outstanding incentive stock options granted under this Plan shall be made in such a manner so as not to constitute a "modification" as defined in Code Section 424(h) and so as not to cause any incentive stock option issued hereunder to fail to continue to qualify as an incentive stock option as defined in Code Section 422(b). 5.12 LIMITATION ON VALUE FOR INCENTIVE STOCK OPTIONS. As to all incentive stock options granted under the terms of this Plan, to the extent that the aggregate fair market value (determined at the time the incentive stock option is granted) of the stock with respect to which incentive stock options are exercisable for the first time by the Optionee during any calendar year (under this Plan and all other incentive stock option plans of the Company, a related corporation or a predecessor corporation) exceeds $100,000, such options shall be treated as nonqualified stock options. The previous sentence shall not apply if the Code is amended or if the Internal Revenue Service publicly rules, issues a private ruling to the Company, any Optionee, or any legatee, personal representative or distributee of an Optionee or issues regulations, changing or eliminating such annual limit, in which case the limitation shall be that provided by the Code or the Internal Revenue Service, as the case may be. 5.13 VALUATION OF COMMON STOCK RECEIVED UPON EXERCISE 5.13.1 EXERCISE OF OPTIONS UNDER SECTIONS 5.4(A) AND (C). The value of Common Stock received by the Optionee from an exercise under Sections 5.4(a) and 5.4(c) hereof shall be the fair market value, which shall mean the last reported sales price, regular way, of the Common Stock on the date of receipt by the Company of the Optionee's delivery of shares under Section 5.4(a) hereof or delivery of the exercise notice under Section 5.4(c) hereof (or, if no sale takes place on any such day, the closing bid price of the Common Stock on such day), on the principal securities exchange (including the National Association of Securities Dealers, Inc. (the "NASD'S") National Market System) on which the Common Stock is admitted or listed for trading, or, if the Common Stock is not listed on any such exchange on any such day, the highest reported bid price for the Common Stock as furnished by the NASD through NASDAQ, or a similar organization if NASDAQ is no longer reporting such information, or, if the Common Stock is not listed for trading on an exchange and is not quoted on NASDAQ or any similar organization on any such day, the fair value of a share of Common Stock on such day as determined by the Plan Administrator of the Company in good faith. 5.13.2 EXERCISE OF OPTION UNDER SECTION 5.4(B). The value of Common Stock received by the Optionee from an exercise under Section 5.4(b) hereof (a) in the case of the sale of the Common Stock received as a result of the exercise by a broker on the date of receipt by the Company of the Optionee's exercise notice, shall equal the sales price received for such shares; and (b) in all other cases, shall be determined as provided in Section 5.13.1 hereof. SECTION 6. GREATER THAN 10% STOCKHOLDERS. 6.1 EXERCISE PRICE AND TERM OF INCENTIVE STOCK OPTIONS. If incentive stock options are granted under this Plan to employees who own more than 10% of the total combined voting power of all classes of stock of the Company or any related corporation, the term of such incentive stock options shall not exceed five years and the exercise price shall be not less than 110% of the fair market value of the Common Stock at the time the incentive stock option is granted. This provision shall control notwithstanding any contrary terms contained in an option agreement or any other document. The term and exercise price limitations of this provision shall be amended to conform to any change required (or, in the sole discretion of the Plan Administrator, permitted) by a change in the Code or by a ruling or pronouncement of the Internal Revenue Service. 6.2 ATTRIBUTION RULE. For purposes of subsection 6.1, in determining stock ownership, an employee shall be deemed to own the stock owned, directly or indirectly, by or for his or her brothers, sisters, spouse, ancestors and lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be deemed to be owned proportionately by or for its stockholders, partners or beneficiaries. If an employee or a person related to the employee owns an unexercised option or warrant to purchase stock of the Company, the stock subject to that portion of the option or warrant which is unexercised shall not be counted in determining stock ownership. For purposes of this Section 6, stock owned by an employee shall include all stock owned by him which is actually issued and outstanding immediately before the grant of the incentive stock option to the employee. SECTION 7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. The aggregate number and class of shares for which options may be granted under this Plan, the number and class of shares covered by each outstanding option, and the exercise price per share thereof (but not the total price), shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock of the Company resulting from a split-up or consolidation of shares or any like capital adjustment, or the payment of any stock dividend. 7.1. EFFECT OF LIQUIDATION, REORGANIZATION OR CHANGE IN CONTROL. 7.1.1 CASH, STOCK OR OTHER PROPERTY FOR STOCK. Except as provided in subsection 7.1.2, upon a merger (other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of common stock in the surviving corporation immediately after the merger), consolidation, acquisition of property or stock, separation, reorganization (other than a mere reincorporation or the creation of a holding company) or liquidation of the Company, as a result of which the stockholders of the Company receive cash or property other than capital stock in exchange for or in connection with their shares of Common Stock, any option granted hereunder shall terminate, but the Optionee shall have the right immediately prior to any such merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation to exercise such Optionee's option in whole or in part whether or not the vesting requirements set forth in the option agreement have been satisfied. 7.1.2 CONVERSION OF OPTIONS ON STOCK FOR STOCK EXCHANGE. If the stockholders of the Company receive capital stock of another corporation ("Exchange Stock") in exchange for their shares of Common Stock in any transaction involving a merger (other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of common stock in the surviving corporation immediately after the merger), consolidation, acquisition of property or stock, separation or reorganization (other than a mere reincorporation or the creation of a holding company), all options granted hereunder shall be converted into options to purchase shares of Exchange Stock unless the Company and corporation issuing the Exchange Stock, in their sole discretion, determine that any or all such options granted hereunder shall not be converted into options to purchase shares of Exchange Stock but instead shall terminate in accordance with the provisions of subsection 7.1.1. The amount and price of converted options shall be determined by adjusting the amount and price of the options granted hereunder in the same proportion as used for determining the number of shares of Exchange Stock the holders of the Common Stock receive in such merger, consolidation, acquisition of property or stock, separation or reorganization. Unless the Board determines otherwise, the converted options shall be fully vested whether or not the vesting requirements set forth in the option agreement have been satisfied. 7.2 FRACTIONAL SHARES. In the event of any adjustment in the number of shares covered by an option, any fractional shares resulting from such adjustment shall be disregarded and each such option shall cover only the number of full shares resulting from such adjustment. 7.3 DETERMINATION OF BOARD TO BE FINAL. All Section 7 adjustments shall be made by the Board, and its determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. Unless an Optionee agrees otherwise, any change or adjustment to an incentive stock option shall be made in such a manner so as not to constitute a "modification" as defined in Code Section 425(h) and so as not to cause his or her incentive stock option issued hereunder to fail to continue to qualify as an incentive stock option as defined in Code Section 422(b). SECTION 8. SECURITIES REGULATION. Shares shall not be issued with respect to an option granted under this Plan unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, any applicable state securities laws, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or inter-dealer quotation system upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance, including the availability of an exemption from registration for the issuance and sale of any shares hereunder. Inability of the Company to obtain from any regulatory body having jurisdiction the authority deemed by the Company's counsel to be necessary for the lawful issuance and sale of any shares hereunder or the unavailability of an exemption from registration for the issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the nonissuance or sale of such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of an option, the Company may require the Optionee to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such representation is required by any relevant provision of the aforementioned laws. At the option of the Company, a stop-transfer order against any shares of stock may be placed on the official stock books and records of the Company, and a legend indicating that the stock may not be pledged, sold or otherwise transferred unless an opinion of counsel is provided (concurred in by counsel for the Company) stating that such transfer is not in violation of any applicable law or regulation, may be stamped on stock certificates in order to assure exemption from registration. The Company may also require such other action or agreement by the Optionees as it may from time to time deem to be necessary or advisable. THE COMPANY SHALL NOT BE OBLIGATED, BY REASON OF THIS PROVISION OR OTHERWISE, TO UNDERTAKE REGISTRATION OF THE OPTIONS OR STOCK HEREUNDER. Should any of the Company's capital stock of the same class as the stock subject to options granted hereunder be listed on a national securities exchange or inter-dealer quotation system, all stock issued hereunder if not previously listed on such exchange or inter-dealer quotation system shall be authorized by that exchange or system for listing thereon prior to the issuance thereof. SECTION 9. AMENDMENT AND TERMINATION. 9.1 BOARD ACTION. The Board may at any time suspend, amend or terminate this Plan, provided that except as set forth in Section 7, the approval of the holders of a majority of the Company's outstanding shares of voting capital stock present and entitled to vote at any meeting is necessary for the adoption by the Board of any amendment which will: (a) increase the number of shares which are to be reserved for the issuance of options under this Plan; (b) permit the granting of stock options to a class of persons other than those presently permitted to receive stock options under this Plan; or (c) require stockholder approval under applicable law, including Section 16(b) of the Exchange Act. 9.2 AUTOMATIC TERMINATION. Unless sooner terminated by the Board, this Plan shall terminate ten years from the earlier of (a) the date on which this Plan is adopted by the Board or (b) the date on which this Plan is approved by the stockholders of the Company. No option may be granted after such termination or during any suspension of this Plan. The amendment or termination of this Plan shall not, without the consent of the option holder, alter or impair any rights or obligations under any option theretofore granted under this Plan. SECTION 10. EFFECTIVENESS OF THIS PLAN. This Plan shall become effective upon adoption by the Board so long as it is approved by the holders of a majority of the Company's outstanding shares of voting capital stock present and entitled to vote at any meeting at any time within 12 months before or after the adoption of this Plan. Adopted by the Board of Directors on May 6, 1997 and approved by the stockholders on ___________, 1998. EX-10.30 4 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT THIS AGREEMENT is made as of December 11, 1997, among JENNIFER CONVERTIBLES, INC., a Delaware corporation (the "Company"), and KLAUSSNER FURNITURE INDUSTRIES, INC. (the "Purchaser"). Except as otherwise indicated herein, capitalized terms used herein are defined in Section 7 hereof. The parties hereto agree as follows: SECTION 1. - CLOSING. 1A. PURCHASE AND SALE OF THE SERIES A PREFERRED. At the Closing, the Company shall sell to the Purchaser and, subject to the terms and conditions set forth herein, the Purchaser shall purchase from the Company, for a purchase price of $5,000,000, 10,000 shares of convertible preferred stock (the "Preferred Stock") convertible into an aggregate of 1,424,500 shares, par value $0.01 per share (the "Common Stock") (approximately $3.51) per share, subject to adjustment as set forth in the Certificate of Designations (the "Certificate") of the Preferred Stock in the form attached hereto as Exhibit A. 1B. THE CLOSING. The closing of the purchase and sales of the Preferred Stock pursuant to paragraph 1A (the "Closing") shall take place at the offices of Squadron, Ellenoff, Plesent & Sheinfeld, LLP, in New York, New York at 10:00 a.m. on the date hereof, or at such other place or on such other date as may be mutually agreeable to the Company and the Purchaser. At the Closing, the Company shall deliver to the Purchaser stock certificates evidencing the Preferred Stock to be purchased by such Purchaser, registered in such Purchaser's or its nominee's name, upon payment of the purchase price thereof by a cashier's or certified check, or by wire transfer of the purchase price (net of amounts to be used pursuant to Section 2F) immediately available funds to the Company's account as directed by the Company. SECTION 2. - CONDITIONS OF THE PURCHASER'S OBLIGATION AT THE CLOSING. The obligation of the Purchaser to purchase and pay for the Preferred Stock at the Closing is subject to the satisfaction as of the Closing of the following conditions: 2A. REPRESENTATIONS AND WARRANTIES; COVENANTS. The representations and warranties contained in Section 5 hereof shall be true and correct at and as of the Closing, except to the extent of changes caused by the transactions expressly contemplated herein, and the Company shall have performed in all material respects all of the covenants required to be performed by it hereunder prior to the Closing. 2B. CLOSING DOCUMENTS. The Company shall have delivered to the Purchaser all of the following documents: 1 (i) a duly executed Registration Rights Agreement (the "Registration Rights Agreement") in the form of Exhibit B hereto; (ii) certified copies of the resolutions duly adopted by the Board authorizing the execution, delivery and performance of this Agreement, and the consummation of all other transactions contemplated by this Agreement. (iii) certified copies of the Certificate and the Company's Certificate of Incorporation and bylaws, each as in effect at the Closing; and (iv) such other documents relating to the transactions contemplated by this Agreement as any Purchaser or its special counsel may reasonably request. 2D. PROCEEDINGS. All corporate and other proceedings taken or required to be taken by the Company in connection with the transactions contemplated hereby to be consummated at or prior to the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to the Purchaser and its special counsel. 2E. AUDITORS OPINION. The opinion of Richard A. Eisner & Company as to the Company's financial statements for the fiscal year ended August 30, 1997 shall be no more qualified than the opinion given for the prior fiscal year and shall not contain a "going concern" qualification. 2F. USE OF PROCEEDS. At the Closing, the Company shall use a portion of the proceeds to pay all obligations to the Purchaser and its affiliates and subsidiaries that, as of the Closing have been billed and outstanding for more than 60 days (as reflected on their books and records, but without waiving any dispute the Company may have as to the amounts so reflected). SECTION 3. - RIGHT OF FIRST REFUSAL 3A. So long as the Purchaser owns at least 10% of the outstanding Common Stock of the Company or Preferred Stock convertible into at least 10% of such outstanding Common Stock, the Purchaser shall have the right (the "Right") of first refusal to purchase any shares of Common Stock (or debt or equity securities convertible into or exercisable for Common Stock, hereinafter called "Equivalents") if the sale price of such Common Stock or effective sale price of the Common Stock underlying such Equivalents (after giving effect to the price paid for such Equivalents together with any additional consideration to be paid to the Company on exercise or conversion) is less than $3.51 per share (as appropriately adjusted to reflect stock splits, stock dividends and similar events). If the Company proposes to make any such sale, it shall first give the Purchaser written notice (the "Offer Notice") of the terms of such proposed sale by the Company, including the type of security to be sold, the sale price or effective sale price and the amount to be sold. The Purchaser may elect to exercise the Right to purchase all or a portion of the securities described in the Offer Notice on the terms described in the Offer Notice by providing written notice (the "Exercise Notice") to the Company within 15 days after its has received the Offer Notice, specifying the amount of the securities it intends to purchase. If the Purchaser does not exercise the Right or exercises it in part, the Company shall be entitled to sell up to the number of securities set forth in the Offer Notice (or 2 the remaining balance after giving effect to the exercise of the Right) at a price no less favorable to the Company than the price set forth in the Offer Notice. If the Purchaser exercises the Right in whole or in part, the closing of the sale of securities contemplated thereby shall take place on the 15th day after the Exercise Notice is received the Company at the offices of the Company or at such other time and place as the parties mutually agree, provided that if the Exercise Notice is for the purchase of less than all of the securities set forth in the Offer Notice the Company may, by written notice to the Purchaser, decline to sell such portion, but in such event shall have no right to sell any such securities to any third party. Notwithstanding the foregoing, the Purchaser shall not have the Right with respect to options and warrants outstanding on the date hereof and the grant of additional options (the "Exempt Options") to employees or consultants to purchase up to 50,000 shares of Common Stock, provided that if the Company grants any Exempt Options it will simultaneously grant the Purchaser options, on the same terms, to purchase such number of shares of Common Stock as would be necessary to preserve the Purchaser's percentage beneficial ownership of the outstanding Common Stock assuming the exercise of the Exempt Options so granted. The reduction of the exercise price of any outstanding option shall be treated as a new grant of such option. SECTION 4. - TRANSFER OF RESTRICTED SECURITIES; REGISTRATION RIGHTS. 4A. GENERAL PROVISIONS. The Purchaser agrees that the Preferred Stock and the underlying Common Stock (collectively, the "Securities") constitute restricted securities transferable only pursuant to (i) registration under the Securities Act, (ii) Rule 144 or Rule 144A of the Securities and Exchange Commission (or any similar rule or rules then in force) if such rule is available and (iii) subject to the conditions specified in paragraph 4B below, any other legally available means of transfer. 4B. OPINION DELIVERY. In connection with the transfer of any Securities (other than a transfer described in Section 4A(i) or (ii) above), the holder thereof shall deliver written notice to the Company describing in reasonable detail the transfer or proposed transfer, together with an opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP or other counsel which (to the Company's reasonable satisfaction) is knowledgeable in securities law matters to the effect that such transfer of Securities may be effected without registration of such Securities under the Securities Act. In addition, if the holder of the Securities delivers to the Company an opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP or such other counsel that no subsequent transfer of such Securities shall require registration under the Securities Act and has delivered the original certificate or certificates representing such Securities to the Company, the Company shall promptly upon such contemplated transfer deliver new certificates for such Securities which do not bear the Securities Act legend set forth in Section 6. If the Company is not required to deliver new certificates for such Securities not bearing such legend, the holder thereof shall not transfer the same until the prospective transferee has confirmed to the Company in writing its agreement to be bound by the conditions contained in this Section paragraph and Section 6. 4C. RULE 144A. Upon the request of the Purchaser, the Company shall promptly supply to such Purchaser or its prospective transferees, at such Purchaser's cost, all information regarding the Company required to be delivered in connection with a transfer pursuant to Rule 144A of the Securities and Exchange Commission. 3 4D. LEGEND REMOVAL. If any Securities become eligible for sale pursuant to Rule 144(k), the Company shall, upon the request of the holder of such Securities and receipt of evidence sufficient in the reasonable judgment of the Company's counsel that the Securities are so eligible, remove the legend set forth in Section 6 from the certificates for such Securities. 4E. REGISTRATION RIGHTS. At the Closing, the Company shall enter into the Registration Rights Agreement providing certain demand registration rights as to the Securities. 4F. AGREEMENT NOT TO DISPOSE. The Purchaser hereby agrees not to sell, transfer or otherwise dispose of any of Preferred Stock until September 1, 1999, provided, however, that the Purchaser may transfer Securities to an affiliate of the Purchaser which agrees, in writing, to be bound by the provisions of this Section 4F and, provided, further that nothing herein shall be deemed to prevent Purchaser from converting the Preferred Stock to Common Stock earlier than September 1, 1999 pursuant to Section 4 of the Certificate or from selling, transferring or disposing of any Common Stock received upon such conversion. SECTION 5. - REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to the Purchaser that: 5A. ORGANIZATION, CORPORATE POWER AND LICENSES. The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and is qualified to do business in every jurisdiction in which the failure to so qualify has had or would reasonably be expected to have a material adverse effect on the financial condition, operating results, assets, operations or business prospects of the Company and its Subsidiaries taken as a whole. The Company possesses all requisite corporate power and authority and all material licenses, permits and authorizations necessary to own and operate its properties, to carry on its businesses as now conducted and presently proposed to be conducted and to carry out the transactions contemplated by this Agreement. 5B. CAPITAL STOCK AND RELATED MATTERS. (i) Immediately prior to the Closing, the authorized capital stock of the Company shall consist of (a) 1,000,000 shares of preferred stock, of which no shares shall be outstanding (but certain of which are contemplated to be issued and outstanding pursuant to the class and derivative action settlement agreement) and (b) 10,000,000 shares of Common Stock, of which 5,700,725 shares shall be issued and outstanding. As of the Closing, the Company shall not have outstanding any stock or securities convertible or exchangeable for any shares of its capital stock or containing any profit participation features, nor shall it have outstanding any rights or options to subscribe for or to purchase its capital stock or any stock or securities convertible into or exchangeable for its capital stock or any stock appreciation rights or phantom stock plans, except as set forth on the attached "Capitalization Schedule." As of the Closing, all of the outstanding shares of the Company's capital stock, including the Preferred Stock, shall be validly issued, fully paid and nonassessable. (ii) There are no statutory or contractual stockholders preemptive rights or rights 4 of refusal with respect to the issuance of the Securities hereunder. Assuming the representations of the Purchaser in Section 6 are accurate, the offer, sale and issuance of the shares of Preferred Stock hereunder do not require registration under the Securities Act or any applicable state securities laws. 5C. AUTHORIZATION: NO BREACH. The execution, delivery and performance of this Agreement and all other agreements contemplated hereby to which the Company is a party, have been duly authorized by the Company. Assuming the due and valid execution by the other parties thereto, this Agreement and all other agreements contemplated hereby to which the Company is a party each constitutes a valid and binding obligation of the Company enforceable in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, fraudulent conveyance or other similar laws, and to general principles of equity (whether considered in proceedings at law or in equity). The execution and delivery by the Company of this Agreement and all other agreements contemplated hereby to which the Company is a party, the offering, sale and issuance of the Preferred Stock and the fulfillment of and compliance with the respective terms hereof and thereof by the Company, do not and shall not (i) conflict with or result in a breach of the terms, conditions or provisions of, (ii) constitute a default under, (iii) result in the creation of any lien, security interest, charge or encumbrance upon the Company's or any Subsidiary's capital stock or assets pursuant to, (iv) give any third party the right to modify, terminate or accelerate any obligation under, (v) result in a violation of, or (vi), except as required in connection with a registration under the Securities Act as contemplated by the Registration Rights Agreement, require any authorization, consent, approval, exemption or other action by or notice or declaration to, or filing with, any court or administrative or governmental body or agency pursuant to, the charter or bylaws of the Company or any Subsidiary or any law, statute, rule or regulation to which the Company or any Subsidiary is subject, or any agreement, instrument, order, judgment or decree to which the Company or any Subsidiary is subject. 5D. BROKERAGE. Assuming the Purchaser's representations in Section 6 are accurate, there are no claims for brokerage commissions, finders' fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement binding upon the Company. The Company shall pay, and hold the Purchaser harmless against, any liability, loss or expense (including, without limitation, reasonable attorneys' fees and out-of-pocket expenses) arising in connection with any such claim. 5E. GOVERNMENTAL CONSENT, ETC. No permit, consent, approval or authorization of, or declaration to or filing with, any governmental authority is required in connection with the execution, delivery and performance by the Company of this Agreement or the other agreements contemplated hereby, or the consummation by the Company of any other transactions contemplated hereby or thereby, except as expressly contemplated herein or therein. 5F. PUBLIC FILINGS. To the best of the Company's knowledge, neither the 1996 10-K nor any filing made by the Company with the Securities and Exchange Commission ("SEC") thereafter contained, as of the date filed, any untrue statement of a material fact or omitted, as of the date filed, any material fact necessary to make any statements contained therein not misleading under the circumstances given and the Company has not received any request from the SEC to amend or 5 modify any such filing. 5G. LITIGATION. Attached as Schedule 5G is a description of all litigation, investigations and claims pending against the Company, other than routine matters in the ordinary course of business. SECTION 6. - REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser represents and warrants to the Company the following: (i) The Purchaser hereby represents that it is acquiring the Preferred Stock purchased hereunder or acquired pursuant hereto for its own account with the present intention of holding such securities for purposes of investment, and that it has no intention of selling such securities in a public distribution in violation of the federal securities laws or any applicable state securities laws; provided that nothing contained herein shall prevent the Purchaser and subsequent holders of Preferred Stock from transferring such securities in compliance with the provisions of Section 4 hereof. Each certificate or instrument representing Preferred Stock shall be imprinted with a legend in substantially the following form: "The securities represented by this certificate were originally issued on December __, 1997, and have not been registered under the Securities Act. The transfer of the securities represented by this certificate is subject to the conditions specified in the Purchase Agreement, dated as of December __, 1997 and as amended and modified from time to time, between the issuer (the "Company") and the Purchaser, and the Company reserves the right to refuse the transfer of such securities until such conditions have been fulfilled with respect to such transfer. A copy of such conditions shall be furnished by the Company to the holder hereof upon written request and without charge." Certificates representing the Common Stock underlying the Preferred Stock shall be imprinted with a substantially similar legend. (ii) The Purchaser represents and warrants that it is an "accredited investor" as that term is defined in Regulation D promulgated under the Securities Act. The Purchaser acknowledges that it has been given the opportunity to ask questions and receive satisfactory answers concerning the terms and conditions of the Preferred Stock and obtain additional information in order to evaluate the merits and risks of an investment in the Preferred Stock and to verify the accuracy of the information contained in this Agreement. The Purchaser represents and warrants that it is a sophisticated investor with such knowledge and experience in business and financial matters as will enable the Purchaser to evaluate the merits and risks of investment in the Preferred Stock and is able to bear the economic risks and lack of liquidity of an investment in the Preferred Stock. 6 SECTION 7. - DEFINITIONS. 7A. DEFINITIONS. For the purposes of this Agreement, the following terms have the meanings set forth below: "Affiliate" of any particular Person means any other Person controlling, controlled by or under common control with such particular Person, where "control" means the possession, directly or indirectly, of the power to direct the management and policies of a Person whether through the ownership of voting securities, contract or otherwise. "Officer's Certificate" means a certificate signed by the Company's president or its chief financial officer, stating that (i) the officer signing such certificate has made or has caused to be made such investigations as are reasonably necessary in order to permit him to verify the accuracy of the information set forth in such certificate and (ii) to the best of such officer's knowledge, such certificate does not misstate any material fact and does not omit to state any fact necessary to make the certificate not misleading. "Securities Act" means the Securities Act of 1933, as amended, or any similar federal law then in force. "Securities and Exchange Commission" includes any governmental body or agency succeeding to the functions thereof. "Securities Exchange Act" means the Securities Exchange Act of 1934, as amended, or any similar federal law then in force. "Subsidiary" means, with respect to any Person, any corporation, limited liability company, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a limited liability company, partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a limited liability company, partnership, association or other business entity if such Person or Persons shall be allocated a majority of limited liability company, partnership, association or other business entity gains or losses or shall be or control any managing director or general partner of such limited liability company, partnership, association or other business entity. SECTION 8. - MISCELLANEOUS. 8A. CONSENT TO AMENDMENTS. Except as otherwise expressly provided herein, the provisions of this Agreement may be amended, only if the Company and the Purchaser have amended this Agreement in writing. No other course of dealing between the Company and the Purchaser or any delay in exercising any rights hereunder shall operate as a waiver of any rights of the Purchaser. 7 8B. SUCCESSORS AND ASSIGNS. This Agreement may not be assigned by either party without the other's written consent except as otherwise expressly provided herein, all covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. 8C. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 8D. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Agreement. 8E. DESCRIPTIVE HEADINGS: INTERPRETATION. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a substantive part of this Agreement. The use of the word "including" in this Agreement shall be by way of example rather than by limitation. 8F. GOVERNING LAW. The corporate law of the State of Delaware shall govern all issues and questions concerning the relative rights and obligations of the Company and its stockholders. All other issues and questions concerning the construction, validity, enforcement and interpretation of this Agreement and the exhibits and schedules hereto shall be governed by, and construed in accordance with, the laws of the State of New York, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. In furtherance of the foregoing, the internal law of the State of New York shall control the interpretation and construction of this Agreement (and all schedules and exhibits hereto), even though under that jurisdiction's choice of law or conflict of law analysis, the substantive law of some other jurisdiction would ordinarily apply. 8G. NOTICES. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the recipient, sent to the recipient by reputable overnight courier service (charges prepaid), mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid or sent to the recipient by facsimile. Such notices, demands and other communications shall be sent to the offices of the Company at 419 Crossways Park Drive, Woodbury, New York 11797, Attention: Chief Executive Officer, with a copy to Squadron, Ellenoff, Plesent & Sheinfeld, LLP, Attention: Kenneth R. Koch, Esq., at 551 Fifth Avenue, New York, New York 10176 and to the Purchaser at the address indicated below: 405 Lewallen Street Asheboro, North Carolina 27203 Attention: Robert Shaffner 8 with a copy to: Michael Abel, Esq. Schell Bray Aycock Abel & Livingston L.L.P. 1500 Renaissance Plaza 230 North Elm Street Greensboro, North Carolina 27401 or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. 8H. NO THIRD PARTY BENEFICIARIES. This Agreement shall not confer any rights or remedies upon any Person other than the parties hereto and their respective successors and permitted assigns. 8I. NO WAIVER OR MODIFICATION OF EXISTING AGREEMENTS. Nothing contained herein shall be deemed in any respect to modify or waive any provision of the other agreements between the parties hereto, including without limitation, the Credit and Security Agreement, dated as of March 1, 1996, as amended. 8J. EXPENSES. The parties shall bear their respective expenses in connection with this transaction except that the Company will bear up to $25,000 of the legal fees incurred by the Purchaser in connection herewith. 9 IN WITNESS WHEREOF, the parties hereto have executed this Common Stock Purchase Agreement on the date first written above. JENNIFER CONVERTIBLES, INC. /s/ Harley J. Greenfield ---------------------------------------------- By: Harley J. Greenfield, Chief Executive Officer KLAUSSNER FURNITURE INDUSTRIES, INC. /s/ Robert C. Shaffner ---------------------------------------------- By: Robert C. Shaffner, Senior Vice President 10 EX-10.31 5 REGISTRATION RIGHTS AGREEMENT JENNIFER CONVERTIBLES, INC. REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made by and between Jennifer Convertibles, Inc., a Delaware corporation (the "Company"), and Klaussner Furniture Industries, Inc. (the "Investor"). RECITALS A. The Investor desires to purchase from the Company, and the Company desires to issue and sell to the Investor 10,000 shares of Series A Preferred Stock, par value $0.01 per share, of the Company (the "Shares"). B. As further inducement for the Investor to purchase the Shares from the Company, the Company desires to undertake to register under the Securities Act, the shares of common stock, par value $0.01 per share, of the Company (the "Common Stock"), underlying the Shares, in accordance with the terms hereof. AGREEMENTS The Company and the Investor covenant and agree as follows: 1. DEFINITIONS. For the purposes of this Agreement: (a) The term "Investor" includes (i) the Investor (as defined above) and (ii) each person who is a permitted transferee or assignee of the Registrable Securities pursuant to Section 8 of this Agreement. (b) The term "Prospectus" means the prospectus included in any Registration Statement (including, without limitation, a prospectus that discloses information previously omitted form a prospectus filed as part of an effective Registration Statement in reliance upon Rule 430A promulgated under the Securities Act of 1933, as amended), as amended or supplemented by any prospectus supplement, including post-effective amendments, and all material incorporated by reference deemed to be incorporated by reference in such prospectus. (c) The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or statements or similar documents in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document by the Securities and Exchange Commission (the "SEC"). - 1 - (d) The term "Registrable Securities" means (i) any shares of Common Stock issued or issuable upon conversion of the Shares or acquired upon exercise of the Investor's right of first refusal set forth in Section 3 of the Stock Purchase Agreement, dated as of even date herewith (or underlying Equivalents, as defined in such Stock Purchase Agreement, acquired upon exercise of such right) and (ii) shares of Common Stock issued or issuable upon the conversion or exercise of any convertible security, warrant, right or other security which is issued as a dividend or other distribution with respect to, or in exchange for or in replacement of the shares of Common Stock issued, issuable or held pursuant to clause (i) above, excluding in all cases, however, any Registrable Securities sold by an Investor in a transaction in which its registration rights under this Agreement are not assigned pursuant to Section 8 of this Agreement. (e) The term "Registration Statement" means any registration statement of the Company which covers any of the Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus, amendments or supplements to such registration statement, including post-effective amendments, all exhibits, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. 2. DEMAND REGISTRATION. (a) REQUEST FOR REGISTRATION. Subject to the terms of this Agreement, if the Company receives from holders of Registrable Securities, a written request that the Company effect any registration for an offering of Registrable Securities, then the Company will promptly give written notice of the proposed registration to all the holders of Registrable Securities and will, as soon as practicable, subject to Section 2(c) (ii) use its best efforts to effect registration of the Registrable Securities specified in such request, together with all or such portion of the Registrable Securities of any holder joining in such request as are specified in a written request delivered to the Company within twenty (20) days after written notice from the Company of the proposed registration. If such request is made at a time when the Company is eligible to register securities for a secondary offering by its stockholders on Form S-3 (or any successor form to Form S-3, regardless of its designation), then the Company shall use Form S-3 and, if the Company is not so eligible, the Company shall use any registration form for which it is then eligible. Notwithstanding the foregoing, in no event shall the Company be required to effect more than three registrations (the "Initial Demands") at its expense and two additional registrations (the "Additional Demands"), at the expense of the Investor, pursuant to this Section 2(a); provided, further, that the Company shall not be required to effect more than one registration at its expense of an offering managed by an underwriter (an "Underwritten Registration"). (b) NOTICE OF INTENT TO DISTRIBUTE. Each holder of Registrable Securities agrees to give written notice to the Company at least three business days (but no more than 30 business days) prior to any intended distribution of Registrable Securities pursuant to an effective Registration Statement, which notice shall specify the date on which such holder intends to begin such distribution and such information with respect to such holder and the intended distribution of Registrable Securities by such holder as may be required to amend the Registration Statement - 2 - or supplement the related Prospectus with respect to such intended distribution of Registrable Securities. (c) As soon as practicable after the date notice is provided to the Company pursuant to Section 2(a) or (b) above, the Company shall either: (i) (A) If necessary, prepare and file a post-effective amendment to the Registration Statement or a supplement to the related Prospectus or a supplement or amendment to any document incorporated therein by reference or file any other required document so that such Registration Statement will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and (B) provide to each holder of Registrable Securities who has given notice of intention to distribute such holder's Registrable Securities in accordance with Section 2(b) hereof copies of any documents filed pursuant to this Section 2(c); or (ii) Furnish to all the holders of Registrable Securities who joined in the request for registration pursuant to Section 2(a) above or who informed the Company of an intent to distribute pursuant to Section 2(b) above, a certificate signed by an authorized executive officer of the Company stating that, in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company for any registration to be effected as requested under Section 2(a) or for any distribution to be made as described in Section 2(b), in which case the Company shall have the right to defer such filing of a Registration Statement or such distributions for a period of not more than ninety (90) days; provided, however, that the Company may not utilize this right more than once in any twelve-month period. (d) REGISTRATION OF OTHER SECURITIES IN DEMAND REGISTRATION. Any registration statement filed under this Section 2 may, include securities of the Company other than Registrable Securities to the extent required by agreements in effect as of the date hereof. (e) NOTICE OF UNDERWRITING. If a holder of Registrable Securities intends to distribute the Registrable Securities covered by the holder's request by means of an underwriting, the holder shall so advise the Company as a part of the request made pursuant to this Section 2, and the Company shall include such information in the written notice referred to in Section 2(c). (f) SELECTION OF UNDERWRITER IN DEMAND REGISTRATION. The Company shall (together with all holders proposing to distribute their securities through such underwriting) enter into and perform its obligations under an underwriting agreement in usual and customary form with the representative of the underwriter or underwriters (the "Underwriter's Representative") selected for such underwriting by the Investor and consented to by the Company (which consent shall not be unreasonably withheld). - 3 - 3. OBLIGATIONS OF THE COMPANY. In connection with the registration of the Registrable Securities pursuant to this Agreement, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a Registration Statement or Registration Statements on Form S-3 (or such other form as the Company is then eligible for) with respect to all Registrable Securities included therein, and use its best efforts to cause the Registration Statement to become effective as soon as reasonably possible, subject to Section 2(c)(ii), after such filing and, to keep the Registration Statement effective pursuant to Rule 415 under the Securities Act for a period of at least 90 days (in the case of a Registration Statement on a Form other than Form S-3) and 180 days (in the case of a Registration Statement on Form S-3) (the "Period"), which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. (b) Prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and any prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective for the Period. (c) Furnish promptly to each Investor whose Registrable Securities are included in the Registration Statement such number of copies of a Prospectus, including a preliminary prospectus, and all amendments and supplements thereto, and of such other documents as such Investor may reasonably request in order to facilitate the disposition of Registrable Securities owned by such Investor. (d) Use its reasonable efforts to register and qualify the Registrable Securities covered by the Registration Statement under such other securities or Blue Sky laws of such jurisdiction as shall be reasonably requested by the Investor and prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements and to take such other actions as may be necessary to maintain such registration and qualification in effect at all times for the Period and to take all other actions necessary or advisable to enable the disposition of such securities in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (i) qualify to do business, file a general consent to service of process or subject itself to general taxation in any such states or jurisdictions or (ii) provide any undertaking or make any change in its Certificate of Incorporation or bylaws. (e) Notify the Investor who holds Registrable Securities being sold (or in the event of an underwritten offering, the Underwriter's Representative), at any time when a Prospectus is required to be delivered under the Securities Act, of the happening of any event as a result of which the Prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein - 4 - or necessary to make the statements therein not misleading in light of the circumstances then existing. Subject to Section 2(c), the Company shall use its best efforts promptly to amend or supplement the Registration Statement to correct any such untrue statement or omission. (f) Notify the Investor who holds Registrable Securities being sold (or in the event of an underwritten offering, the Underwriter's Representative) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible time. (g) Make generally available to its security holders as soon as practicable, but not later than forty five (45) days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the Securities Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of the Registration Statement. (h) If the Common Stock is then listed on a national securities exchange, use its best efforts to cause the Registrable Securities to be listed on such exchange if the listing of such Registrable Securities is then permitted under the rules of such exchange, or if the Common Stock is not then listed on a national securities exchange, use its best efforts to facilitate the quotation of the Common Stock on NASDAQ, and use its best efforts to cause continued listing of the Common Stock so long as the Registration Statement is in effect under the Securities Act. (i) Provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement. (j) Take all actions reasonably necessary to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities sold pursuant to the Registration Statement and to enable such certificates to be in such denominations and registered in such names as the Investor or any underwriters may reasonably request. (k) Notwithstanding anything contained in this Section 3 to the contrary, the Company shall have no obligation pursuant to Section 2 for the registration of Registrable Securities held by any Investor where such Investor would then be entitled to sell under Rule 144 within any three-month period (or such other unitary period prescribed under Rule 144 as may be provided by amendment thereof) all of the Registrable Securities then held by such Investor. (l) If the Registration Statement relates to an underwritten offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the Underwriter's Representative. - 5 - (m) At the request of the Investor, furnish to the underwriters, if any, on the date that Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Agreement (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, and (ii) a letter, dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters. (n) Make available for inspection by any underwriters participating in the offering and the counsel, accountants or other agents retained by such underwriter, all pertinent financial and other records, corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by such underwriters in connection with the Registration Statement. 4. OBLIGATIONS OF THE INVESTOR. In connection with the registration of the Registrable Securities pursuant to this Agreement, the Investor shall have the following obligations: (a) It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Agreement with respect to the Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended methods of disposition of such securities as shall be reasonably required to effect the registration of the Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. At least thirty (30) days prior to the first anticipated filing date of the Registration Statement, the Company shall notify the Investor of the information the Company requires from the Investor (the "Requested Information") if it elects to have any of its Registrable Securities included in the Registration Statement. If within seven (7) business days of the filing date the Company has not received the Requested Information from the Investor (a "Non-Responsive Investor"), then the Company may file the Registration Statement without including Registrable Securities of such Non-Responsive Investor. (b) The Investor by its acceptance of the Registrable Securities agrees to cooperate with the Company in connection with the preparation and filing of any Registration Statement hereunder, unless the Investor has notified the Company in writing of the Investor's election to exclude all of its Registrable Securities from the Registration Statement. (c) The Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(e), the Investor will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement until the Investor's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(e) and, if so desired by the Company, the Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of such destruction) all copies, other than the permanent file copies then in such Investor's possession, of the Prospectus current at the time of receipt of such notice. - 6 - (d) In the event the Investor selects an underwriter for the offering, the Investor agrees to enter into and perform its obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations and market stand-off obligations, with the managing underwriter of such offering and to take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities. 5. EXPENSES OF REGISTRATION. All expenses other than underwriting discounts and commissions incurred in connection with registration, filings or qualifications pursuant to Section 2, including, without limitation, all registration, listing, filing and qualification fees, printers and accounting fees, the fees and disbursements of counsel for the Company shall be borne by the Company as to the Initial Demands (provided that the Company shall not be required to bear the expenses of more than one Underwritten Registration) and all expenses relating to any registration thereafter pursuant to Additional Demands (or to more than one Underwritten Registration) shall be borne by the Investor. 6. INDEMNIFICATION. In the event any Registrable Securities are included in a Registration Statement under this Agreement: (a) To the extent permitted by law, the Company will indemnify and hold harmless the Investor, the directors, if any, of the Investor, the officers, if any, of the Investor who sign the Registration Statement, each person, if any, who controls the Investor, any underwriter (as defined in the Securities Act) for the Investor and each person, if any, who controls any such underwriter within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against any losses, claims, damages, expenses or liabilities, joint or several) to which any of them may become subject under the Securities Act, the Exchange Act, other federal or state law or otherwise, insofar as such losses, claims, damages, expenses or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof, arise out of or are based upon any of the following statements, omissions or violations (collectively, a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, including any Prospectus, (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law. Subject to the restrictions set forth in Section 6(c) with respect to the number of legal counsel, the Company will reimburse the Investor and each such underwriter or controlling person, promptly as such expenses are incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding. Notwithstanding anything contained in this Agreement to the contrary, the indemnity agreement contained above in this Section 6(a): (I) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld, (II) shall not apply - 7 - to any such case for any such loss, claim, damage, liability or action arising out of or based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by the Investor or any such underwriter or controlling person, as the case may be, and (III) with respect to any preliminary prospectus, shall not inure to the benefit of any person from whom the person asserting any such claim purchased the Registrable Securities that are the subject thereof (or to the benefit of any person controlling such person) if the untrue statement or omission of material fact contained the preliminary prospectus was corrected in the Prospectus, as then amended or supplemented. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Investor or any such underwriter or controlling person and shall survive the transfer of the Registrable Securities by an Investor pursuant to Section 8. (b) To the extent permitted by law, each Investor, severally and not jointly, will indemnify and hold harmless, to the same extent and in the same manner set forth in Section 6(a), the Company, each of its directors, each of its officers who have signed the Registration Statement, each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, any underwriter and any other stockholder selling securities pursuant to the Registration Statement or any of its directors or officers or any person who controls such holder or underwriter, against any losses, claims, damages or liabilities, joint or several) to which any of them may become subject, under the Securities Act, the Exchange Act, other federal or state law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Investor expressly for use in connection with such registration; and such Investor will reimburse any legal or other expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Investor shall be liable under this Section 6(b) for only that amount of losses, claims, damages and liabilities as does not exceed the proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such registration. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such indemnified party and shall survive the transfer of the Registrable Securities by the Investor pursuant to Section 8. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above, with respect to information about such persons so furnished in writing by such persons expressly for inclusion in the Registration Statement (c) Promptly after receipt by an indemnified party under this Section 6 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel satisfactory to the indemnifying party; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses - 8 - to be paid by the indemnifying party, if, in the reasonable opinion of counsel for the indemnifying party, representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The Company shall pay for only one legal counsel for the Investor. Such legal counsel shall be selected by the Investor. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall relieve such indemnifying party of any liability to the indemnified party under this Section 6 only to the extent prejudicial to its ability to defend such action, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under section 6. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, promptly as such expense, loss, damage or liability is incurred and is due and payable. (d) To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under this Section 6 to the extent permitted by law; provided, however, that (i) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in this Section 6, (ii) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11 of the Securities Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of such fraudulent misrepresentation, and (iii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 7. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making available to the Investor the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit the Investor to sell securities of the Company to the public without registration, the Company agrees to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144, at all times after ninety (90) days after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public. (b) File with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act. (c) Furnish to each Investor, so long as such Investor owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company), the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing the - 9 - Investor of any rule or regulation of the SEC which permits the selling of any such securities without registration. 8. ASSIGNMENTS OF REGISTRATION RIGHTS. The rights to have the Company register securities pursuant to this Agreement may be assigned by the Investor to transferees or assignees of such securities provided that (i) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned, (ii) such assignment is in accordance with and permitted by all other agreements between the Company and the transferor or assignor, and (iii) such assignments shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Securities Act. The term "Investor" as used in this Agreement shall include permitted assignees. 9. MISCELLANEOUS. (a) Notices required or permitted to be given hereunder shall be in writing and shall be deemed to be sufficiently given when personally delivered or sent by registered mail, return receipt requested, addressed (i) if to the Company, 419 Crossways Park Drive, Woodbury, New York 11797, Attention: President, and (ii) if to an Investor, at the address set forth under its signature herein, or at such other address as each such party furnishes by notice given in accordance with this Section 9(a). (b) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, will not operate as a waiver thereof. No waiver will be effective unless and until it is in writing and signed by the party giving the waiver. (c) This Agreement shall be enforced, governed and construed in all respects in accordance with the laws of the State of New York (without regard to conflicts of law principles) as such laws are applied by New York courts to agreements entered into and to be performed in New York by and between residents of New York. This Agreement shall be binding upon each Investor and its heirs, estate, legal representatives, successors and permitted assignees and shall inure to the benefit of the Company and its successors and assigns. In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. (d) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only by a writing executed by the Company and the Investor. - 10 - Any amendment or waiver effected in accordance with this Section 9(d) shall be binding upon the Investor and the Company. (e) Any such person is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, then the Company shall be entitled to act upon the basis of the instructions, notice or election received from the registered owner of such Registrable Securities. (f) Subject to execution and delivery of an appropriate confidentiality agreement, Investor shall be entitled to participate, at its own expense, in the preparation of any Registration Statement filed hereunder and to receive information from the Company relevant in connection therewith. Dated this 11th day of December, 1997. JENNIFER CONVERTIBLES, INC. By: /s/ Harley J. Greenfield ------------------------------- Name: Harley J. Greenfield Title: Chief Executive Officer KLAUSSNER FURNITURE INDUSTRIES, INC. By:/s/ Robert C. Shaffner ---------------------------------------- Robert Shaffner, Senior Vice President 405 Lewallen Street Drawer 2201 Asherboro, North Carolina 27204 - 11 - EX-10.32 6 WAIVER & MODIFICATION AGREEMENT KLAUSSNER FURNITURE INDUSTRIES, INC. 405 LEWALLEN ROAD ASHEBORO, NORTH CAROLINA 27203 December 11, 1997 WAIVER AND MODIFICATION AGREEMENT --------------------------------- To the Below-Named Parties: Gentlemen: Reference is made to that certain Credit and Security Agreement dated as of the 1st day of March, 1996 by and among the undersigned and each of you (the "Credit and Security Agreement"), together with all Guaranties, Security Agreements, Assignments, Powers of Attorney, and all other agreements, instruments and documents executed in connection therewith, as amended by letter agreement dated February 26, 1997 (hereinafter collectively referred to as the "Credit Agreements"). All capitalized terms not otherwise defined herein shall have the meaning given such terms in the Credit Agreements. This will confirm our agreement with respect to (1) waiver by the Suppliers and the Secured Party of certain Events of Default described in Section 8(a) of the Credit and Security Agreement and (2) modification of the Credit and Security Agreement. WAIVER - ------ At August 30, 1997, the amount of Secured Obligations outstanding for more than 21 days of the due date was approximately $1,990,000 and, since that date, Secured Obligations in varying amounts have been outstanding for more than 21 days of the due date. The Suppliers and the Secured Party hereby waive any Events of Default occurring on or before the date hereof based on Debtors' failure to pay any Secured Obligations within 21 days of the due date. This Waiver does not apply to any Event of Default occurring after the date hereof based on Debtors' failure to pay any Secured Obligations within 21 days of the due date (regardless of whether such Secured Obligations are outstanding on the date hereof or arise hereafter). The Suppliers and the Secured Party shall have all of the rights and remedies provided for in the Credit Agreements upon the occurrence and continuance of any Event of Default not waived herein. MODIFICATION - ------------ The Credit and Security Agreement is hereby amended by adding thereto a new Section 3A to read as follows: "3A LATE PAYMENT FEE. The Suppliers and Purchasing have agreed that, in lieu of interest and for the convenience of the parties, Purchasing shall pay to the Suppliers, on or before the 10th day of each month (beginning January 10, 1998 with respect to the month of December 1997 and continuing on the 10th day of each month thereafter during the term of this Agreement), an amount equal to the product of .67% times the sum of all Secured Obligations outstanding for more than 60 days as of the last day of the immediately preceding month (based on the Suppliers' invoice date, as reflected on their books and records)." Purchasing, Convertibles, and each of the other Debtors hereby acknowledge and agree that, from and after the date hereof, the terms "Obligations" and "Secured Obligations", as used in the Credit Agreements, include the obligations of Purchasing under Section 3A of the Credit and Security Agreement, as hereinabove amended. Convertibles shall reimburse the Suppliers and the Secured Party for all costs and expenses (including reasonable attorneys' fees) incurred by them in connection with the preparation and negotiation of this Waiver and Modification Agreement. Except as herein specifically provided, no other changes, amendments or modifications to the Credit Agreements are intended or implied and the same are hereby ratified and confirmed. 2 Please confirm that this letter accurately sets forth our understanding and agreement by signing and returning the enclosed copy. Very truly yours, KLAUSSNER FURNITURE INDUSTRIES, INC. (for (itself individually, as successor by merger to Realistic Furniture Industries, Inc. and as Secured Party) RFI ENTERPRISES, INC. KLAUSSNER INTERNATIONAL, L.L.C. KLAUSSNER FURNITURE OF CALIFORNIA, INC. KLAUSSNER CORPORATE SERVICES, INC. (d/b/a Stylecraft) By: /s/ Robert C. Shaffner --------------------------------------------- Robert C. Shaffner READ AND AGREED TO: JENNIFER PURCHASING CORP. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- JENNIFER CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- JENNIFER CONVERTIBLES LICENSING CORP. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- JENNIFER L.P. III By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- 3 JENNIFER L.P. IV By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- JENNIFER MANAGEMENT II CORP. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- ELEGANT LIVING MANAGEMENT, LTD. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- JENNIFER L.P. V By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- JENNIFER L.P. VI By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- BURLINGTON CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- FRAMINGHAM CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- 4 BOSTON POST ROAD CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- SAUGUS CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- WEST ROXBURY CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- CAMBRIDGE CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- DANBURY SQUARE CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- EAST BRUNSWICK CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- WISCONSIN CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- 5 HARTSDALE CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- HIGH RIDGE CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- CONTOUR ROAD CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- CIPRIANO SQUARE CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- NICOLE CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- PORTSMOUTH CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- DANIEL WEBSTER CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- 6 JENNIFER LONG BRANCH, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- ROUTE 17 CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- ROUTE 440 CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- ROUTE 46 CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- ROUTE 7 CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- ROUTE 10 CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- STATEN ISLAND CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- 7 LEESBURG CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- VIENNA CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- VALLEY STREAM CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- CONVERTIBLES OF GRAND CONCOURSE, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- CONVERTIBLES OF WOODBRIDGE, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- CONVERTIBLES OF UNION, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- SOUTHEASTERN FLORIDA HOLDING COMPANY, INC. By: -------------------------------------- Title: -------------------------------------- 8 JENNIFER BOCA, INC. By: -------------------------------------- Title: -------------------------------------- JENNIFER LAUDERHILL, INC. By: -------------------------------------- Title: -------------------------------------- JENNIFER NORTH MIAMI, INC. By: -------------------------------------- Title: -------------------------------------- JENNIFER FLAGLER INC. By: -------------------------------------- Title: -------------------------------------- JENNIFER FORT LAUDERDALE, INC. By: -------------------------------------- Title: -------------------------------------- NATICK CONVERTIBLES, INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- JENNIFER CONVERTIBLES BOYLSTON MA., INC. By: /s/ Harley J. Greenfield -------------------------------------- Title: Chief Executive Officer -------------------------------------- 9 EX-11.1 7 EXHIBIT 11.1
EXHIBIT 11.1 JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES STATEMENT RE: COMPUTATION OF NET (LOSS) PER SHARE YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996, AND AUGUST 26, 1995 (in thousands, except per share data) 1997 1996 1995 Fully Fully Fully Primary Diluted Primary Diluted Primary Diluted ------- ------- ------- ------- -------- -------- Net (loss) ($3,061) ($3,061) ($6,023) ($6,023) ($12,068) ($12,068) ======= ======= ======= ======= ======== ======== Common shares outstanding 5,701 5,701 5,701 5,701 5,701 5,701 ======= ======= ======= ======= ======== ======== Net (loss) per common share ($ 0.54) ($ 0.54) ($ 1.06) ($ 1.06) ($ 2.12) ($ 2.12) ======= ======= ======= ======= ======== ========
EX-27 8 FINANCIAL DATA SCHEDULE
5 0000806817 JENNIFER CONVERTIBLES, INC. 1 USD YEAR AUG-30-1997 SEP-01-1996 AUG-30-1997 1 3,405,000 0 1,149,000 0 7,943,000 12,974,000 14,109,000 6,440,000 22,998,000 30,232,000 0 0 0 57,000 (13,424,000) 22,998,000 97,789,000 97,789,000 67,114,000 101,487,000 0 0 28,000 (2,966,000) 95,000 (3,061,000) 0 0 0 (3,061,000) (0.54) (0.54)
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