-----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, EP381j3rAWsIrrJDi05ebkhsQwyc0sDFKV3hbVHAC3KQsb17xNB73n8NiWQZBcKg D1ODhmtTFOQhwJGT7Y7fiA== 0001019056-99-000656.txt : 19991214 0001019056-99-000656.hdr.sgml : 19991214 ACCESSION NUMBER: 0001019056-99-000656 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990828 FILED AS OF DATE: 19991213 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: 99773554 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 August 28, 1999 Commission File number 1-9681 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 (Address of principal executive office) 5712 - --------------------------------------- ---------------------------- (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] State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.) Aggregate market value of voting stock held by non-affiliates of registrant as of November 14, 1997: $ 12,826,631 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Shares of common stock outstanding as of November 19, 1999: 5,704,058 List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for indemnification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). DOCUMENTS INCORPORATED BY REFERENCE: NONE PART I Item 1. BUSINESS. UNLESS OTHERWISE SET FORTH HEREIN, WHEN WE USE THE TERM "WE" OR ANY DERIVATION THEREOF, WE MEAN JENNIFER CONVERTIBLES, INC., A DELAWARE CORPORATION, AND ITS DIRECT OR INDIRECT SUBSIDIARIES. BUSINESS OVERVIEW We are the owner and licensor of the largest group of sofabed specialty retail stores in the United States, with 123 Jennifer Convertibles(R) stores located on the Eastern seaboard, in the Midwest, on the West Coast and in the Southwest as of August 28, 1999. Of these 123 Jennifer Convertibles(R) stores, we owned 52 and licensed 71 as of August 28, 1999. These 71 licensees pay us a royalty and include several stores which are owned or operated by an affiliated private company, Jara Enterprises, Inc. Such number does not include 23 Jennifer Convertible stores which are owned or operated by the private company on a royalty-free basis. As of August 28, 1999, we also owned an additional 32 "Jennifer Leather" stores. 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. We are the largest dealer of Sealy(R) sofabeds in the United States. Each of our stores has a kiosk devoted to mattress sales. The Jennifer Leather stores specialize in the retail sale of leather livingroom furniture. In fiscal 1997, we 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. We display merchandise in attractively decorated settings designed to show the merchandise as it would appear in the customer's home. In order to generate sales, our licensees and we rely on the attractive image of the stores, competitive pricing, prompt delivery and extensive advertising. We believe that the image presented by our stores is an important factor in our overall marketing strategy. Accordingly, stores are designed to display our merchandise in attractive settings. All of our 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. We display 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 our competitors that primarily target particular segments of the market, we attempt to attract customers covering a broad socioeconomic range of the market and, accordingly, offer 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. We also generally feature attractive price incentives to promote the purchase of merchandise. In addition to offering merchandise by brand name manufacturers, we offer merchandise at our Jennifer Convertibles and Jennifer Leather stores under the "Jennifer" brand name for sofabeds and under the "Bellissimo Collection" brand name for leather merchandise. 1 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 for an additional charge. To maximize the use of our real estate and to offer customers greater selection and value, we, as is common in the mattress industry, sell various sizes of sofabeds with various sizes of mattresses but display only one size of sofabed at our stores. We also offer leather furniture in a number of different grades of leather and colors. We currently emphasize contemporary and traditional sofabeds and companion pieces in the Jennifer Convertibles stores and in the Jennifer Leather stores. We generate 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. This private company operates 27 Jennifer Convertibles stores, 21 of which it owns and six of which it licenses or manages. We do not own or collect any royalties from 23 of such stores which are located in New York. However, the private company operates these stores in substantially the same way as we operate our stores. The private company is owned by Fred Love, an individual who is currently one of our principal stockholders and formerly was one of our directors. Mr. Love is also the brother-in-law of Harley J. Greenfield, our Chairman of the Board, Chief Executive Officer, director and principal stockholder. See "Notes to Consolidated Financial Statements Footnote - Related Party Transactions" and "Certain Relationships and Related Transactions." Merchandise ordered from inventory is generally available to be delivered within two weeks. Customers who place special orders for items, colors or fabrics not in inventory must generally wait four to six weeks for delivery, except for Italian leather merchandise which may take up to 20 weeks. We believe that our delivery times on stocked items and special orders are significantly faster than the usual delivery times for furniture and that our ability to offer quick delivery of merchandise represents a significant competitive advantage. OPERATIONS Generally, our stores are open seven days per week. They are typically staffed by a manager, one full-time salesperson and in some cases, one or more part-time salespersons, as dictated by the sales volume and customer traffic of each particular store. In some cases, where sales volume and customer traffic so warrant, stores may be staffed with one to three additional full-time salespersons. Our licensed stores are substantially the same in appearance and operation as our other stores. Our licensees and we have district managers throughout the United States. The district managers supervise store management and monitor stores within their assigned district to ensure compliance with operating procedures. District managers report to and coordinate operations in their district with our executive management. An inventory of approximately 70% of the items displayed in the stores, in the colors and fabrics displayed, is usually stocked at the private company's warehouse facilities which are described below. Our licensees and we 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 by bank check, certified or 2 official, upon delivery of the merchandise. The balance of the purchase price is collected by the independent trucker making the delivery. MARKETING We advertise in newspapers, radio and on television in an attempt to saturate our marketplaces. Our approach to advertising requires us to establish a number of stores in each area we enter. This concentration of stores enables area advertising expenses to be spread over a larger revenue base and to increase the prominence of the local advertising program. We create advertising campaigns for use by our stores which also may be used by the private company stores. The private company bears a share of advertisement costs in New York. However, we also advertise independently of the private company outside of the New York metropolitan area. We are entitled to reimbursement from most of our licensees, which are responsible for their respective costs of advertising; however, the approach and format of such advertising is usually substantially the same for us and our licensees. We also have the right to approve the content of all licensee advertising. See "Certain Relationships and Related Transactions." In order to further understand our markets, we carefully monitor our sales and obtain other information reflecting trends in the furniture industry and changes in customer preferences. We also review industry publications, attend trade shows and maintain close contact with our suppliers to aid in identifying trends and changes in the industry. LEASING STRATEGY AND CURRENT LOCATIONS We consider the ability to obtain attractive, high-traffic store locations to be critical to the success of our stores. Together with outside real estate consultants, we select sites and negotiate leases on behalf of our licensees. The site selection process involves numerous steps, beginning with the identification of territories capable of sustaining a number of stores sufficient to enable such stores to enjoy significant economies of scale, particularly in advertising, management and distribution. Significant factors in choosing a territory include market demographics and the availability of newspapers and other advertising media to efficiently provide an advertising umbrella in the new territory. Once a territory is selected, we pick 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 one of our officers and we are 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 car or other forms of transportation and provide convenient parking. The locations currently leased by our licensees and us range in size from 1,900 square feet to a little over 8,000 square feet. We anticipate that stores opened in the future will range from approximately 2,000 square feet to 4,000 square feet. Stores may be freestanding or part of a strip shopping center. 3 In fiscal 1999, we closed two stores and opened four new stores. We will continue to selectively close stores where the economics so dictate and we plan to aggressively open additional stores if attractive opportunities present themselves. SOURCES OF SUPPLY We currently purchase merchandise for our stores, the stores of our licensees and for the private company, from a variety of domestic manufacturers generally on 60 to 90 day terms. We also purchase from overseas manufacturers on varying terms. Our purchasing power combined with the purchasing power of our licensees and of the private company enables us to receive the right, in some instances, to market exclusively certain products, fabrics and styles. See "Certain Relationships and Related Transactions." Our principal supplier of sofabeds is Klaussner Furniture Industries, Inc., which also manufactures furniture under the Sealy(R) brand name. Sealy(R) brand name sofabeds are our largest selling brand name item and we believe that Sealy(R) brand name mattresses are the largest selling mattresses in the world and have the highest consumer brand awareness. We are the largest sofabed specialty retailer and the largest Sealy(R) sofabed dealer in the United States. During the fiscal year ended August 28, 1999, we purchased approximately 77% of our merchandise from Klaussner. Leather furniture is purchased primarily from Klaussner, Softline S.p.A., Italdesign, Natuzzi and Ashley. The loss of Klaussner as a supplier could have a material adverse effect on our operations and on our financial well-being. In March 1996, as part of a series of transactions with Klaussner, we, among other things, granted Klaussner a security interest in substantially all of our assets in exchange for improved credit terms under a credit and security agreement with Klaussner. In addition, in December 1997, Klaussner purchased $5,000,000 of our convertible preferred stock. In fiscal 1997, Klaussner also gave us certain vendor credits for advertising and repairs. In fiscal 1998 and 1999, Klaussner gave us certain vendor credits for repairs only. In addition, in December 1999, Klaussner agreed to loan us $150,000 per store to fund the addition of up to 10 new stores. Any such loans are subject to acceleration if we do not purchase at least 50% of our upholstered furniture by dollar volume from Klaussner. See "Certain Relationships and Related Transactions" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a more detailed description of these transactions, Klaussner's $5,000,000 investment and other transactions with Klaussner. LICENSING ARRANGEMENTS The stores we license include certain limited partnership licensees whose accounts are included in our consolidated financial statements which we refer to in this report as our "LP's", and also include other licensees whose accounts are not so included which we refer to as "unconsolidated licensees". Our arrangements with our licensees typically involve providing the licensee with a license, bearing a royalty of 5% of sales, to use the name Jennifer Convertibles(R). Our existing licensing arrangements are not uniform and vary from licensee to licensee. Generally, however, we either manage the licensed stores or, if the licensee is a partnership, have a subsidiary act as general partner of such partnership, in each case, for 1% of the licensee's profits. The arrangements generally have a term ranging between 10 and 20 years 4 and may include options on the licensee's part to extend the license for additional periods. These arrangements may also involve the grant of exclusivity as to defined territories. In some cases, we also have 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 in our ownership, the right to put their investments to us 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 us and we purchase merchandise for the licensees. We also provide certain accounting services to certain licensees for which we generally charge $6,000 per store per annum. As of August 28, 1999, we were owed an aggregate of $6,207,000 for royalties, advances and merchandise by our licensees, a substantial portion of which was overdue. Of such amount, $2,324,000 due from LP's is eliminated in our financial statements as a result of the consolidation of these limited partnerships and $3,883,000 due from our 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 us or our current or former management and, in December 1996, the private company acquired the limited partnership interests in those limited partnerships owning an aggregate of 49 licensed stores. See "Certain Relationships and Related Transactions." WAREHOUSING AND RELATED SERVICES Pursuant to a warehousing agreement with the private company, which expires in 2001, we currently utilize 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. These warehouse facilities service our owned and licensed stores and the private company's stores. Although we are not obligated to use the warehouse facilities of the private company, we have done so to avoid the disruption and the administrative and other costs associated with developing and maintaining the infrastructure required to manage warehousing and handling independently. The warehousing agreement provides that the private company is not obligated to provide services for more than 300 of our owned stores. We pay the private company a monthly warehouse fee equal to 5% of the retail selling price of all merchandise delivered from the warehouse facilities to customers of our owned stores, except for stores opened subsequent to July 1, 1999, which are not charged the 5% fee. Such fee includes 5% of the retail selling price of any related services, such as fabric protection, provided in connection with such merchandise. In addition, the private company has separately contracted with our 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 set forth under the warehousing agreement. The private company also provides to us a number of other services, including fabric protection and warranty services. In addition to the fee for warehousing, we pay the private company a portion, which is approximately one-third, of fabric protection revenues from our customers except for such revenues from customers of stores opened subsequent to July 1, 1999, of which we retain 100%. We also pay the private company for freight charges based on quoted freight rates for arranging delivery of our merchandise. See "Certain Relationships and Related Transactions." 5 TRADEMARKS The trademarks Jennifer Convertibles(R), Jennifer Leather(R), Jennifer House(R), With a Jennifer Sofabed, There's Always a Place to Stay(R), Jenni-Pedic(R), Elegant Living(R), Jennifer's Worryfree Guarantee(R), Jennifer Living Rooms(R) (with logo) and Bellissimo Collection(R) are registered with the U.S. Patent and Trademark Office and are now owned by us. The private company, as licensee, was granted a perpetual royalty-free license to use and sublicense these proprietary marks (other than the ones related to Jennifer Leather) in the State of New York, subject to certain exceptions, including nine stores currently owned by us and operating in New York and two more which the private company has agreed we may open on a royalty-free basis. See "Certain Relationships and Related Transactions." EMPLOYEES As of August 28, 1999, we employed 443 people, including six executive officers. We train personnel to meet our expansion needs by having our most effective managers and salespersons train others and evaluate their progress and potential for us. We believe that our employee relations are satisfactory. None of our employees are represented by a collective bargaining unit. We have never experienced a strike or other material labor dispute. COMPETITION We compete with other furniture specialty stores, major department stores, individual furniture stores and regional furniture chains, some of which have been established for a long time in the same geographic areas as our stores (or areas where we or our licensees may open stores). We believe that the principal areas of competition with respect to our business are store image, price, delivery time, selection and service. We believe that we compete effectively with such retailers because our stores offer a broader assortment of convertible sofabeds than most of our competitors and, as a result of volume purchasing, we are able to offer our merchandise at attractive prices. We also advertise more extensively than many of our competitors and offer substantially faster delivery on most of our items. Item 2. PROPERTIES. We maintain our executive offices in Woodbury, New York pursuant to a lease which expires in the year 2005. As of August 28, 1999, the LP's and we lease all of our store locations pursuant to leases which expire between 1999 and 2013. During fiscal 2000, 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." Item 3. LEGAL PROCEEDINGS. We are involved in a number of proceedings described below. 6 SETTLEMENT OF CLASS ACTION LITIGATION On November 30, 1998, the court approved the settlement of a series of 11 class actions commenced in December 1994 against us, various of our 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 we and the other named defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder in connection with the press release issued by us on or about December 2, 1994. All of these class actions were consolidated under the caption In Re Jennifer Convertibles, Case No. 94 Civ. 5570, pending in the Eastern District of New York. The settlement 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 value of $370,000. The cash portion of the settlement was funded entirely by insurance company proceeds. We issued 26,664 shares of series B preferred stock, convertible into 18,664 shares of our common stock. These shares are non-voting, have a liquidation preference of $5.00 per share or $133,000 in total, and accrue dividends at the rate of $.35 per share per annum. The cumulative unpaid dividends at August 28, 1999 totaled $7,000. The preferred stock is convertible at our option at any time after the common stock trades at a price of at least $7.00 per share. THE DERIVATIVE LITIGATION Beginning in December 1994, a series of six actions were commenced as derivative actions on our behalf, 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, the private company, 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. - ---------------- 1 Each of these individuals and entities is named as a defendant in at least one action. 7 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 our present and former officers and directors, including but not limited to claims relating to the matters described in our December 2, 1994 press release. As described in prior filings, we had entered into settlement agreements as to the derivative litigation subject, in the case of certain of such agreements, to court approval of such settlement by a certain date. Such court approval was not obtained by such date, and in July 1998, the private company exercised its option to withdraw from the settlement. We are currently negotiating with the private company with respect to a new settlement. However, there can be no assurance that a settlement will be reached or as to the terms of such settlement. OTHER LITIGATION We are also subject, in the ordinary course of business, to a number of litigations in relation to leases for those of our stores which we have closed or relocated. Management does not believe the outcome of such litigations will be material to our financial position. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The principal market for our common stock during the two fiscal years ended August 28, 1999 and August 29, 1998 was the NASDAQ Bulletin Board. The following table sets forth, for the fiscal periods indicated, the high and low bid prices of our common stock on the Bulletin Board. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. High Low ----- ----- Fiscal Year 1998: 1st Quarter..................... $2 1/2 $1 3/4 2nd Quarter..................... 2 1/2 1 3/16 3rd Quarter..................... 2 1/32 1 9/16 4th Quarter..................... 2 1/2 1 11/16 8 High Low ----- ----- Fiscal Year 1999: 1st Quarter..................... $1 15/16 $1 7/8 2nd Quarter..................... 2 9/16 2 3/8 3rd Quarter..................... 3 2 13/16 4th Quarter..................... 2 13/16 2 1/16 As of November 16, 1999, there were approximately 229 holders of record and approximately 1,510 beneficial owners of our common stock. On October 29, 1999, the closing bid and asked prices of the common stock as reported on the NASDAQ Bulletin Board were $1 3/4 and $2, respectively. DIVIDEND POLICY We have never paid a dividend on our common stock and we do not anticipate paying dividends on the common stock at the present time. We currently intend to retain earnings, if any, for use in our business. There can be no assurance that we will ever pay dividends on our common stock. Our dividend policy with respect to the common stock is within the discretion of the Board of Directors and its policy with respect to dividends in the future will depend on numerous factors, including our earnings, financial requirements and general business conditions. 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 08/28/1999 08/29/1998 08/30/1997 08/31/1996 08/26/1995 ----------- ----------- ---------- ---------- ---------- Net sales 109,284 111,541 97,789 106,041 126,074 ----------- ----------- ---------- ---------- ---------- Cost of sales, including store occupancy, warehousing, delivery and fabric protection 71,607 74,054 67,114 72,708 86,964 Selling, general and administrative expenses 35,890 35,984 32,904 37,618 45,955 Depreciation and amortization 1,668 1,727 1,840 1,852 2,261 Termination of consulting agreement, legal and other costs -- -- -- -- 500 (Recovery) provision for losses on amounts due from Private Company and Unconsolidated Licensees (42) (196) (426) 952 3,088 Loss from store closings (9) 355 55 191 1,670 ----------- ----------- ---------- ---------- ---------- 109,114 111,924 101,487 113,321 140,438 ----------- ----------- ---------- ---------- ---------- Operating income (loss) 170 (383) (3,698) (7,280) (14,364) ----------- ----------- ---------- ---------- ---------- Other income (expense): Royalty income 388 386 374 375 523 Interest income 171 108 67 195 311 Interest expense (106) (172) (28) (47) (48) Other income, net 150 271 319 880 1,670 ----------- ----------- ---------- ---------- ---------- 603 593 732 1,403 2,456 ----------- ----------- ---------- ---------- ---------- Income (loss) before income taxes 773 210 (2,966) (5,877) (11,908) Income taxes 403 120 95 146 160 ----------- ----------- ---------- ---------- ---------- Net income (loss) $ 370 $ 90 ($3,061) ($6,023) ($12,068) =========== =========== ========== ========== ========== Basic income (loss) per share $ 0.06 $ 0.02 ($0.54) ($1.06) ($2.12) =========== =========== ========== ========== ========== Diluted income (loss) per share $ 0.05 $ 0.01 ($0.54) ($1.06) ($2.12) =========== =========== ========== ========== ========== Weighted average common shares outstanding basic income (loss) per share 5,701,559 5,700,725 5,700,725 5,700,725 5,700,725 Effect of potential common shares issuances: Stock options 22,077 32,641 Convertible preferred stock 1,430,722 1,068,375 ----------- ----------- ---------- ---------- ---------- Weighted average common shares outstanding diluted income (loss) per share 7,154,358 6,801,741 5,700,725 5,700,725 5,700,725 =========== =========== ========== ========== ========== Cash Dividends -- -- -- -- -- =========== =========== ========== ========== ========== Store data: 08/28/99 08/29/98 08/30/97 08/31/96 08/26/95 ----------- ----------- ---------- ---------- ---------- Company-owned stores open at the end of period 84 82 84 86 90 Consolidated licensed stores open at the end of period 62 62 63 64 68 Licensed stores not consolidated open at end of period 9 11 11 11 11 ----------- ----------- ---------- ---------- ---------- Total stores open at end of period 155 155 158 161 169 =========== =========== ========== ========== ========== Balance Sheet Date: 08/28/99 08/29/98 08/30/97 08/31/96 08/26/95 ----------- ----------- ---------- ---------- ---------- Working capital (deficiency) ($10,581) ($11,110) ($17,258) ($15,757) ($10,988) Total assets 26,145 24,099 22,998 25,435 33,871 Long-term obligations 63 49 421 230 337 Total liabilities 34,181 32,547 36,365 35,741 38,154 (Capital deficiency) stockholders' equity (8,036) (8,448) (13,367) (10,306) (4,283) (Capital deficiency) stockholders' equity per share ($1.41) ($1.48) ($2.34) ($1.81) ($0.75)
9 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 OUR 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 US, FACTORS AFFECTING THE FURNITURE INDUSTRY GENERALLY, SUCH AS THE COMPETITIVE AND MARKET ENVIRONMENT, AND MATTERS WHICH MAY AFFECT OUR 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 We are 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. RESULTS OF OPERATIONS FISCAL YEAR ENDED AUGUST 28, 1999 COMPARED TO FISCAL YEAR ENDED AUGUST 29, 1998: Net sales decreased by 2.0% to $109,284,000 for the fiscal year ended August 28, 1999 as compared to $111,541,000 for the fiscal year ended August 29, 1998. This decrease is primarily attributable to a decrease in the Jennifer Leather division's net sales of $3,328,000 or 10.2% due to the closing of two Jennifer Leather stores in the 1999 fiscal year and the closing of two other Jennifer Leather stores during the 1998 fiscal year. Comparable store sales for all of our stores open for a full year in each period decreased by 0.8%. 10 Cost of sales decreased by 3.3% to $71,607,000 for the fiscal year ended August 28, 1999 from $74,054,000 for the fiscal year ended August 29, 1998. Cost of sales as a percentage of sales was 65.5% in fiscal 1999, which declined from 66.4% in the prior year. The percentage decrease of 3.3% is primarily due to decreased warehouse costs of $1,200,000 due to the amendment of the warehouse arrangement with the private company. Included in cost of sales are charges from the private company for warehouse expenses of $4,262,000, fabric protection services of $2,292,000 and freight of $2,363,000. This compared with $5,576,000, $2,592,000 and $2,775,000, respectively, in the previous year. Selling, general and administrative expenses were $35,890,000 (32.9% as a percentage of sales) for the fiscal year ended August 28, 1999 as compared to $35,984,000 (32.3% as a percentage of sales) for the fiscal year ended August 29, 1998, a decrease of $94,000 from the prior year. The decrease is due to the decrease in salaries and other operating expenses, which in aggregate amounted to approximately $974,000, principally due to the decrease in sales. The decrease in operating expenses was offset by an increase in advertising expenses of approximately $880,000 which is due to our national television advertising campaign. Our receivables from the private company ($3,955,000), the unconsolidated licensees (other than Southeastern Florida Holding Corp.) ($2,233,000) and Southeastern Florida Holding Corp. ($1,650,000) increased in the aggregate by $541,000 in the fiscal year ended August 28, 1999 to $7,838,000. In connection with the uncertainty of collectibility and the relationship between the private company, certain licensees consisting of our unconsolidated licensees other than Southeastern Florida Holding Corp., Southeastern Florida Holding Corp. and us, we account monthly 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 to the extent that cash is received from these entities prior to the issuance of our financial statements. These entities have losses and/or capital deficiencies and, accordingly, we have fully reserved uncollected amounts which totaled $6,654,000 at August 28, 1999. Interest income increased by $63,000 to $171,000 for the fiscal year ended August 28, 1999 as compared to the prior year. The increase generally reflects a better cash management program. Net income in the fiscal years ended August 28, 1999 and August 29, 1998 was $370,000 and $90,000, respectively, an increase of income of $280,000. The primary reason for the significant improvement is better management of expenses and the decrease of the warehouse costs, which resulted from an amendment of the original warehouse agreement with the private company. 11 FISCAL YEAR ENDED AUGUST 29, 1998 COMPARED TO FISCAL YEAR ENDED AUGUST 30, 1997: Net sales increased by 14.1% to $111,541,000 for the fiscal year ended August 29, 1998 as compared to $97,789,000 for the fiscal year ended August 30, 1997. This increase is mainly attributable to an increase in the Jennifer Leather division's net sales of $9,447,000 or 37.9%. In the prior year, the division suffered from an inability to obtain merchandise due to an overseas supplier's production problems. Comparable store sales for all of our stores open for a full year in each period increased by 15.0%. Cost of sales increased by 10.3% to $74,054,000 for the fiscal year ended August 29, 1998 from $67,114,000 for the fiscal year ended August 30, 1997. The dollar increase of $6,940,000 is primarily attributable to higher purchases. Cost of sales as a percentage of sales was 66.4% in fiscal 1998, which declined from 68.6% in the prior year primarily because of the higher sales levels. Also included in cost of sales are charges from the private company for warehouse expenses of $5,576,000, fabric protection services of $2,592,000 and freight of $2,775,000. This compared with $5,021,000, $2,543,000 and $2,827,000, respectively, in the previous year. Selling, general and administrative expenses were $35,984,000 (32.3% as a percentage of sales) for the fiscal year ended August 29, 1998 as compared to $32,904,000 (33.6% as a percentage of sales) for the fiscal year ended August 30, 1997, an increase of $3,080,000 or 9.4% from the prior year. This increase was due principally to higher salaries and related benefits of $1,876,000, principally because of the higher sales volume which generated increased commissions as well as the assumption by us of certain payroll expenses starting January 1, 1998 previously funded by the private company totaling $948,000 and new costs of $991,000 in connection with an enhanced private label credit card program that commenced in the current fiscal year. Adjustments related to canceled customer orders declined by $436,000. Advertising expenses declined by $74,000 to $10,819,000 (9.7% as a percentage of sales) as compared to $10,893,000 (11.1% as a percentage of sales) in the prior year. The prior year amount included a credit from Klaussner Furniture Industries, Inc. that totaled $1,075,000. Our receivables from the private company ($3,166,000), the Unconsolidated Licensees (other than Southeastern Florida Holding Corp.) ($2,302,000) and Southeastern Florida Holding Corp. ($1,829,000) increased in the aggregate by $399,000 in the fiscal year ended August 29, 1998 to $7,297,000. In connection with the uncertainty of collectibility and the relationship between the private company, the Private Licensees, Southeastern Florida Holding Corp. and us, we account monthly 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 to the extent that cash is received from these entities prior to the issuance of the financial statements. These entities have losses and/or capital deficiencies and, accordingly, we had fully reserved for all amounts due from the private company, the Private Licensees and Southeastern Florida Holding Corp. in prior years which totaled $6,696,000 at August 29, 1998. 12 Interest income increased by $41,000 to $108,000 for the fiscal year ended August 29, 1998 as compared to the prior year. The increase generally reflects a new cash management program started this year with a new bank. Net income in the fiscal year ended August 29, 1998 was $90,000 as compared to a net loss of $3,061,000 in the prior year, a decrease of loss of $3,151,000. The primary reason for the significant improvement was due to higher sales which produced greater gross margin dollars and management of expenses, which was offset by lower income on customer adjustments to canceled orders and the higher payroll costs from the private company, as discussed above. LIQUIDITY AND CAPITAL RESOURCES As of August 28, 1999, we had an aggregate working capital deficiency of $10,581,000 compared to a deficiency of $11,110,000 at August 29, 1998 and had available cash and cash equivalents of $6,907,000 compared to $4,384,000 at August 29, 1998. The increase of working capital is due to the positive cash flows from operations of $3,509,000 for the year ended August 28, 1999 as compared to the negative cash flows from operations of $3,607,000 for the year ended August 29, 1998. This increase in operating cash flows resulted primarily from an increase of customer deposits and accounts payable and a decrease in merchandise inventories. Due to the significant improvement in our positive operating cash flow, we believe we will have adequate cash flow to fund our operations for the next fiscal year. We are continuing to fund the operations of the LP's which continue to generate operating losses. All such losses have been consolidated in our consolidated financial statements. Our receivables from the private company, the unconsolidated licensees, and Southeastern Florida Holding Corp., had been fully reserved for in prior years. There can be no assurance that the total reserved amount of receivables of $6,654,000 for the year ended August 28, 1999 will be collected. It is our intention to continue to fund these operations in the future. Starting in 1995, the private company and we entered into offset agreements that permit the two companies to offset their current monthly obligations to each other in excess of $1,000,000 of credit extended by us to the private company. Additionally, as part of such agreements, the private company in November 1995 agreed to assume certain liabilities owed to us by the unconsolidated licensees and Southeastern Florida Holding Corp. Current obligations of the private company and the Unconsolidated Licensees as of August 28, 1999 have been paid. In March 1996, we executed a Credit and Security Agreement with our principal supplier, Klaussner, which extended the payment terms for merchandise shipped from 60 days to 81 days. Since the second quarter of the current fiscal year, we have not exceeded these 60 day payment terms by more than 14 days. As of August 28, 1999, there were no amounts owed to Klaussner which were over these extended payment terms. On December 11, 1997, the Credit and Security Agreement was modified to include a late fee of .67% per month for invoices we pay beyond the normal 60 day terms. This provision became effective commencing with the month of January 1998. See "Certain Relationships and Related Transactions". As part of the Credit and Security Agreement, we granted a security interest in all of our assets including the collateral assignment of our leasehold interests, our trademarks and a licensee agreement to operate our business in the event of default. 13 On December 11, 1997, we 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 convertible commencing September 1, 1999 and has other rights associated with it. On November 30, 1998, the court approved a settlement of all the class action litigation pending against us. The cash portion of the settlement was funded entirely by insurance company proceeds. Based upon the proofs of claim filed, we issued $111,000 in Preferred Stock and we made no cash outlays other than for legal costs. In fiscal 1998 and 1997, the LP's and we closed an aggregate of six stores. In fiscal 1999, two additional stores were closed. Several were closed for non-performance, but a number of such closings were due to our 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. For the fiscal years ended August 28, 1999 and August 29, 1998, the LP's and we together spent $743,000 and $141,000, for each such years, for capital expenditures. We currently anticipate capital expenditures approximating $1,300,000 during fiscal 2000 to support the opening of new stores during the next fiscal year. A portion of our store openings will be funded by Klaussner pursuant to an agreement, entered into in December 1999, pursuant to which Klaussner agreed, sbuject to certain conditions, to lend us $150,000 per new store for up to 10 new stores. Each loan will be evidenced by a three year note, bearing interest at the LIBO rate plus 3%. The notes are subject to acceleration under certain circumstances including closing of the stores funded by the loan if we are purchasing at least 50% of our upholstered furniture by dollar volume from Klaussner. In addition, Klaussner will be entitled to a premium on the cost of furniture purchased from it by us for sale to customers of the stores funded by Klaussner. YEAR 2000 We recognize the need to ensure that our operations will not be adversely impacted by potential error from software program calculations using the year 2000 date. We have completed all modifications, changes and testing work in regard to all operating programs that utilize the date as a key for comparison and/or calculation. We realize that while all departmental managers have signed off on the testing of Y2K, there is no amount of testing that can ensure 100% compliance. The cost of achieving Year 2000 compliance, including in-house salaries, wages and benefits, has been estimated at approximately $450,000, which was primarily paid for by the private company which has the responsibility of maintaining the MIS department. We have planned for additional expenditures of approximately $25,000 to correct any minor Y2K software problems after January 1, 2000. INFLATION There was no significant impact on the Company's operations as a result of inflation during the fiscal year ended August 28, 1999. 14 RISK FACTORS CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS This annual report contains certain forward-looking statements based on current expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including the risk factors set forth below and elsewhere in this report. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of these risks actually occur, our business, financial condition and operating results could be materially adversely affected. The cautionary statements made in this annual report on Form 10-K should be read as being applicable to all forward-looking statements wherever they appear in this annual report on Form 10-K. OUR COMPANY HAS EXPERIENCED SUBSTANTIAL LOSSES UNTIL RECENTLY AND CURRENTLY HAS A NEGATIVE NET WORTH We achieved a profit of $370,000 and $90,000 in the fiscal years ended August 28, 1999 and August 29, 1998, respectively. We incurred a net loss of $3,061,000 in the fiscal year ended August 30, 1997. The furniture business is cyclical and we may be unable to continue operating profitably, either due to a change in such cycle, losses from new stores, changes in consumer preferences or demographics or unknown risks and uncertainties that may cause us to incur losses from operations. We had a negative net worth of $8,036,000 as of August 28, 1999. Such negative net worth may impair our ability to obtain additional financing or credit from our suppliers and make it more difficult to obtain leases from landlords. THE OUTCOME OF PENDING LITIGATION IS UNCERTAIN AND MAY ENTAIL SIGNIFICANT EXPENSE As described under "Legal Proceedings", we are currently involved in certain derivative litigation. We have spent a substantial amount on legal fees and other expenses in connection with such litigation. There can be no assurance that we will settle such litigation or that we will be successful in such litigation if not settled. In addition, if we are able to settle the litigation, there can be no assurance that we will be able to do so on terms favorable to us. OUR COMPANY COULD SUFFER FROM POTENTIAL CONFLICTS OF INTEREST Potential conflicts of interest exist since two of our principal stockholders, directors and officers, Harley J. Greenfield, our Chairman of the Board and Chief Executive Officer, and Edward B. Seidner, a director and our Executive Vice President, are owed over $10 million by the private company, which owns, controls or licenses the private company stores. Accordingly, such persons derive substantial economic benefits from the private company. In addition, Fred Love, the owner of the private company, is Mr. Greenfield's brother-in-law. Circumstances may arise in which the interest of the private company stores, of the private company or of Mr. Greenfield and Mr. Seidner will conflict with our interests, including the negotiations to settle the litigation described above. There are also numerous relationships, and have been numerous transactions, between us and the private company, including an agreement under which the 15 private company warehouses merchandise for us and coordinates delivery of such merchandise and under which we purchase merchandise for the private company. The private company provides similar services to our licensees. See "Certain Relationships and Related Transactions." WE HEAVILY DEPEND ON ONE SUPPLIER We purchase a significant percentage of our merchandise from Klaussner, which also manufactures furniture under the Sealy(R) brand name. During the fiscal year ended August 28, 1999, we purchased approximately 77% of our merchandise from Klaussner. Since a large portion of our revenues have been derived from sales of Klaussner products, the loss of this supplier could have a material adverse impact on us until alternative sources of supply are established. Klaussner is also a principal stockholder and creditor of ours and of the private company. Our obligations to Klaussner are secured by substantially all of our assets. Klaussner's position as a significant creditor could potentially result in a temporary or permanent loss of our principal supply of merchandise, if, for example, Klaussner halted supply because we defaulted on or were late in making our payments to Klaussner. Moreover, Klaussner's position as a secured creditor, together with our negative net worth, may make it difficult to obtain substantial supplies from our vendors. See "Certain Relationships and Related Transactions." THE CYCLICAL NATURE OF THE FURNITURE INDUSTRY POSES RISKS TO US FROM A PROLONGED ECONOMIC DOWNTURN The furniture industry historically has been cyclical, fluctuating with general economic cycles. During economic downturns, the furniture industry tends to experience longer periods of recession and greater declines than the general economy. We believe that the industry is significantly influenced by economic conditions generally and particularly by consumer behavior and confidence, the level of personal discretionary spending, housing activity, interest rates, credit availability, demographics and overall consumer confidence. All of these factors could be negatively affected by an economic downturn and therefore a prolonged economic downturn might have a material adverse effect on our business. COMPETITION IN THE FURNITURE INDUSTRY COULD COST US SALES AND CAUSE US TO REDUCE PRICES The retail sofabed business is highly competitive and includes competition from traditional furniture retailers and department stores as well as numerous discount furniture outlets. Our stores may face sharp price cutting, as well as imitation and other forms of competition, and we cannot prevent or restrain others from utilizing a similar marketing format. Although we are the largest sofabed specialty retail dealer in the United States, many of our competitors have considerably greater financial and other resources than do we. WE MAY HAVE DIFFICULTY OBTAINING ADDITIONAL FINANCING Our ability to expand and support our business may depend upon our ability to obtain additional financing. We may have difficulty obtaining debt 16 financing as all of our assets are pledged to Klaussner as security for the amounts we owe under the Klaussner Credit and Security Agreement and because of our negative net worth. From time to time, our financial position has made it difficult for us to secure third party consumer financing. Inability to offer such financing adversely affects sales. HARLEY J. GREENFIELD AND CURRENT MANAGEMENT ARE LIKELY TO RETAIN CONTROL As of November 19, 1999, Harley J. Greenfield, our Chairman of the Board and Chief Executive Officer and principal stockholder, beneficially owns approximately 13.9% of our outstanding shares of common stock. Approximately 31% of the outstanding common stock is beneficially owned by all officers and directors as a group, including Messrs. Greenfield and Seidner. Since the holders of our common stock do not have cumulative voting rights, such officers' and directors' ownership of our common stock will likely enable them to exercise significant influence in matters such as the election of our directors and other matters submitted for stockholder approval. Also, the relationship of such persons to the private company could serve to perpetuate management's control in light of the private company's performance of important functions. OUR FUTURE SUCCESS DEPENDS HEAVILY ON ONE EXECUTIVE Our future success will depend substantially upon the abilities of Harley J. Greenfield, our Chairman of the Board and Chief Executive Officer and one of our principal stockholders. The loss of Mr. Greenfield's services could materially adversely affect our business and our prospects for the future. We maintain key-man life insurance on the life of Mr. Greenfield in the amount of two million ($2,000,000). WE ARE NOT LIKELY TO DECLARE DIVIDENDS We have never declared or paid any cash dividends on our capital stock and do not intend to pay any cash dividends in the foreseeable future. We currently anticipate that we will retain all our earnings for use in the operation and expansion of our business and, therefore, do not anticipate that we will pay any cash dividends in the foreseeable future. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not Applicable. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Index immediately following the signature page. 17 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III Item 10. OUR DIRECTORS AND EXECUTIVE OFFICERS. The names and ages of our directors and our executive officers as of November 15, 1999 are as follows: Position(s) with the Name Age Company ---- --- -------------------- Harley J. Greenfield 55 Director, Chairman of the Board and Chief Executive Officer Edward G. Bohn 54 Director Kevin J. Coyle 54 Director Edward B. Seidner 47 Director and Executive Vice President Bernard Wincig 68 Director Rami Abada 40 Director, President, Chief Operating Officer and Interim Chief Financial Officer Ronald E. Rudzin 37 Senior Vice President Leslie Falchook 39 Vice President - Administration Kevin Mattler 41 Vice President - Store Operations Our directors are elected at the Annual Meeting of stockholders and hold office until their successors are elected and qualified. Our officers are appointed by the Board of Directors and serve at the pleasure of the Board of Directors. We currently have no compensation or nominating committees. The Board of Directors held seven meetings during the 1999 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 28, 1999, consisted of Messrs. Greenfield and Seidner. The Stock Option Committee had one meeting during the 1999 fiscal year. The Stock Option Committee is authorized to administer our stock option plans. 18 The Board of Directors has an Audit and Monitoring Committee, which, during the fiscal year ended August 28, 1999, consisted of Bernard Wincig, Edward Bohn and Kevin Coyle. During such fiscal year, the Audit and Monitoring Committee held three meetings. The Audit and Monitoring Committee is responsible for reviewing the adequacy of the structure of our financial organization and the implementation of our financial and accounting policies. In addition, the Audit and Monitoring Committee reviews the results of the audit performed by our outside auditors before the Annual Report to Stockholders is published. This committee also monitors transactions between the private company and us. Set forth below is a biographical description of each of our directors and executive officers as of November 15, 1999. HARLEY J. GREENFIELD Mr. Greenfield has been our Chairman of the Board and Chief Executive Officer since August 1986 and was our President from August 1986 until December 1997. Mr. Greenfield has been engaged for more than 30 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 New York Home Furnishings Association. EDWARD G. BOHN Mr. Bohn has been a member of our Board of Directors 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 handled the sale and installation of software. Since June 1995, he has been a director of Nuwave Technologies, Inc. From September 1994 to the present, he has operated as an independent consultant for various companies in financial and operational matters. 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 date. KEVIN J. COYLE Mr. Coyle was appointed as a member of our Board of Directors in February 1995. Mr. Coyle is a certified public accountant specializing in litigation support. Mr. Coyle is also currently serving as the Chief Financial Officer of FreshDirect of New York, Inc., a company organized to sell perishable food products directly to consumers over the Internet. Until 1993, Mr. Coyle was President of Olde Kraft Company Ltd., a retail furniture business operating seven stores in the New York Metropolitan Area. Mr. 19 Coyle graduated from Queens College with a BS in accounting and is a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants. EDWARD B. SEIDNER Mr. Seidner became a member of our Board of Directors in August 1986 and an Executive Vice President 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 New York Home Furnishings Association. BERNARD WINCIG Mr. Wincig became a member of our Board of Directors 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. RAMI ABADA Mr. Abada became our President and a member of our Board of Directors on December 2, 1997, has been our Chief Operating Officer since April 12, 1994 and became the Interim Chief Financial Officer on September 10, 1999 following the resignation of George J. Nadel. Mr. Abada was our Executive Vice President from April 12, 1994 to December 2, 1997. Prior to joining us, 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. RONALD E. RUDZIN Mr. Rudzin became our Senior Vice President on April 12, 1994. Prior to joining us, Mr. Rudzin had been employed by the private company since 1979. Mr. Rudzin was, and is, in charge of directing our sales force and the sales forces of the private company stores and our licensed stores. LESLIE FALCHOOK Mr. Falchook has been one of our Vice Presidents since September 1986. Mr. Falchook is primarily involved with our internal operations. Prior to joining us, Mr. Falchook had been employed by the private company since 1982. KEVIN MATTLER Mr. Mattler became our Vice President - Store Operations on April 12, 1994 and has been with us since 1988. Mr. Mattler is involved with, and supervises, the operation of our stores and, during his tenure with us, Mr. Mattler has been involved in all facets of our operations. Prior to joining us, Mr. Mattler had been employed by the private company since 1982. 20 Certain of our directors and former officers are defendants in the litigation described under "Legal Proceedings" above. See also "Certain Relationships and Related Transactions." Item 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table sets forth compensation paid for the fiscal years ended August 28, 1999, August 29, 1998 and August 3o, 1997, or such shorter period as such employees were employed by us to those persons who were either (a) the chief executive officer as of August 28, 1999 or (b) one of our four other most highly compensated executive officers at August 28, 1999 whose total annual salary and other compensation exceeded $100,000.
ANNUAL COMPENSATION LONG-TERM COMPENSATION --------------------------------------------- ---------------------------------------------------- AWARDS PAYOUTS ----------------------------------------- RESTRICTED SECURITIES OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER NAME AND PRINCIPAL COMPENSATION AWARD(S) OPTIONS PAY-OUTS COMPENSATION POSITION YEAR SALARY($) BONUS($) ($) ($) /SARS (#) ($) ($) - ------------------------------------------------------------------------------------------------------------------------------------ (a) (b) (c) (d) (e) (f) (g) (h) (i) Harley J. Greenfield, 1999 $320,000(1) $63,675 $ 0(1) __ 0(1) __ $ 0(1) Chairman of the Board 1998 320,000 (1)(2) $ 0 __ 0 __ $ 0 and Chief Executive 1997 320,000 __ $ 0 __ 0 __ $ 0 Officer __ Edward B. Seidner, 1999 $240,000 __ $ 0 __ 0 __ $ 0 Executive Vice President 1998 240,000 __ $ 0 __ 0 __ $ 0 1997 240,000 __ $ 0 __ 0 __ $ 0 George J. Nadel, 1999 $225,000 __ $ 0 __ 0 __ $ 0 Executive Vice President 1998 225,000 __ $ 0 __ 0 __ $ 0 and Chief Financial 1997 225,000 __ $ 0 __ 50,000(3) __ $ 0 Officer
21
ANNUAL COMPENSATION LONG-TERM COMPENSATION --------------------------------------------- ---------------------------------------------------- AWARDS PAYOUTS ----------------------------------------- RESTRICTED SECURITIES OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER NAME AND PRINCIPAL COMPENSATION AWARD(S) OPTIONS PAY-OUTS COMPENSATION POSITION YEAR SALARY($) BONUS($) ($) ($) /SARS (#) ($) ($) - ------------------------------------------------------------------------------------------------------------------------------------ (a) (b) (c) (d) (e) (f) (g) (h) (i) Leslie Falchook, 1999 $116,000 __ $ 0 __ 0 __ $ 0 Vice President - 1998 116,000 __ $ 0 __ 0 __ $ 0 Administration 1997 116,000 __ $ 0 __ 50,000 __ $ 0 (4) Rami Abada, President, 1999 $120,000(5) $63,675 $ 0(5) __ 0 (5) __ $ 0(5) Chief Operating Officer 1998 120,000 (5)(6) $ 0 __ 100,000 __ $ 0 and Interim Chief 1997 120,000 __ $ 0 __ (7) $ 0 Financial Officer __ 100,000 __ (8) Ronald E. Rudzin, 1999 $120,000 __ $ 0 __ 0 __ $ 0 Senior Vice President 1998 120,000 __ $ 0 __ 0 __ $ 0 1997 120,000 __ $ 0 __ 100,000 __ $ 0 (9) Kevin Mattler, 1999 $131,000 __ $ 0 __ 0 __ $ 0 Vice President - 1998 $120,000 __ $ 0 __ 0 __ $ 0 Store Operations 1997 $ 96,000 __ $ 0 __ 50,000(10) __ $ 0
- --------------------- (1) On August 15, 1999, we entered into a five year renewable employment agreement with Mr. Greenfield under which Mr. Greenfield is entitled to a base salary of $400,000, subject to certain cost-of-living increases, and incentive bonuses based on our earnings before interest, taxes, depreciation and amortization ("EBITDA") and revenues. Mr. Greenfield has voluntarily reduced his base salary through fiscal 1999 to $320,000. (2) Such amount was accrued with respect to fiscal 1999, but not yet paid. (3) On May 6, 1997, Mr. Nadel was granted options to purchase 50,000 shares of our common stock at $2.00 per share, the market value on the date of grant, in exchange for the cancellation of the options granted in 1995 to Mr. Nadel to purchase 25,000 shares of our common stock at $2.50 per share and to purchase 25,000 shares of our common stock at $3.53 per share, in each case the market value on the date of grant. (4) On May 6, 1997, Mr. Falchook was granted options to purchase 50,000 shares of our 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 our common stock at $13.125 per share which were granted in 1993. (5) On August 15, 1999, we entered into a five year renewable employment agreement with Mr. Abada under which Mr. Abada is entitled to a base salary of $400,000 for the first three years and $500,000 thereafter, subject to certain cost-of-living increases, incentive bonuses based on EBITDA and revenues, and stock options to purchase 300,000 shares of our common stock at $3.51 per share which were granted to Mr. Abada in November of 1999. Mr. Abada is entitled to, and we will pay him for, amounts due to him under the agreement from and including the date of his agreement. (6) Such amount was accrued with respect to fiscal 1999, but not yet paid. (7) On December 3, 1997, Mr. Abada was granted options to purchase 100,000 shares of our common stock at $2.44 per share, the market value on the date of grant. 22 (8) On May 6, 1997, Mr. Abada was granted options to purchase 100,000 shares of our common stock at $2.00 per share, the market value on the date of grant. (9) On May 6, 1997, Mr. Rudzin was granted options to purchase 100,000 shares of our common stock at $2.00 per share, the market value on the date of grant. (10) On May 6, 1997, Mr. Mattler was granted options to purchase 50,000 shares of our common stock at $2.00 per share, the market value on the date of the grant. Non-employee directors currently receive a fee of $10,000 per year, plus $500 per meeting attended which fees amounted to an aggregate of $76,000 in fiscal 1999. Directors are reimbursed for out-of-pocket expenses incurred in connection with their services as such. STOCK OPTION PLANS We have Incentive and Non-Qualified Stock Option Plans, pursuant to which, as of August 28, 1999, options to purchase an aggregate of 820,047 shares of our common stock were outstanding and under which options to purchase an aggregate of 26,953 shares of common stock were available for grant. In addition, options granted outside of these plans to purchase an additional 784,000 shares of common stock were outstanding as of August 28, 1999. These plans are administered by a Stock Option Committee consisting of two persons appointed by the Board of Directors. As of August 28, 1999, this 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 our capital stock, 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 Stock Option Committee considers the person's position, responsibilities, service, accomplishments, present and future value to us, the anticipated length of his future service and other relevant factors. Members of this committee are not eligible to receive options under these 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 these plans. The exercise price of all options granted under or outside of these plans equaled or exceeded the market value of the underlying shares on the date of grant. OPTION GRANTS IN LAST FISCAL YEAR In November, 1999, in connection with his employment contract entered in August 1999, Mr. Abada was awarded stock options to purchase 300,000 shares 23 of our common stock at $3.51 per share, which exceeds the market value of the common stock on the date of the grant. AGGREGATED 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 28, 1999 August 28, 1999 (1) - ------------------------------------------------------------------------------------------------------------------------------------ Shares Acquired On Value Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable ---- ------------- -------- ----------- ------------- ----------- ------------- Harley J. Greenfield (2)(4) N/A N/A 297,047 0 $0 $0 Edward B. Seidner N/A N/A 0 0 0 0 George J. Nadel(3)(4) N/A N/A 33,332 16,668 2,000 1,000 Leslie Falchook(4)(5) N/A N/A 33,332 16,668 2,000 1,000 Rami Abada(6)(7) N/A N/A 99,998 100,002 6,000 6,000 Ronald E. Rudzin(8) N/A N/A 33,332 16,668 2,000 1,000
------------------- (1) Amount reflects the market value of the underlying shares of our common stock as reported on the Bulletin Board on August 28, 1999, a bid price of $2.06, less the exercise price of each option. (2) Includes (a) 122,047 options granted on September 17, 1991 at an exercise price of $4.88 per share, (b) 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 (c) 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 December 3, 1997 to Mr. Abada at an exercise price of $2.44 per share. (8) Includes 100,000 options granted on May 6, 1997 to Mr. Rudzin at an exercise price of $2.00 per share. 24 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* AMONG JENNIFER CONVERTIBLES, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX AND THE S & P HOUSEHOLD FURNISHINGS & APPLIANCES INDEX
Cumulative Total Return -------------------------------------------------------------------- 8/94 8/95 8/96 8/97 8/98 8/99 JENNIFER CONVERTIBLES, INC. 100 40 32 32 23 27 NASDAQ STOCK MARKET (U.S.) 100 135 152 212 200 371 S & P HOUSEHOLD FURNISHINGS & APPLIANCES 100 101 103 131 152 223
*$100 INVESTED ON 8/31/94 IN STOCK OR INDEX - INCLUDING REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING AUGUST 31.
Begin: 08/31/1994 Period End: 08/31/1999 End: 08/31/1999 Beginning Transaction Closing No. Of Dividend Dividend Shares Ending Cum. Tot. Date* Type Price** Shares*** per Share Paid Reinvested Shares Return ----- ----------- -------- ---------- --------- -------- ---------- ------ --------- 31-Aug-94 Begin 7.750 12.90 12.903 100.00 31-Aug-95 Year End 3.063 12.90 12.903 39.52 31-Aug-96 Year End 2.500 12.90 12.903 32.26 31-Aug-97 Year End 2.500 12.90 12.903 32.26 31-Aug-98 Year End 1.813 12.90 12.903 23.39 31-Aug-99 End 2.110 12.90 12.903 27.23
* Specified ending dates or ex-dividends dates. ** All Closing Prices and Dividends are adjusted for stock splits and stock dividends. *** 'Begin Shares' based on $100 investment. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth, as of November 30, 1999, information regarding the beneficial ownership of our common stock by (a) each person who is known to us to be the owner of more than five percent of our common stock, (b) each of our directors, (c) each of the executive officers whose total annual salary and other compensation for fiscal year 1999 exceeded $100,000, and (d) all directors and executive officers as a group. Information as to David A. Belford and the Pacchia, Grossman, Shaked, Wexford Group, Hans J. Klaussner and Klaussner is based on Schedules 13D filed by such persons or group:
AMOUNT AND NATURE OF NAME AND ADDRESS OF BENEFICIAL BENEFICIAL OWNER OWNERSHIP (1) PERCENT OF CLASS ---------------- ----------------- ---------------- Harley J. Greenfield (2) 835,336 (2)(3) 13.9% Edward B. Seidner (2) 553,914 (2)(4) 9.7 Fred J. Love (2) 585,662 (2)(5)(6) 10.3 Jara Enterprises, Inc. (the private company) (2) 293,579 (6) 5.1 David A. Belford (7) 394,000 (7) 6.9 Pacchia, Grossman, Shaked, Wexford Group (8) 482,100 (8) 8.5 Bernard Wincig (9) 147,239 (9) 2.6 Edward G. Bohn (10) 25,000 (10) 0.4 Kevin J. Coyle (10) 31,250 (10) 0.5 Leslie Falchook (11) 60,932 (11) 1.1 George J. Nadel (12) 33,332 (12) 0.6 Rami Abada (13) 152,998 (13) 2.6 Ronald E. Rudzin (14) 129,166 (14) 2.2 Kevin Mattler (15) 33,332 (15) 0.6 Hans J. Klaussner and Klaussner Furniture 1,424,500 (16) 19.9 Industries, Inc. (16) All directors and executive 1,969,167 (2)(3)(4)(9) 31.2 officers as a group (10)(11)(13)(14)(15) (nine (9) persons)
-------------------- (1) All of such shares are owned directly with sole voting and investment power, unless otherwise noted below. 25 (2) The address of Messrs. Greenfield and Seidner is c/o Jennifer Convertibles, Inc., 419 Crossways Park Drive, Woodbury, New York 11797. The address of Fred J. Love and the private company is One Ames Court, Plainview, New York 11803. Mr. Greenfield and Mr. Love are brothers-in-law. (3) Includes (a) 292,831 shares underlying options granted to Mr. Greenfield by Mr. Love and the private company, over which Mr. Greenfield has no voting power but has shared dispositive power, as such shares may not be disposed of without his consent and (b) 297,047 shares of common stock underlying vested options granted to Mr. Greenfield by us, with respect to which shares Mr. Greenfield would have sole voting and dispositive power upon exercise of such options. Does not include 300,000 shares of common stock underlying options to acquire convertible preferred stock granted to Mr. Greenfield by Klaussner subsequent to November 30, 1999. See "Executive Compensation." (4) Includes 292,831 shares underlying the options granted to Mr. Seidner by Mr. Love and the private company, over which Mr. Seidner has no voting power but has shared dispositive power, as such shares may not be disposed of without his consent. (5) Includes 293,579 shares of common stock owned by the private company, over which Mr. Love has sole voting and dispositive power, which, together with 292,083 shares owned directly by Mr. Love, are subject to the options granted to Mr. Greenfield by Mr. Love and the options granted to Mr. Seidner by Mr. Love and the private company, 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 the private company. Includes shares of our common stock owned by three of the private company's wholly-owned subsidiaries. Mr. Love has sole voting and shared dispositive power over such shares, as such shares are subject to the options granted by him to Mr. Greenfield and Mr. Seidner and may not be disposed of without the consent of the relevant optionee. The private company's address is One Ames Court, Plainview, New York 11803. (7) The address of David A. Belford is 2097 S. Hamilton Road, Suite 200, Columbus, Ohio 43232. (8) Represents the shares of our common stock owned by a group which was formed to object to the prior 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 - 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 - 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 - sole 37,700, shared 1,300, total 39,000; (18) IRA fbo Amir 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. 26 (9) Includes 8,800 shares of our common stock owned by Mr. Wincig's wife and 27,666 shares of our common stock underlying exercisable options. Does not include 1,334 shares of our common stock underlying options which have not yet vested. (10) Includes, as to each individual, 25,000 shares of our common stock underlying exercisable options. (11) Includes 33,332 shares of our common stock underlying options which are currently exercisable options, but does not include 16,668 shares of our common stock underlying options which are not currently exercisable. (12) Includes 33,332 shares of our common stock underlying options which are currently exercisable options, but does not include 16,668 shares of common stock underlying options which are not currently exercisable. (13) Includes 99,998 shares of our common stock underlying options which are currently exercisable options, but does not include 400,002 shares of our common stock underlying options which are not currently exercisable. (14) Includes 66,666 shares of our common stock underlying options which are currently exercisable options, but does not include 33,334 shares of our common stock underlying options which are not currently exercisable. (15) Includes 33,332 shares of our common stock underlying exercisable options, but does not include 16,668 shares of our common stock underlying options which are not currently exercisable. (16) Represents 1,424,500 shares underlying convertible preferred stock issued to Klaussner in connection with Klaussner's $5,000,000 investment. Includes 300,000 shares of common stock subject to options to acquire preferred stock granted to Mr. Greenfield by Klaussner subsequent to November 30, 1999. See "Certain Relationships and Related Transactions." Based on information contained in the Schedule 13D filed by Klaussner and its owner, Hans J. Klaussner, Mr. Klaussner is the sole stockholder of the parent of Klaussner and, accordingly, may be deemed the beneficial owner of the 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 our review of reports filed by our directors, executive officers and 10% shareholders 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 1999. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. THE PRIVATE COMPANY Until November 1994, Harley J. Greenfield, Fred J. Love and Edward B. Seidner, each owned 33- 1/3% of the private company, which, together with its subsidiaries, owns or licenses the private company stores. In November of 1994, Messrs. Greenfield and Seidner sold their interests in the private company for long-term notes and options to purchase the shares of our common stock which are owned by Mr. Love and the private company. As a result of such sale, Mr. Love now beneficially owns 100% of the private company. The private company is responsible for the warehousing for our owned stores, our licensed stores and the private company stores and leases and operates the warehouse facilities for such stores. Until December 31, 1993, the private company was also responsible for the purchasing and for certain advertising and promotional activities for our owned stores, our licensed stores and the private company stores. Effective January 1, 1994, we assumed the responsibility for purchasing and advertising for ourselves, our licensees, and the private company stores. The private company is responsible for a share of all advertising production costs and costs of publication of promotional material within the New York area. Until October 27 28, 1993, a corporation of which Messrs. Greenfield, Seidner and Love each owned 33-1/3%, owned the trademarks "Jennifer Convertibles(R)" and "With a Jennifer Sofabed, There's Always a Place to Stay(R)." On October 28, 1993, these trademarks were assigned to us from such corporation for nominal consideration, and we agreed to license such trademarks to the private company in New York, as described below. Mr. Love is, and until November 1994, Mr. Seidner was, an executive officer and director of the private company. As noted above, in November 1994, Mr. Greenfield and Mr. Seidner sold their interests in the private company in exchange for long-term promissory notes from the private company and options to purchase the shares of our common stock which are owned by the private company and Mr. Love. These notes are due in December 2023. Only interest is payable on the notes until December 1, 2001 and, thereafter, principal is payable monthly through the maturity date. These notes amount to $10,273,204 in aggregate principal, of which $5,136,602 is owned by Mr. Greenfield and $5,136,602 is owned by Mr. Seidner. The notes bear interest at a rate of 7.5% per annum although a portion of such interest was deferred for a period of time. During the fiscal year ended August 28, 1999, Mr. Greenfield and Mr. Seidner each received approximately $330,000 of interest on their promissory notes from the private company. These notes are secured by (a) a security interest in the private company's personal property, (b) Mr. Love's personal guarantee of the private company's performance under the Notes, and (c) a stock pledge by Mr. Love of his stock in the private company to secure his obligations under the guarantees. The options owned by Mr. Greenfield and Mr. Seidner to purchase the Jennifer common stock owned by Mr. Love and the private company and referred to above are exercisable for an aggregate of 585,662 shares of such common stock, of which 292,831 are owned by Mr. Greenfield and 292,831 by Mr. Seidner at a price of $15.00 per share until they expire on November 7, 2004. In addition, Mr. Greenfield and Mr. Seidner each owe $1,354,000 to the private company as of August 28, 1999. THE LICENSE Pursuant to a license agreement between us and the private company, the private company has the perpetual, royalty-free right to use, sublicense and franchise the use of the trademarks "Jennifer Convertibles(R)," with "Jennifer Sofabeds, There's Always a Place to Stay(R)" in the state of New York. The license is exclusive in such territory, subject to certain exceptions including nine stores operated by us in New York on a royalty-free basis and up to two additional stores which the private company has agreed may be opened in New York on a royalty-free basis. THE PURCHASING AND WAREHOUSING AGREEMENT As set forth in "Business-Warehousing and Related Services," the private company provides certain warehouse facilities and related services, including arranging for goods to be delivered to such facilities and to customers pursuant to a warehousing agreement between the private company and us. The private company is reimbursed by us and its licensees for the freight charges on such deliveries at predetermined freight rates. The private company also provides fabric protection services, including a life-time warranty, to our customers and our licensees. 28 We retain approximately 2/3 of the revenues from fabric protection and the warranty. During the fiscal year ended August 28, 1999, the LP's and we paid warehouse fees under an Offset Agreement dated March 1, 1996 to the private company aggregating approximately $4,262,000. During the fiscal year ended August 28, 1999, the LP's and we also paid $2,363,000 under the Offset Agreement for freight charges and $2,292,000 for fabric protection to the private company. On February 9, 1999, we entered into an amendment to the warehouse agreement which reduced the monthly warehousing fees by $150,000 or an aggregate of $1,200,000 through August 31, 1999 when the amendment terminated. In December of 1999, the $150,000 per month arrangement was extended, effective as of September 1, 1999, and the private company also agreed that stores opened by us after June 1, 1999 would not be charged the 5% warehousing fee or fabric protection charges. Pursuant to a purchasing agreement, we are obligated to purchase merchandise for the private company on the same terms as we purchase merchandise for ourselves. During the fiscal year ended August 28, 1999, the private company purchased from us approximately $11,646,000 of merchandise, net of discounts and allowances, which was paid under the Offset Agreement. THE OFFSET AGREEMENT By agreement dated November 1, 1995, the private company and we agreed as to certain amounts owed, as of August 26, 1995, to each other and owed by certain licensees consisting of our unconsolidated licensees other than Southeastern Florida Holding Corp. which we refer to as the "Private Licensees." In addition, the private company agreed to assume the obligations of the Private Licensees referred to above and to offset the amounts owed to us by the private company against the amounts owed to the private company by us. By the Offset Agreement dated March 1, 1996, we agreed to continue to offset, on a monthly basis, amounts owed by the private company and the Private Licensees to us for purchasing, advertising, and other services and matters against amounts owed by us to the private company for warehousing services, fabric protection, freight and other services and matters. The parties are currently operating under the terms of an unsigned offset agreement which provides for cash payments of current amounts due in excess of $1,000,000 owed to us. In addition, since January 1, 1998, we have assumed certain payroll expenses previously funded by the private company which totaled $1,408,000 in the fiscal year ended August 28, 1999 and $948,000 for the fiscal year ended August 29, 1998. As of August 28, 1999, the private company owed to us $1,184,000 for current charges for fiscal 1999 under the Offset Agreement which have since been fully paid. The private company paid for all current charges under the Offset Agreement during fiscal 1999. Amounts owed by the private company and certain licensees to us as of August 28, 1999 which consist of unpaid amounts from fiscal 1996 and prior years totaling $6,654,000, 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." 29 THE ADVERTISING AGREEMENT Under the advertising agreement between the private company and us, the private company and the unconsolidated licensees bear their 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 28, 1999, the charges for such costs totaled $2,240,000. JENNIFER LIVING ROOMS In September 1996, we opened two test "Jennifer Living Rooms" stores in St. Louis, Missouri. Under its license with us, 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 we had claims against Messrs. Greenfield, Love, Seidner and the private company. During fiscal 1999, we paid legal fees for Harley J. Greenfield of $3,846 in connection with these matters. JCI CONSULTANT, L.P. Until August 20, 1999, JCI Consultant, L.P. was the beneficial owner of more than 5% of our stock. Related parties of JCI Consultant, L.P. owned, until we purchased it as of September 1, 1994, Jennifer L.P. II, a limited partnership which operated, pursuant to a license agreement with us, 21 Jennifer Convertible stores in the Detroit, St. Louis, Indianapolis, Milwaukee and Kansas City metropolitan areas. On August 20, 1999, we entered into an L.P. Option Purchase and Termination Agreement with Jennifer Chicago Ltd., an Illinois corporation, and our wholly-owned subsidiary, Jenco Partners, L.P., a limited partnership which was the sole limited partner of Jennifer Chicago, L.P., a Delaware limited partnership operating 14 stores in Chicago, JCI Consultant L.P., a limited partnership which owned options to purchase 1,200,000 shares of our common stock, Selig Zises, a principal stockholder of Jenco Partners and JCI Consultant, Jay Zises, the private company, Fred Love, Harley J. Greenfield and Edward B. Seidner pursuant to which (a) Jennifer Chicago Ltd. acquired, from Jenco Partners, 100% of the limited partnership interest in Jennifer Chicago L.P. and (b) the options held by JCI Consultant to purchase 1,200,000 shares of our common stock at an exercise price of $8.00 per share were terminated. As consideration for the above, we paid an aggregate of $699,000 consisting of $252,000 in cash and a promissory note in the principal amount of $447,000. Such note bears interest at prime plus 3% per annum 30 with the principal payable in two installments as follows: $223,500 to be paid on February 1, 2000 and the remaining $223,500 to be paid on September 1, 2000. During the fiscal year ended August 28, 1999, we earned $498,000 of royalties from our partnership interest in Jennifer Chicago, which is eliminated in the financial statements due to the consolidation of the LP's for financial statement purposes. In further connection with the above L.P. Option Purchase and Termination Agreement, Jennifer Chicago Ltd., the private company, Mr. Greenfield, Mr. Love, Mr. Seidner and we on the one hand and the Zises, JCI Consultant and Jenco Partners on the other, entered into mutual releases. The Zises also agreed not to, directly or indirectly, acquire any beneficial interest in our common stock until December 31, 2010. ADDITIONAL MATTERS Currently, Rami Abada, our President and Chief Operating Officer, owns two corporations which each own a licensed Jennifer Convertibles store. During the year ended August 28, 1999, such corporations purchased $735,000 of merchandise and incurred royalties of $81,000, all of which were paid in full under the Offset Agreement. Such corporations have received financing from the private company, with a balance of $889,337 as of August 28, 1999, and, by a letter agreement dated March 14, 1998 among Mr. Abada, the two corporations and us, all amounts owed by the two corporations to us 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 28, 1999, Mr. Abada received $330,000 of salary, severance pay, distributions and other payments from such licensees and the private company. Currently, Ronald Rudzin, our Senior Vice President, owns one licensed Jennifer Convertibles store. He previously owned two such stores but he sold one of these to the private company in January of 1999 and the private company now operates this store on a royalty-free basis. Mr. Rudzin's mother currently owns two licensed Jennifer Convertibles stores. As of August 28, 1999, all amounts owed by the three corporations to us which amounts were 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 year ended August 28, 1999, such corporations purchased $1,373,000 of merchandise from us and incurred $115,000 of additional charges with us, all of which were paid in full under the Offset Agreement. During the fiscal year ended August 28, 1999, Mr. Rudzin received approximately $210,000 of salary, distributions and other payments from such licensees and the private company. Amounts owed to us, other than for current charges, by the corporate licensees referred to above, each of which is a Private Licensee, have been fully reserved against in the accompanying financial statements 31 for the 1997, 1998 and 1999 fiscal years due to uncertain collectibility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." From time to time the private company and we use the services of Wincig & Wincig, a law firm of which Bernard Wincig, one of our directors and stockholders, is a partner. Mr. Wincig and his firm received approximately $153,208 of legal fees from us and the LP's and an aggregate of approximately $23,052 from the private company during the fiscal year ended August 28, 1999. On December 11, 1997, Klaussner purchased 10,000 shares of our Series A Convertible Preferred Stock for $5,000,000. In connection with such purchase, Klaussner waived any of our defaults under the Credit and Security Agreement we entered into with Klaussner in 1996 and approximately $2,965,650 of the proceeds of the $5,000,000 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 currently convertible into 1,424,500 shares of common stock at 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 August 28, 1999, 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. If we sell our common stock or equivalents of our stock 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, then, in connection with its $5,000,000 investment, Klaussner has the right of first refusal to purchase such stock or stock equivalents at that price. Klaussner will have this 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 us, at our expense, to register the shares of common stock underlying its preferred stock and any shares it acquires upon exercise of this right. In December 1999, in order to provide Harley J. Greenfield with an incentive to remain our Chief Executive Officer, Klaussner granted Mr. Greenfield an option to purchase 2,106 shares of preferred stock owned by Klaussner. Such shares are convertible into 300,000 shares of our common stock. The exercise price of the option is $5.00 per share of such underlying common stock. The option is exercisable until August 31, 2004, unless terminated earlier by certain events, including Mr. Greenfield's ceasing to be our Chief Executive Officer. In further connection with Klaussner's $5,000,000 investment, the Credit and Security Agreement was modified to provide a late payment fee at a rate of .67% per month for invoices we pay beyond the normal 60 day term. In fiscal 1999, Klaussner gave us $1,889,000 of allowances for a repair program. In addition, in December 1999, Klaussner entered into an agreement with us pursuant to which it agreed, subject to certain conditions, to loan $150,000 to each of our subsidiaries which operates or intends to operate a new store 32 approved by Klaussner. The agreement provides that the maximum aggregate amount of the loans will be $1,500,000 (10 stores). Each such loan will be evidenced by a three-year note, bearing interest at the then LIBO rate for three-month loans plus 3%. Payment of the notes may be accelerated under certain conditions, including the closing of the store funded by the related loan or if we are not purchasing at least 50% by dollar volume of our upholstered furniture from Klaussner. As additional consideration, we have agreed to pay an additional premium on furniture purchased from Klaussner to satisfy orders originating from new stores funded by these loans. Such premium would be 3% of the customary cost of such merchandise until the note is paid in full and would decrease to 2% for the 10 years after the note is paid. Such premium payments would cease after such 10-year period. 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. 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. Jennifer Convertibles, Inc. Current Report on Form 8-K dated August 20, 1999 and filed September 3, 1999 reporting on an Item 5 event. (c) EXHIBITS. 3.1 - Certificate of Incorporation, incorporated herein by reference to Exhibit 3.1 to our Registration Statement - File Nos. 33-22214 and 33-10800. 3.2 - Certificate of Designations, Preferences and Rights of Series A Preferred Stock, incorporated herein by reference to Exhibit 3.2 to our Annual Report on Form 10-K for the year ended August 30, 1997. 33 3.3 - Certificate of Designations, Preferences and Rights of Series B Preferred Stock, incorporated herein by reference to Exhibit 3.3 to our Annual Report on Form 10-K for the year ended August 29, 1998. 3.4 - By-Laws, incorporated herein by reference to Exhibit 3.2 to our Annual Report on Form 10-K for the year ended August 26, 1995. 10.1 - Incentive and Non-Qualified Stock Option Plan, incorporated herein by reference to Exhibit 10.4 to the Registration Statement. 10.2 - 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. 10.3 - Warehousing Agreement, dated as of December 31, 1993, between Jennifer Convertibles, Inc. and Jennifer Warehousing, Inc., incorporated herein by reference to our Quarterly Report on Form 10-Q for the quarterly period ending February 26, 1994. 10.4 - Purchasing Agreement, dated as of December 31, 1993, between Jennifer Convertibles, Inc. and Jara Enterprises, Inc., incorporated herein by reference to our Quarterly Report on Form 10-Q for the quarterly period ending February 26, 1994. 10.5 - Advertising Agreement, dated as of December 31, 1993, between Jennifer Convertibles, Inc. and Jara Enterprises, Inc., incorporated herein by reference to our Quarterly Report on Form 10-Q for the quarterly period ending February 26, 1994. 10.6 - Amendment No. 1 to Warehousing Agreement, dated as of May 28, 1994, amending the Warehousing Agreement referred to in 10.3 and the related Rebate Note, incorporated herein by reference to Exhibit 10.34 to our Annual Report on Form 10- K for the fiscal year ended August 27, 1994. 34 10.7 - Amendment No. 1 to Purchasing Agreement, dated as of May 28, 1994, amending the Purchasing Agreement referred to in 10.4., incorporated herein by reference to Exhibit 10.35 to our Annual Report on Form 10-K for the fiscal year ended August 27, 1994. 10.8 - License Agreement, dated as of October 28, 1993, among Jennifer Licensing Corp. and Jara Enterprises, Inc., incorporated herein by reference to Exhibit 2 to our Current Report on Form 8-K dated November 30, 1993. 10.9 - 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 our Annual Report on Form 10- K for the fiscal year ended August 26, 1995. 10.10 - 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 our Annual Report on Form 10- K for fiscal year ended August 26, 1995. 10.11 - 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 our Annual Report on Form 10-K for the fiscal year ended August 26, 1995. 10.12 - 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 our Annual Report on Form 10-K for the fiscal year ended August 26, 1995. 10.13 - Form of Subordination Agreement, dated as of August 9, 1996, by Harley J. Greenfield and Edward B. Seidner, incorporated herein by reference to Exhibit 10.45 to our Annual Report on Form 10-K for the fiscal year ended August 26, 1995. 10.14 - Credit and Security Agreement, dated as of March 1, 1996, among Klaussner Furniture Industries, Inc., Jennifer Convertibles, Inc. and the other signatories thereto, incorporated herein by reference to Exhibit 4 to our Current Report on Form 8-K dated March 18, 1996. 35 10.15 - 1997 Stock Option Plan, incorporated herein by reference to Exhibit 10.29 to our Annual Report on Form 10-K for the fiscal year ended August 31, 1997. 10.16 - Stock Purchase Agreement, dated December 11, 1997, between Klaussner and Jennifer Convertibles, Inc., incorporated herein by reference to Exhibit 10.30 to our Annual Report on Form 10-K for fiscal year ended August 30, 1997. 10.17 - Registration Rights Agreement, dated December 11, 1997, between Klaussner and Jennifer Convertibles, Inc., incorporated herein by reference to Exhibit 10.31 to our Annual Report on Form 10-K for fiscal year ended August 30, 1997. 10.18 - Waiver and Modification Agreement, dated December 11, 1997, among Klaussner and related entities and Jennifer Purchasing Corp., Jennifer Convertibles, Inc., Jennifer Licensing Corp., and Jennifer L.P. III, incorporated herein by reference to Exhibit 10.32 to our Annual Report on Form 10-K for the fiscal year ended August 30, 1997. 10.19 - L.P. and Option Purchase and Termination Agreement, dated as of August 20, 1999, among Jennifer Convertibles, Inc., Jennifer Chicago Ltd., an Illinois corporation and a wholly-owned subsidiary of Jennifer Convertibles, Inc., Jenco Partners, L.P., a limited partnership, which is the sole limited partner of Jennifer Chicago, L.P., a Delaware Limited partnership, JCI Consultant, L.P., a limited partnership which owned certain options to purchase capital stock of Jennifer Convertibles, Inc., Selig Zises, a principal of Jenco Partners, L.P. and JCI Consultant, L.P., Jay Zises, Jara Enterprises, Inc., Fred J. Love, and, Harley J. Greenfield and Edward B. Seidner, incorporated herein by reference to our Current Report on Form 8-K dated August 20, 1999 and filed September 3, 1999 reporting on an Item 5 event. 10.20 - General Release, made as of August 20, 1999, by JCI Consultant, L.P., Jenco Partners L.P., Jay Zises and Selig Zises for the benefit of Jennifer Convertibles, Inc., Jennifer Chicago Ltd., Jara Enterprises, Inc., Harley J. Greenfield, Fred J. Love and Edward B. Seidner, incorporated herein by reference to our Current Report on Form 8-K dated August 20, 1999 and filed September 3, 1999 reporting on an Item 5 event. 10.21 - General Release, made as of August 20, 1999, by Jennifer Convertibles, Inc., Jennifer Chicago Ltd., Jara Enterprises, Inc., Harley J. Greenfield, Fred J. Love an Edward B. Seidner for the benefit of JCI Consultant, L.P., Jenco Partners L.P., Jay Zises and Selig Zises, incorporated herein by reference to our Current Report on 36 Form 8-K dated August 20, 1999 and filed September 3, 1999 reporting on an Item 5 event. 10.22 - Note, dated as of September 1, 1999, in the principal amount of $447, 000 to the order of Jenco Partners, L.P. from Jennifer Convertibles, Inc., incorporated herein by reference to our Current Report on Form 8-K dated August 20, 1999 and filed September 3, 1999 reporting on an Item 5 event. 10.23 - Employment Agreement, dated as of August 15, 1999, between Harley J. Greenfield and Jennifer Convertibles, Inc. 10.24 - Employment Agreement, dated as of August 15, 1999, between Rami Abada and Jennifer Convertibles, Inc., as amended. 10.25 - Agreement, dated as of September 1, 1999, between Jennifer Convertibles, Inc. and Jara Enterprises, Inc. 10.26 - Agreement, dated as of September 1, 1999 between Jennifer Convertibles, Inc. and Jara Enterprises, Inc. 10.27 - Loan Agreement dated as of December 8, 1999, between Jennifer Convertibles, Inc. and Klaussner Furniture Industries, Inc. 10.28 - Stock Option Agreement dated as of December 8, 1999, between Harley J. Greenfield and Klaussner Furniture Industries, Inc. 10.29 - Registration Rights Agreement, dated as of December 10, 1999, by Jennifer Convertibles, Inc. in favor of Harley J. Greenfield in connection with the Stock Option Agreement, dated as of December 8, 1999. 21.1 - Subsidiaries, incorporated herein by reference to Exhibit 22.1 to our 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. 37 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 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 Chairman of the Board December 10, 1999 ------------------------ and Chief Executive Harley J. Greenfield Officer (Principal Executive Officer) /s/ EDWARD B. SEIDNER Director December 10, 1999 ------------------------ Edward B. Seidner /s/ BERNARD WINCIG Director December 10, 1999 ------------------------ Bernard Wincig /s/ EDWARD BOHN Director December 10, 1999 ------------------------ Edward Bohn /s/ KEVIN J. COYLE Director December 10, 1999 ------------------------ Kevin J. Coyle /s/ RAMI ABADA President, Director, Chief December 10, 1999 ------------------------ Operating Officer and Rami Abada Interim Chief Financial Officer 38 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 28, 1999, August 29, 1998 and August 30, 1997 (In thousands except for share amounts) JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Index to Financial Statements Independent Auditors' Report.........................................F1 Consolidated Balance Sheets at August 28, 1999 and August 29, 1998 ...................................................F2 Consolidated Statements of Operations for the years ended August 28, 1999, August 29, 1998 and August 30, 1997...............F3 Consolidated Statements of (Capital Deficiency) for the years ended August 28, 1999, August 29, 1998, and August 30, 1997 .............F4 Consolidated Statements of Cash Flows for the years ended August 28, 1999, August 29, 1998 and August 30, 1997...............F5 Notes to Consolidated Financial Statements...........................F6
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands, except for share data) ASSETS (SEE NOTE 5) August 28, 1999 August 29, 1998 --------------- --------------- Current assets: Cash and cash equivalents $ 6,907 $ 4,384 Accounts receivable 31 500 Merchandise inventories 9,634 10,018 Due from Private Company and Unconsolidated Licensees, net of reserves of $6,654 and $6,696 at August 28, 1999 and August 29, 1998 1,184 601 Prepaid expenses and other current assets 596 388 -------- -------- Total current assets 18,352 15,891 Store fixtures, equipment and leasehold improvements at cost, net 5,377 6,147 Deferred lease costs and other intangibles, net 611 783 Goodwill, at cost, net 1,142 535 Other assets (primarily security deposits) 663 743 -------- -------- $ 26,145 $ 24,099 ======== ======== LIABILITIES AND (CAPITAL DEFICIENCY) Current liabilities: Accounts payable, trade $ 15,030 $ 14,917 Customer deposits 8,757 6,892 Accrued expenses and other current liabilities 4,447 5,192 Amounts payable under acquisition agreement 699 -------- -------- Total current liabilities 28,933 27,001 Deferred rent and allowances 5,185 5,497 Long-term obligations under capital leases 63 49 -------- -------- Total liabilities 34,181 32,547 -------- -------- Commitments and contingencies (Notes 9 and 10) (Capital Deficiency): Preferred stock, par value $.01 per share Authorized 1,000,000 shares Series A Convertible Preferred-10,000 shares issued and outstanding at August 28, 1999 and August 29, 1998 (liquidation preference $5,000) Series B Convertible Preferred-26,664 shares issued and outstanding at August 28, 1999 (liquidation preference $133) Common stock, par value $.01 per share Authorized 10,000,000 shares; issued and outstanding 5,704,058 and 5,700,725 shares at August 28, 1999 and August 29, 1998, respectively 57 57 Additional paid-in capital 27,482 27,710 Notes receivable from warrant holders (270) Accumulated (deficit) (35,575) (35,945) -------- -------- (8,036) (8,448) -------- -------- $ 26,145 $ 24,099 ======== ======== See Notes to Consolidated Financial Statements. F2
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except share data) Year ended Year ended Year ended August 28, 1999 August 29, 1998 August 30, 1997 --------------- --------------- --------------- (52 weeks) (52 weeks) (52 weeks) Net sales $ 109,284 $ 111,541 $ 97,789 ----------- ----------- ----------- Cost of sales, including store occupancy, warehousing, delivery and fabric protection (including charges from the Private Company of $8,917, $10,943, and $10,390) 71,607 74,054 67,114 Selling, general and administrative expenses 35,890 35,984 32,904 Recovery of amounts due from Private Company and Unconsolidated Licensees (42) (196) (426) (Income) loss from store closings (9) 355 55 Depreciation and amortization 1,668 1,727 1,840 ----------- ----------- ----------- 109,114 111,924 101,487 ----------- ----------- ----------- Operating income (loss) 170 (383) (3,698) Other income (expense): Royalty income 388 386 374 Interest income 171 108 67 Interest expense (106) (172) (28) Other income, net 150 271 319 603 593 732 Income (loss) before income taxes 773 210 (2,966) Income taxes 403 120 95 ----------- ----------- ----------- Net income (loss) $ 370 $ 90 ($3,061) =========== =========== =========== Basic income (loss) per common share $ 0.06 $ 0.02 ($0.54) Diluted income (loss) per common share $ 0.05 $ 0.01 ($0.54) Weighted average common shares outstanding basic income (loss) per share 5,701,559 5,700,725 5,700,725 Effect of potential common share issuance: Stock options 22,077 32,641 -- Convertible preferred stock 1,430,722 1,068,375 -- ----------- ----------- ----------- Weighted average common shares outstanding diluted income (loss) per share 7,154,358 6,801,741 5,700,725 =========== =========== ===========
See Notes to the Consolidated Financial Statements. F3
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Consolidated Statements of (Capital Deficiency) Years Ended August 28, 1999, August 29, 1998 and August 30, 1997 (In thousands, except share data) Notes Preferred stock Preferred stock Additional receivable Series A Series B Common Stock paid-in from warrant Accumulated Shares Par Value Shares Par Value Shares Par Value capital holders (deficit) Totals -------- --------- -------- --------- --------- --------- --------- ------------ ----------- --------- 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) Write off of notes receivable from warrant holders -- -- -- -- -- -- (30) 30 -- -- Net income -- -- -- -- -- -- -- -- 90 90 Sale of Series A Preferred Stock 10,000 -- -- -- -- -- 4,829 -- -- 4,829 -------- ------ -------- ------ --------- --------- --------- --------- ---------- --------- Balances at August 29, 1998 10,000 -- -- -- 5,700,725 57 27,710 (270) (35,945) (8,448) Write off of notes receivable from warrant holders -- -- -- -- -- -- (270) 270 -- -- Exercise of stock options -- -- -- -- 3,333 0 6 -- -- 6 Purchase of stock options -- -- -- -- -- -- (75) -- -- (75) Issuance of Series B Preferred Stock -- -- 26,664 -- -- -- 111 -- -- 111 Net income -- -- -- -- -- -- -- -- 370 370 -------- ------ -------- ------ --------- --------- --------- --------- ---------- --------- Balances at August 28, 1999 10,000 0 26,664 0 5,704,058 $ 57 $ 27,482 $ 0 $ (35,575) $ (8,036) ======== ====== ======== ====== ========= ========= ========= ========= ========== ========= See Notes to Consolidated Financial Statements. F4
JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) Year Ended Year Ended Year Ended August 28, 1999 August 29, 1998 August 30, 1997 --------------- --------------- --------------- (52 weeks) (52 weeks) (52 weeks) Cash flows from operating activities: Net income (loss) $ 370 $ 90 ($3,061) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,668 1,727 1,840 Provision for warranty costs 100 100 204 (Income) loss from store closings (9) 355 40 Deferred rent (313) (183) (62) Recovery of amounts due from Private Company and Unconsolidated Licensees (42) (196) (426) Changes in operating assets and liabilities: Decrease (increase)in merchandise inventories 384 (2,075) 278 Decrease in refundable income taxes -- -- 23 (Increase) decrease in prepaid expenses and other current assets (208) 89 (23) Decrease in accounts receivable 469 649 439 (Increase) decrease in due from Private Company and Unconsolidated Licensees (541) (405) 426 Decrease in other assets, net 81 9 124 Increase (decrease) in accounts payable trade 113 (1,697) 868 Increase (decrease) in customer deposits 1,865 (1,949) (34) (Decrease) in accrued expenses and other payables (428) (121) (501) ------- ------- ------- Net cash provided by (used in) operating activities 3,509 (3,607) 135 ------- ------- ------- Cash flows from investing activities: Capital expenditures (743) (141) (206) Decrease in deferred lease costs and other intangibles -- 16 64 ------- ------- ------- Net cash (used in) investing activities (743) (125) (142) ------- ------- ------- Cash flows from financing activities: Payments of obligations under capital leases (243) (118) (188) Sale of Series A Preferred Stock -- 4,829 -- ------- ------- ------- Net cash (used in) provided by financing activities (243) 4,711 (188) ------- ------- ------- Net increase (decrease) in cash and cash equivalents 2,523 979 (195) Cash and cash equivalents at beginning of year 4,384 3,405 3,600 ------- ------- ------- Cash and cash equivalents at end of year $ 6,907 $ 4,384 $ 3,405 ======= ======= ======= Supplemental disclosure of cash flow information: Income taxes paid $ 418 $ 102 $ 95 ======= ======= ======= Interest paid $ 106 $ 172 $ 28 ======= ======= ======= Supplemental disclosure of non-cash financing activities: Issuance of Series B Preferred Stock-in settlement of liability $ 111 Acquisition of Limited Partnership interest and stock options through the issuance of notes payable $ 699 Acquisition of equipment through capital lease financing $ 379 ======= =======
See Notes to Consolidated Financial Statements. F5 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 28, 1999, August 29, 1998 and August 30, 1997 (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 28, 1999 and August 29, 1998, 84 and 82 Company-owned stores operated under the Jennifer Convertibles, Jennifer Leather and Jennifer Living Rooms names. The Company licensed stores to limited partnerships ("LP's") of which a subsidiary of the Company is the general partner. The LP's have had losses since inception and the Company has made advances 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 28, 1999 and August 29, 1998, the LP's operated 62 stores under the Jennifer Convertibles name. The Company has also licensed stores to parties, certain of 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 28, 1999 and August 29, 1998, 9 and 11, stores respectively, were operated by such Unconsolidated Licensees and the results of their operations are not included in the consolidated financial statements. Also not included in the consolidated financial statements are the results of operations of 25 stores in New York which are owned or operated 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 notes in the amount of $10,273 collateralized by the assets of the Private Company and due in 2023. 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 substantially reserved for. 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. F6 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 28, 1999, August 29, 1998 and August 30, 1997 (In thousands except for share amounts) The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company was profitable in the fiscal years ended August 28, 1999 and August 29, 1998 and during fiscal 1999 net cash was generated by operating activities. Unprofitable stores have been closed, including 8 stores during fiscal 1997 through 1999, and expense reduction plans have been implemented throughout all operational areas of the Company. Additionally, significant purchase allowances have been received from the Company's principal vendor (see Note 5). On November 30, 1998, the court approved the settlement of all class action litigation against the Company, the cash portion of which was funded entirely by the Company's insurance carriers. In addition, on September 23, 1998, the Company was advised by the Securities and Exchange Commission that a formal investigation into the affairs of the Company had been terminated and no enforcement action had been recommended. As of August 28, 1999, pending unresolved matters relate to derivative action lawsuits and potential claims by the Company to recover damages (see Note 10). At August 28, 1999, the Company has both a working capital deficiency of $10,581 and a capital deficiency of $8,036. As discussed in Note 5, the Company has entered into a credit and security agreement with its largest supplier and the owner of the outstanding shares of the Series A convertible preferred stock, Klaussner Furniture Industries, Inc. ("Klaussner") (which in fiscal 1999 accounted for approximately 77% of the Company's purchases of merchandise) which, effectively extended the payment terms for merchandise shipped. As of August 28, 1999, accounts payable includes $10,620 due to Klaussner ($10,078 at August 29, 1998). (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. F7 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 28, 1999, August 29, 1998 and August 30, 1997 (In thousands except for share amounts) MERCHANDISE INVENTORIES Merchandise inventories are stated at the lower of cost (determined on the first-in, first-out method) or market and are physically located, as follows: 8/28/99 8/29/98 ------- -------- Showrooms $ 4,203 $ 4,113 Warehouses 5,431 5,905 ------- -------- $ 9,634 $ 10,018 ======= ======== 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 periods of ten to forty years from the acquisition date using the straight-line method. Accumulated amortization at August 28, 1999 and August 29, 1998 amounted to $610 and $592, respectively. DEFERRED LEASE AND OTHER INTANGIBLE COSTS Deferred lease costs, consisting primarily of lease commissions and payments made to assume existing leases, are deferred and amortized over the term of the lease. 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. 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. Accordingly, the Company has recorded deferred rent and allowances of $5,185 and $5,497 at August 28, 1999 and August 29, 1998, respectively. F8 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 28, 1999, August 29, 1998 and August 30, 1997 (In thousands except for share amounts) 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. The Company also finances sales and sells financed receivables on a non-recourse basis to a finance company. Fees paid to the finance company are included in selling, general and administrative expenses. EARNINGS (LOSS) PER SHARE Basic income (loss) per common share is computed by dividing the net income (loss) after reduction for $7 of cumulative preferred stock dividends in 1999, by the weighted average number of shares of common stock outstanding during each period. Diluted income per share reflects the assumed conversion or exercise of Convertible Preferred Stock, options and warrants in periods where they are dilutive. The effect of these securities are excluded from diluted (loss) per share in the year ended August 30, 1997 because they are anti-dilutive. ADVERTISING The Company advertises in newspapers, radio and on television. Advertising costs are expensed as incurred and are included in selling, general and administrative expenses. Advertising expenses for the years ended August 28, 1999, August 29, 1998 and August 30, 1997 aggregated $11,699, $10,819 and $10,893, respectively, net of amounts charged to the Private Company and Unconsolidated Licensees (see Note 3). WARRANTIES Estimated warranty costs are expensed in the same period that sales are recognized. CONCENTRATION OF RISKS During fiscal 1999, the Company purchased 77% and 8%, respectively, of its inventory from two suppliers under normal or extended trade terms. The Company utilizes many local banks as depositories for cash receipts received at its showrooms. Such funds are transferred weekly to a concentration account maintained at one commercial bank. At August 28, 1999 and August 29, 1998, amounts on deposit with this one bank totaled 89% and 82% of total cash, respectively. F9 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 28, 1999, August 29, 1998 and August 30, 1997 (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 approximates fair value due to their short-term nature. SEGMENT INFORMATION The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 requires publicly-held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS No. 131 permits operating segments to be aggregated if they have similar economic characteristics, products, type of customers and methods of distribution. Accordingly, the Company's specialty furniture stores are considered to be one reportable operating segment. PRE-OPENING COSTS In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities" which requires costs of start-up activities to be expensed as incurred. SOP 98-5 is effective for the year ending August 26, 2000. As of August 28, 1999, there are no unamortized pre-opening costs. F10 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 28, 1999, August 29, 1998 and August 30, 1997 (In thousands except for share amounts) (3) RELATED PARTY TRANSACTIONS The Private Company, pursuant to a warehouse agreement, provides services to the Company and the LP's relating to distribution, inventory control reporting and data processing. The Company and LP's pay a monthly warehousing fee based on 5% of the retail sales prices and a portion of fabric protection revenue collected from customers, excluding sales from stores opened after July 1, 1999. On February 9, 1999, the Company entered into an amendment to the warehouse agreement which reduced the monthly warehousing fees by $150 or an aggregate of $1,200 through August 31, 1999 when the amendment terminated. On September 1, 1999, the period through which the warehouse fees were reduced was extended. Additionally, the Private Company provides fabric protection, warranty services and freight services at pre-determined rates. The Company's cost of sales includes these charges. Revenue from customers for fabric protection services is included in net sales. Indicated below are the amounts charged by the Private Company: Year Ended -------------------------- 8/28/99 8/29/98 8/30/97 ------- ------- ------- INCLUDED IN COST OF SALES: Freight $ 2,363 $ 2,775 $ 2,827 Fabric protection services 2,292 2,592 2,543 Warehousing fees 4,262 5,576 5,020 ------- ------- ------- Total $ 8,917 $10,943 $10,390 ----- ======= ======= ======= The Company has 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 28, 1999, August 29, 1998 and August 30, 1997, approximately $11,646, $11,745, and $10,671, respectively, of inventory at cost (before rebates) was purchased by the Private Company through the Company and $3,988, $3,195, and $3,529, respectively, of inventory at cost (before rebates) was purchased by the Unconsolidated Licensees through the Company. The Company receives 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 Private Company receives 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 28, 1999, $619 was credited to the Private Company on account of discounts for such year, $628 was credited for the year ended August 29, 1998 and $590 was credited for the year ended August 30, 1997. F11 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 28, 1999, August 29, 1998 and August 30, 1997 (In thousands except for share amounts) The Company has assumed the responsibility of advertising for itself, the LP's, the Unconsolidated Licensees and the Private Company. Under the arrangement, the Private Company and Unconsolidated Licensees are charged a share of advertising costs. Such charges aggregated $2,240, $2,139, and $2,218 for the years ended August 28, 1999, August 29, 1998 and August 30, 1997, respectively. Two executive officers of the Company and a relative of one of the officers, own or owned interests in certain Unconsolidated Licensee stores. During the years ended August 28, 1999, August 29, 1998 and August 30, 1997 royalty income includes approximately $386, $391, and $371, respectively, from these Unconsolidated Licensees stores. The Private Company and the Company have agreed 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 against amounts owed by the Company to the Private Company for warehousing services, fabric protection, freight and other services. To the extent that either party owes the other an amount in excess of $1,000 for current obligations, such excess is to be paid in cash to either party. Since the inception of this agreement in March 1996, the Private Company has paid current obligations in excess of $1,000. Due to the uncertainty of collectibility, certain amounts due from the Private Company and Unconsolidated Licensees, which were not offset, have been fully reserved in the consolidated financial statements, as follows: Private Unconsolidated Company Licensees Totals ------- -------------- ------- AT AUGUST 28, 1999: Gross amount due $ 3,955 $ 3,883 $ 7,838 Reserves (2,771) (3,883) (6,654) ------- ------- ------- Net Amount $ 1,184 $ -0- $ 1,184 ======= ======= ======= AT AUGUST 29, 1998: Gross amount due $ 3,166 $ 4,131 $ 7,297 Reserves (2,565) (4,131) (6,696) ------- ------- ------- Net Amount $ 601 $ -0- $ 601 ======= ======= ======= F12 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 28, 1999, August 29, 1998 and August 30, 1997 (In thousands except for share amounts) Pursuant to a proposed settlement agreement with the Private Company that was never completed (see Note 10), the Company entered into the monthly offset agreement, described above, which requires payments of current obligations in excess of $1,000 by the Private Company. In addition, the Company paid the Private Company $650 in additional warehouse fees for the two fiscal years ended August 30, 1997 (of which $130 was charged to cost of sales in fiscal 1997) and since January 1, 1998 has assumed certain payroll expenses previously funded by the Private Company which totaled $1,408 in the fiscal year ended August 28, 1999 and $948 in the fiscal year ended August 29, 1998. Such payroll expenses are included in selling, general and administrative expenses. The Private Company has stated that, if a settlement 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. The Company has granted the Private Company a perpetual, royalty-free license to use and to sublicense and franchise the use of trademarks in the State of New York. The license is exclusive in such territory, subject to certain exceptions. See note 9 with respect to certain limited partnership interests owned by the Private Company. A director (and stockholder) of the Company received approximately $153, $154, and $164 in legal fees in the fiscal years ended in 1999, 1998, and 1997, respectively. See Note 5 for transactions with Klaussner. (4) STORE FIXTURES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS August 28, August 29, 1999 1998 -------- --------- Automobiles $ 58 $ 58 Store fixtures and furniture 6,134 6,047 Leasehold improvements 6,762 6,325 Computer equipment 1,551 1,476 -------- --------- 14,505 13,906 Less: Accumulated depreciation and amortization (9,128) (7,759) -------- --------- $ 5,377 $ 6,147 ======== ========= At August 28, 1999 and August 29, 1998, computer equipment includes $1,301 and $1,289, and accumulated depreciation and amortization includes $981 and $794, respectively, of equipment under capital leases. F13 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 28, 1999, August 29, 1998 and August 30, 1997 (In thousands except for share amounts) (5) TRANSACTIONS WITH KLAUSSNER: The Company and Klaussner have executed a Credit and Security Agreement that provides that Klaussner effectively extend the payment terms for merchandise shipped from 60 days to 81 days and provides Klaussner with a security interest in all the Company's assets including accounts receivable, inventory, store fixtures and equipment, as well as the assignment of leaseholds, trademarks and a license agreement to operate the Company's business in the event of default and non-payment. The Company has agreed to pay Klaussner a late payment fee of .67% per month times the sum of all invoices outstanding for more than 60 days at each month end. At August 28, 1999 and August 29, 1998, the Company owed Klaussner $10,620 and $10,078, respectively, no portion of which exceeded the 60 day payment terms. Allowances of $1,889 (1999), $1,694 (1998) and $2,241 (1997) were obtained from Klaussner, of which $1,889, $1,694 and $1,166, respectively, reduced cost of goods sold and in fiscal 1997, $1,075 reduced selling, general and administrative expenses. On December 11, 1997, the Company sold to Klaussner 10,000 shares of Series A Preferred Stock for $5,000. These shares are non-voting, have a liquidation preference of $5,000, do not pay dividends (except if declared on the common stock) and are convertible (as of September 1, 1999) into 1,424,500 shares of the Company's common stock. In addition, as long as Klaussner owns at least 10% of the Company's outstanding common stock, assuming conversion, it has the right of first refusal to purchase any common stock or equivalents to be sold by the Company at less than $3.51 per share. On December 8, 1999, Klaussner entered into an agreement with the Company in which it agreed, subject to certain conditions, to loan $150 for each new store approved by Klaussner. The agreement provides that the maximum aggregate amount of the loans will be $1,500 (10 stores). Each such loan will be evidenced by a three year note, bearing interest at the then LIBOR rate for three month loans plus 3%. Payment of the notes may be accelerated under certain conditions, including the closing of the store funded by the related loan or if the Company is not purchasing at least 50% by dollar volume of their upholstered furniture from Klaussner. As additional consideration, the Company has agreed to pay an additional premium on furniture purchased from Klaussner to satisfy orders originating from new stores funded by these loans. Such premium would be 3% of the customary cost of such merchandise until the note is paid in full and would decrease to 2% for the 10 years after the note is paid. Such premium payments would cease after such 10 year period. F14 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 28, 1999, August 29, 1998 and August 30, 1997 (In thousands except for share amounts) In addition, on December 8, 1999, Klaussner granted to the Chief Executive Officer an option to purchase 2,106 shares of preferred stock owned by Klaussner. Such shares are convertible into 300,000 shares of the Company's common stock. The exercise price of the option is $5.00 per share of such underlying common stock. The option is exercisable until August 31, 2004, unless terminated earlier by certain events, including termination of employment. (6) INCOME TAXES Components of income tax expense are as follows: Year Ended -------------------------- 8/28/99 8/29/98 8/30/97 ------- ------- ------- Current: Federal $ -- $ -- $ -- State 403 120 95 Deferred: Federal -- -- -- State -- -- -- ----- ----- ----- $ 403 $ 120 $ 95 ===== ===== ===== 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 ---------------------------------- 8/28/99 8/29/98 8/30/97 ------- ------- ------- "Expected" tax expense (benefit) 34.0% 34.0% (34.0)% Increase (reduction) in taxes resulting from: State income tax, net of federal income tax benefit 34.4% 36.8% 2.0% Non-deductible items 6.8% 25.5% 1.7% Disallowances pursuant to: Revenue Agents Report -- 90.6% -- Other 1.1% 1.3% 2.0% (Decrease)increase in valuation allowance (24.2)% (131.1)% 31.3% ------ ------ ------ 52.1% 57.1% 3.0% ====== ====== ====== F15 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 28, 1999, August 29, 1998 and August 30, 1997 (In thousands except for share amounts) The principal components of deferred tax assets, liabilities and the valuation allowance are as follows: August 28, 1999 August 29, 1998 --------------- --------------- Deferred tax assets: Federal and state net operating loss carryforwards $ 5,753 $ 5,200 Reserve for losses on loans and advances 2,727 2,341 Accrued partnership losses 41 997 Deferred rent expense 1,231 1,221 Inventory capitalization 253 267 Other expenses for financial reporting, not yet deductible for taxes 506 540 -------- -------- Total deferred tax assets, before valuation allowance 10,511 10,566 Less: Valuation allowance (8,832) (9,019) -------- -------- Total deferred tax assets $ 1,679 $ 1,547 ======== ======== Deferred tax liabilities: Difference in book and tax basis of fixed assets $ 1,552 $ 1,470 Other 127 77 -------- -------- Total deferred tax liabilities 1,679 1,547 -------- -------- Net deferred tax assets $ -0- $ -0- ======== ======== A valuation allowance has been established to offset a portion of the deferred tax asset as the Company has not determined that it is more likely than not that the available net operating loss carryforward or deductible termporary differences will be utilized. During the years ended August 28, 1999, August 29, 1998 and August 30, 1997, the valuation allowance (decreased) increased by $(187), ($282), and $960, respectively. As of August 28, 1999, the Company has a net operating loss carryforward of approximately $14,000, expiring $4,000 in the year 2010, $7,000 in the year 2011, $1,000 in the year 2012 and $2,000 in the year 2018. F16 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 28, 1999, August 29, 1998 and August 30, 1997 (In thousands except for share amounts) (7) ACQUISITION 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 received a royalty of 5% of sales from the Chicago Partnership's stores and gave the Chicago Partnership the exclusive right to open Jennifer Convertibles stores in the defined territory. Pursuant to the Partnership Agreement, the limited partner 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 were, subject to certain exceptions, 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 had 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 could put its interest to the Private Company if certain executives of the Company and the Private Company owned less than 700,000 shares of the Company's common stock. On August 20, 1999, the Company purchased the limited partner's interest in the Chicago Partnership, and options, which were due to expire in 2001, to purchase 1,200,000 shares of common stock (held by a former consultant of the Company who is related to the limited partner) at $8.00 per share. The aggregate purchase price for the partnership interests and options was $699. The purchase price was paid, $252 in cash on September 1, 1999 and the balance of $447 by issuance of a note bearing interest at 3% over prime and payable in two installments of $223 on February 1, 2000 and September 1, 2000. The portion of the purchase price ($624) allocated to the purchase of the limited partnership interest was charged to goodwill and the portion ($75) allocated to the purchase of the option was charged to additional paid-in capital. F17 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 28, 1999, August 29, 1998 and August 30, 1997 (In thousands except for share amounts) (8) STOCK OPTION 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 8/31/96 811,547 $ 6.80 706,883 $ 7.07 =========== ========= Granted 732,000 $ 2.00 Canceled (264,500) $ 8.00 Expired (50,000) $ 2.75 --------- ----------- Outstanding at 8/30/97 1,229,047 $ 3.99 480,381 $ 7.07 =========== ========= Granted 143,000 $ 2.31 Canceled (13,667) $ 2.00 --------- ----------- Outstanding at 8/29/98 1,358,380 $ 3.84 738,670 $ 5.33 =========== ========= Exercised (3,333) $ 2.00 Canceled (1,000) $ 2.00 Expired (50,000) $ 5.00 --------- ----------- Outstanding at 8/28/99 1,304,047 $ 3.80 970,661 $ 4.39 ========= =========== =========== ========= The number of shares of Common Stock reserved for options available for grant under the Plans was 26,953 at August 28, 1999. The weighted average remaining contractual life of the outstanding options is 6.7 years. F18 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 28, 1999, August 29, 1998 and August 30, 1997 (In thousands except for share amounts) 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 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 compensation expense been determined based upon the fair value of the options at the grant date, as prescribed under SFAS No. 123, the Company's net income (loss) would have been as follows: 1999 1998 1997 ----- ----- ------- Net Income (Loss): As reported $ 370 $ 90 $(3,061) Pro forma under SFAS 123 $ 81 $(181) $(3,141) Basic income (loss) per share: As reported $0.06 $ 0.02 $ (0.54) Pro forma under SFAS 123 $0.01 $(0.03) $ (0.55) Diluted income (loss) per share: As reported $0.05 $ 0.01 $ (0.54) Pro forma under SFAS 123 $0.01 $(0.03) $ (0.55) The weighted average fair value on the date of grant of options granted is estimated at $1.03 in 1998 and $1.22 in 1997 using the Black-Scholes option-pricing model with the following weighted average assumptions: 1998 1997 ----- ------- Risk-free interest rate 5.76% 6.95% Expected life of options 5 5 Expected stock price volatility 44% 69% Expected dividend yield 0% 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. F19 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 28, 1999, August 29, 1998 and August 30, 1997 (In thousands except for share amounts) (9) COMMITMENTS AND OTHER LEASES The Company and LP's lease retail store locations under operating leases for varying periods through 2013 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 for all non-cancelable leases with initial terms of one year or more consisted of the following at August 28, 1999: Year Ending August ------------------------------------ 2000.........................$12,290 2001......................... 11,716 2002......................... 11,122 2003......................... 9,249 2004............. ........... 6,922 Thereafter................... 9,729 ------- $61,028 ======= Rental expense for all operating leases amounted to approximately $13,661, $13,559, and $13,657 net of sublease income of $184, $222, and $166 for the years ended August 28, 1999, August 29, 1998 and August 30, 1997, 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. CERTAIN LIMITED PARTNERSHIP AGREEMENTS 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. F20 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 28, 1999, August 29, 1998 and August 30, 1997 (In thousands except for share amounts) On December 31, 1996, the Private Company acquired the limited partners' interests in these partnerships. LETTERS OF CREDIT In May 1999, a $200 standby letter of credit was issued on behalf of the Company to an institution that provides a new private label credit card program. Such letter of credit is secured by $200 in an interest bearing money market account. The new private label credit card program requires the Company to issue an additional $1,000 in standby letters of credit on various dates to May 29, 2000. The Private Company is participating in this program and has provided $50 of the $200 referred to above and has agreed to provide 25% of all cash needed to fund future standby letters of credit. Such letters of credit will be terminated when the Company achieves certain specified levels of profitability. EMPLOYMENT AGREEMENTS On August 15, 1999, the Chief Executive Officer of the Company entered into a five-year employment agreement with a base salary of $400 per annum. The agreement provides for bonuses based on earnings and revenues. On August 15, 1999, the President and Chief Operating Officer of the Company entered into a five year employment agreement with a base salary of $400 per annum for the first three years and $500 per annum thereafter. The agreement provides for bonuses based on earnings and revenues and also provides for a grant of options to acquire 300,000 shares of common stock at an exercise price of $3.51 per share (which exceeded the fair market value at date of grant) vesting over three years. Such options were granted during fiscal 2000. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES The components of accrued expenses and other current liabilities are: 8/28/99 8/29/98 ------- ------- Advertising $ 1,182 $ 1,334 Payroll 887 859 Legal 184 93 Accounting 178 260 Store closings 70 279 Litigation settlement costs 279 500 Sales tax 505 542 Warranty 404 304 Other 758 1,021 ------- ------- $ 4,447 $ 5,192 ======= ======= F21 JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements August 28, 1999, August 29, 1998 and August 30, 1997 (In thousands except for share amounts) (10) CLAIMS AND LITIGATION 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 Southeastern Florida Holding Corporation (S.F.H.C.) which is an Unconsolidated Licensee and (2) the funding of Limited Partnerships (LP's) III through V. 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, among other matters, concluded that it "has reviewed many significant related party transactions and recommends to the Board that the Company assert claims to recover damages for harm caused the Company". On January 26, 1995, the Board of Directors received the "Final Report of Counsel to the Independent Committee of the Board of Directors" which reached the same conclusions and recommendations. On March 10, 1995, the Board of Directors received the "Response of Harley Greenfield (Chief Executive Officer of the Company and one of the co-founders of the Private Company) 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, referred to above, that asserted that there was nothing improper. The Company is negotiating a settlement of these claims together with a settlement of the derivative litigation referred to below, however, the ultimate outcome of these matters is not presently determinable (see Note 3 for potential asserted claims by the Private Company). F22 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". On November 30, 1998, the court approved the settlement of the class action litigation. The settlement provided 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. The cash portion of the settlement was funded entirely by insurance company proceeds. The Company issued 26,664 shares of Series B Preferred Stock, convertible into 18,664 shares of the Company's common stock, based on valid proofs of claims actually filed. These shares are non-voting, have a liquidation preference of $5.00 per share ($133) and accrue dividends at the rate of $.35 per share per annum (cumulative unpaid dividends of $7 at August 28, 1999). The preferred stock is convertible at the option of the Company at anytime after the common stock trades at a price of at least $7.00 per share. Estimated settlement costs had been accrued in a prior year and, accordingly, $110 of the excess of the accrual relating to both the class and the derivative actions has been credited to other income, net in the year ended August 28, 1999 and the $279 balance of the accrual is included in accrued expenses for estimated remaining legal fees in connection with the derivative litigation. The Company had entered into settlement agreements as to the derivative litigation, subject, in the case of certain of such agreements, to court approval of such settlement by a certain date. Such court approval was not obtained by such date. The Company and the Private Company are negotiating with respect to a new settlement. There can be no assurance that a settlement will be reached or as to the terms of such settlement. 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 previously proposed settlement agreements. The group has requested deposition and document discovery in advance of any hearing on the fairness of any 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. The ultimate outcome of the derivative litigation is not presently determinable. F23 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". On May 3, 1995 the SEC commenced a formal investigation into the affairs of the Company. On September 23, 1998, the Company was advised by the SEC that the formal investigation had been terminated and that no enforcement action had been recommended. F24 EX-10.23 2 EXHIBIT 10.23 EMPLOYMENT AGREEMENT AGREEMENT, dated as of August 15, 1999 (the "Effective Date"), by and between Harley J. Greenfield (the "Executive") and Jennifer Convertibles, Inc., a Delaware corporation (the "Company"). WHEREAS, the Executive is currently serving as Chairman of the Board of Directors of the Company (the "Board") and as Chief Executive Officer; WHEREAS, the Board desires that the Company continue to employ the Executive and the Executive desires to continue to furnish services to the Company on the terms and conditions hereinafter set forth; and WHEREAS, the parties desire to enter into this agreement setting forth the terms and conditions of the continuing employment relationship of the Executive with the Company; NOW, THEREFORE, in consideration of the premises and the mutual agreements set forth below, the parties hereby agree as follows: 1. EMPLOYMENT. The Company hereby agrees to continue to employ Executive, and Executive hereby accepts such continuing employment, on the terms and conditions hereinafter set forth. 2. EMPLOYMENT PERIOD. The term of the Agreement shall commence on the Effective Date and terminate on the fifth anniversary of the Effective Date; PROVIDED, HOWEVER, that on the third anniversary of the Effective Date and on each anniversary of the Effective Date thereafter, the term of the Agreement shall automatically be extended for one additional year, unless, not later than six (6) months prior to such anniversary, the Company or the Executive shall have given notice not to extend the term of the Agreement (the term of this Agreement, together with any extensions thereon, the "Employment Period"). The Employment Period shall end on the earlier to occur of (i) the date on which the Employment Period expires following a notice by the Company or the Executive not to extend the Employment Period and (ii) the Executive's Date of Termination, as defined in Section 7(b) hereof. 3. POSITION AND DUTIES. a. During the Employment Period, Executive shall serve as the Chairman of the Board and Chief Executive Officer of the Company. The Executive shall report directly to the Board and shall have those powers and duties consistent with his positions and such other powers and duties as may be prescribed by the Board, provided that such other powers and duties are consistent with Executive's positions set forth herein. b. Executive agrees to devote substantially his full working time, attention and energies to the performance of his duties for the Company. It shall not, however, be a violation of this Agreement for the Executive to (i) serve on corporate, civic or charitable boards or committees, (ii) give speeches and make media appearances to discuss matters of public interest and (iii) manage his personal investments, so long as the foregoing activities do not interfere substantially with the performance of the Executive's responsibilities in accordance with this Agreement. 4. PLACE OF PERFORMANCE. The principal place of performance of the Executive's duties shall be at the Company's corporate offices in Long Island, New York, subject to reasonable travel requirements on behalf of the Company. 5. COMPENSATION AND RELATED MATTERS. a. BASE SALARY. As compensation for the performance by Executive of his obligations hereunder, during the Employment Period, the Company shall pay Executive a base salary at a rate not less than $400,000 per year (the base salary in effect from time to time, the "Base Salary"). On the first business day following the end of the Exclusionary Period (as defined in Section 5(d), below) and on each anniversary of the Effective Date thereafter during the Employment Period, the Base Salary shall be increased at a rate equal to the increase in the cost of living as determined by the Bureau of Labor Statistics in its Consumer Price Index reports; PROVIDED, HOWEVER, that (i) on the date of the first such increase (I.E., the first business day following the end of the Exclusionary Period), the Base Salary shall be increased at a rate equal to the cumulative increases in the cost of living during the Exclusionary Period, as determined by the Bureau of Labor Statistics in its Consumer Price Index reports and (ii) on the anniversary of the Effective Date that first occurs following the end of the Exclusionary Period, the increase in the Executive's Base Salary shall be in respect of the increase in the cost of living between the end of the Exclusionary Period and such anniversary, as determined by the Bureau of Labor Statistics in its Consumer Price Index reports. Once increased, the Base Salary shall not be decreased. b. ANNUAL BONUS. As compensation for services rendered during the Employment Period, Executive shall be entitled to the following annual cash incentive awards (collectively, the "Annual Bonus"); PROVIDED, 2 HOWEVER, that (x) the requirement that the Company pay an Annual Bonus in accordance with this Section 5(b) shall not limit the Company's discretionary ability to make additional bonus payments from time to time during the Employment Period and (y) in no event shall the portion of the Annual Bonus otherwise earned pursuant to Section 5(b)(i) below be paid unless the Company has positive cash flow in accordance with generally accepted accounting principles, adjusted for borrowing either for the growth of the Company or for settlement expenditures related to current derivative litigation: i. a lump sum cash payment, payable on or around January 10 following the end of each fiscal year during the Employment Period, equal to 2.5% of EBITDA (defined to mean net income before interest, taxes, depreciation and amortization expense, as determined (A) by the Company's auditors in accordance with generally accepted accounting principles and (B) prior to payment of the Annual Bonus) in respect of such fiscal year; and ii. a lump sum cash payment, payable on or around January 10 following the end of each fiscal year during the Employment Period, equal to the product of (A) the excess, if any, of (1) the aggregate revenues in respect of such fiscal year of (a) the Company, (b) any partnership in which the Company is the general partner, (c) any licensee of the Company and (d) Jara Enterprises (the "Private Company"), over (2) $142 million (such amount being the aggregate revenues of the entities listed in clause (a) through (d), above, for the fiscal year ended August 29, 1998), and (B) 0.001. For purposes of clarification, the amount payable in accordance with this clause (ii) shall equal $1,000 for each $1,000,000 in revenue of the entities listed herein in excess of $142,000,000. c. COMPENSATION PLANS; STOCK OPTIONS. During the Employment Period, Executive shall be eligible to participate in all compensation plans and programs, including, but not limited to, equity based award plans and incentive programs made available generally to employees or to senior executives of the Company; PROVIDED, HOWEVER, that for the period (the "Exclusionary Period") commencing on the Effective Date and ending on the third anniversary of the effective date of the settlement of the "Derivative Actions" (as that term is defined in the Memorandum of Understanding by and among the parties to the derivative actions pending in the United States District Court for the Eastern District of New York, bearing case numbers 94-5694, 95-0080 and 95-3162), in no event shall Executive be granted options to acquire the common stock, par value $0.01 per share, of the Company ("Options"). During the remainder of the Employment Period following the Exclusionary Period, Executive shall be eligible to receive Options at such times and in such amounts as may be determined from time to time by the Option Committee of the Board. 3 d. RETIREMENT AND WELFARE BENEFITS. During the Employment Period, Executive shall participate in all defined contribution and defined benefit retirement plans, and employee welfare benefit plans and programs (including medical, hospitalization, dental, accident and disability insurance) that were in effect for the benefit of the Executive immediately prior to the Effective Date or that may be in effect during the Employment Period; PROVIDED, HOWEVER, that this Section 5(d) shall not prevent the Company from administering such plans and programs in accordance with their terms. Notwithstanding the foregoing, the Company shall provide, at its sole expense, a split-dollar life insurance policy for the benefit of the Executive with a face amount equal to $6 million. e. EXPENSES. The Company shall reimburse Executive for all reasonable business expenses incurred by the Executive; PROVIDED, HOWEVER, that the Executive shall be required to provide itemized statements only to the extent such expenses exceed $15,000 in any given year. f. VACATION. The Executive shall be entitled to at least three (3) weeks paid vacation per year (with a maximum of three (3) weeks unused vacation carrying forward in any given year), in accordance with the Company's vacation policy applicable to senior executives. g. FRINGE BENEFITS AND PERQUISITES. During the Employment Period, the Company shall provide to the Executive all the fringe benefits and perquisites that were in effect for the benefit of the Executive immediately prior to the Effective Date (including but not limited to the use of a Company automobile for business and personal travel and the reimbursement for all automobile-related expenses). 6. TERMINATION. The Executive's employment hereunder may be terminated under the following circumstances, in each case subject to the provisions of this Agreement. a. DEATH. The Executive's employment hereunder shall terminate upon his death. b. DISABILITY. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties hereunder on a full-time basis (i) for a period of six consecutive months or (ii) for shorter periods aggregating six months during any twelve month period, and, in either case, within thirty (30) days after written Notice of Termination (as described in Section 7(a) hereof) is given the 4 Executive shall not have returned to the performance of his duties hereunder on a full-time basis, the Company may terminate the Executive's employment hereunder for "Disability." c. CAUSE. The Company may terminate the Executive's employment hereunder for Cause. "Cause" for termination by the Company of the Executive's employment hereunder shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's Disability or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 6(d) hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties or (ii) the Executive's conviction for the commission of a felony. For purposes of clause (i) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Board establishes, by clear and convincing evidence, that Cause exists. d. GOOD REASON. The Executive may terminate his employment hereunder for "Good Reason" in the event of a material breach by the Company of its obligations under this Agreement, which breach has not been cured within ten (10) days after written notice thereof has been given by Executive to the Company specifying the acts or omissions of the Company alleged to give rise to "Good Reason". e. OTHER TERMINATIONS. The Company may terminate the Executive's employment hereunder (other than for Cause or Disability), and the Executive may terminate his employment (other than for Good Reason) in each case subject to the provisions of this Agreement. 7. TERMINATION PROCEDURE. a. NOTICE OF TERMINATION. Any termination of the Executive's employment by the Company or by the Executive (other than termination pursuant to Section 6(a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 11. 5 b. DATE OF TERMINATION. "Date of Termination" shall mean (i) if the Executive's employment is terminated by his death, the date of his death, (ii) if the Executive's employment is terminated pursuant to Section 6(b), thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period), (iii) if the Executive's employment is terminated pursuant to Section 6(c), the Date of Termination shall be the date set forth in the Notice of Termination (provided that, if the Executive's employment is terminated pursuant to Section 6(c)(i), the Date of Termination shall not be earlier than thirty (30) days after delivery of the Notice of Termination) and (iv) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or any later date (within 30 days) set forth in such Notice of Termination; PROVIDED, HOWEVER, in each case, that if within thirty (30) days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties or by a binding and final arbitration award in accordance with Section 18 hereof. 8. COMPENSATION UPON TERMINATION. a. DEATH OR DISABILITY. If the Executive's employment is terminated by reason of his death or Disability, the Company shall pay to the Executive (or his legal representatives or estate or as may be directed by the legal representatives of his estate, as the case may be) the following: i. a lump sum cash payment, within five (5) days following the Date of Termination, equal to any earned but unpaid Base Salary or Annual Bonus due to the Executive (the "Accrued Amounts"); ii. salary continuation (equal to the Base Salary in effect on the Date of Termination) for the 12-month period following the Date of Termination; iii. a lump sum cash payment, as soon as practicable following the end of the fiscal year in which the Date of Termination occurs (but in no event later than January 10 following the end of such fiscal year), equal to a pro rata portion (through the Date of Termination) of the Annual Bonus, calculated in respect of the fiscal year in which the Date of Termination occurs, based upon the Company's actual performance during such fiscal year (the "Pro Rata Bonus"); and 6 iv. any other death or disability benefits generally available in accordance with the terms and conditions of the various death or disability plans or programs in which the Executive was participating as of the Date of Termination. b. TERMINATION BY COMPANY OTHER THAN FOR DISABILITY OR CAUSE OR BY EXECUTIVE FOR GOOD REASON. If the Executive's employment is terminated by the Company other than for Disability or Cause or by the Executive for Good Reason, the Company shall pay or provide to the Executive the following: i. a lump sum cash payment, within five (5) days following the Date of Termination, equal to the Accrued Amounts; ii. a lump sum cash payment, as soon as practicable following the end of the fiscal year in which the Date of Termination occurs (but in no event later than January 10 following the end of such fiscal year), equal to the Pro Rata Bonus; iii. a lump sum cash payment, within five (5) days following the Date of Termination, equal to three (3) times the sum of the Executive's Base Salary and the highest Annual Bonus earned by the Executive during the Employment Period (or, if no Annual Bonus shall have been earned by the Executive as of the Date of Termination, (A) a lump sum cash payment, within five (5) days following the Date of Termination, equal to three (3) times the Executive's Base Salary and (B) a lump sum cash payment, as soon as practicable following the end of the fiscal year in which the Date of Termination occurs (but in no event later than January 10 following the end of such fiscal year), equal to three (3) times the Annual Bonus that would have been payable to the Executive for the fiscal year in which the Date of Termination occurs, based upon the Company's actual performance during such fiscal year); iv. for three (3) years following the Date of Termination, continuing coverage under all employee welfare benefit plans and programs in which the Executive was entitled to participate immediately prior to the Date of Termination (provided that the Executive's continued participation is possible under the general terms and provisions of such plans and programs); PROVIDED, HOWEVER, that in the event that the Executive's participation in any such plan or program is barred, the Company shall arrange to provide the Executive 7 and his dependents with benefits substantially similar to those which the Executive and his dependents would otherwise have been entitled to receive under such plans and programs; and v. for three (3) years following the Date of Termination, the various fringe benefits and perquisites described in Section 5(g) hereof. c. CAUSE OR BY EXECUTIVE OTHER THAN FOR GOOD REASON. If the Executive's employment shall be terminated by the Company for Cause or by the Executive (other than for Good Reason), then the Company shall pay the Executive, within five (5) days following such Date of Termination, in a lump sum cash payment, the Accrued Amounts. 9. MITIGATION. The Executive shall not be required to mitigate amounts payable pursuant to this Agreement by seeking other employment or otherwise, nor shall such payments be reduced on account of any remuneration earned by the Executive attributable to employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 10. SUCCESSORS; BINDING AGREEMENT. a. SUCCESSORS. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of its businesses and/or assets to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation in the same amount and on the same terms as he would be entitled to hereunder if he terminated his employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, the "Company" shall mean the Company as hereinbefore defined and any successor to the business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 10 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. b. EXECUTIVE'S SUCCESSORS. This Agreement shall not be assignable by the Executive. This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other 8 designee or, if there be no such designee, to the Executive's estate. 11. NOTICE. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Harley J. Greenfield 1725 York Avenue apt. 11F New York, NY 10128 If to the Company: Jennifer Convertibles, Inc. 419 Crossways Park Drive Woodbury, NY 11797 Attn: Ed Seidner, Executive Vice President with a copy to: Squadron Ellenoff Plesent Sheinfeld 551 Fifth Avenue New York, NY 10176 Attn: Kenneth R. Koch, Esq. or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 12. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and an authorized officer of the Company. No waiver by any party hereto at any time of any breach by the other parties hereto of, or compliance with, any condition or provision of this 9 Agreement to be performed by any such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York without regard to its conflicts of law principles. Any termination of the Executive's employment or of this Agreement shall have no effect on any continuing obligations arising under this agreement, including without limitation, the right of the Executive to receive payments and/or benefits pursuant to Section 8 hereof and the obligations described in Sections 15 and 16 hereof. 13. VALIDITY. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 15. INDEMNIFICATION. To the fullest extent permitted by law, the Company shall indemnify the Executive (including the advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by the Executive in connection with the defense of any lawsuit or other claim to which he is made a party by reason of being an officer, director or employee of the Company or any of its subsidiaries. During the Employment Period and for at least three (3) years thereafter, the Company shall make every reasonable effort to maintain customary director and officer liability insurance covering the Executive for acts and omissions prior to and during the Employment Period. 16. CONFIDENTIALITY; NON-COMPETITION, ETC. a. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all trade secrets, confidential information, and knowledge or data relating to the Company and its businesses, which shall have been obtained by the Executive during the Executive's employment by the Company and its subsidiaries and which shall not have been or hereafter become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). The Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such trade secrets, information, knowledge or data to anyone other than the Company and those designated by the Company. Any termination of the Executive's 10 employment or of this Agreement shall have no effect on the continuing operation of this Section 13(a). Executive agrees to return all confidential information, including all photocopies and summaries thereof, and any such information stored electronically on tapes, computer disks or in any other manner to the Company at any time upon request by the Company and upon the termination of his employment hereunder for any reason. b. NON-COMPETITION. During the Employment Period and, in the event of a termination by the Company for Cause or by the Executive other than for Good Reason, for the one-year period commencing upon the Date of Termination (such periods, collectively, the "Non-Competition Period"), the Executive shall not engage in Competition, as defined below; PROVIDED, HOWEVER, that it shall not be a violation of this Section 16(b) for the Executive to become the registered or beneficial owner of up to two percent (2%) of any class of the capital stock of a competing corporation registered under the Securities Exchange Act of 1934, as amended, provided that the Executive does not actively participate in the business of such corporation until such time as this covenant expires. For purposes of this Agreement, "Competition" by the Executive shall mean the Executive's engaging in, or otherwise directly or indirectly being employed by or acting as a consultant or lender to, or being a director, officer, employee, principal, agent, stockholder, member, owner or partner of, or permitting his name to be used in connection with the activities of any other business or organization that competes, directly or indirectly, in the sofabed and/or leather specialty retailing business within the geographical areas in which the Company conducts its business as of the Date of Termination. c. NON-DISPARAGEMENT. The Executive agrees that, during the Non-Competition Period, he will not make or publish any statement which is, or may reasonably be considered to be, disparaging of the Company, its subsidiaries or affiliates, or directors, officers, employees or the operations, products or services of the Company or any of its subsidiaries or affiliates, except in connection with the performance of his services hereunder to the extent the Executive makes the statement to employees of the Company or its affiliates in good faith furtherance of the Company's business. d. REMEDIES. In the event of a breach or threatened breach of this Section 16, the Executive agrees that the Company shall be entitled to apply for injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach, the Executive acknowledging that damages would be inadequate and insufficient. 17. LEGAL FEES. The Company shall pay to the Executive all legal fees and expenses incurred by the Executive in connection with the negotiation and execution of this Agreement and in disputing in good faith any issue hereunder relating to the termination of the Executive's employment or in 11 seeking in good faith to obtain or enforce any benefit or right provided by this Agreement. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 18. ARBITRATION. Except as otherwise provided herein, all controversies, claims or disputes arising out of or related to this Agreement shall be settled in New York City, New York, under the rules of the American Arbitration Association then in effect, and judgment upon such award rendered by the arbitrator(s) may be entered in any court of competent jurisdiction. All costs of the arbitration shall be borne by the Company. 19. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto; and any prior agreement of the parties hereto in respect to the subject matter contained herein. 20. WITHHOLDINGS. All payments to the Executive under this Agreement shall be reduced by all applicable withholding required by federal, state or local law. 12 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. JENNIFER CONVERTIBLES, INC. /s/ HARLEY J. GREENFIELD -------------------------------- By: Harley J. Greenfield Its: Chief Executive Officer and Chairman of the Board /s/ HARLEY J. GREENFIELD -------------------------------- Harley J. Greenfield 13 EX-10.24 3 EXHIBIT 10.24 EMPLOYMENT AGREEMENT AGREEMENT, dated as of August 15, 1999 (the "Effective Date"), by and between Rami Abada (the "Executive") and Jennifer Convertibles, Inc., a Delaware corporation (the "Company"). WHEREAS, the Executive is currently serving as President and Chief Operating Officer of the Company; WHEREAS, the Board of Directors of the Company (the "Board") desires that the Company continue to employ the Executive and the Executive desires to continue to furnish services to the Company on the terms and conditions hereinafter set forth; and WHEREAS, the parties desire to enter into this agreement setting forth the terms and conditions of the continuing employment relationship of the Executive with the Company; NOW, THEREFORE, in consideration of the premises and the mutual agreements set forth below, the parties hereby agree as follows: 1. EMPLOYMENT. The Company hereby agrees to continue to employ Executive, and Executive hereby accepts such continuing employment, on the terms and conditions hereinafter set forth. 2. EMPLOYMENT PERIOD. The term of the Agreement shall commence on the Effective Date and terminate on the fifth anniversary of the Effective Date; PROVIDED, HOWEVER, that on the third anniversary of the Effective Date and on each anniversary of the Effective Date thereafter, the term of the Agreement shall automatically be extended for one additional year, unless, not later than six (6) months prior to such anniversary, the Company or the Executive shall have given notice not to extend the term of the Agreement (the term of this Agreement, together with any extensions thereon, the "Employment Period"). The Employment Period shall end on the earlier to occur of (i) the date on which the Employment Period expires following a notice by the Company or the Executive not to extend the Employment Period and (ii) the Executive's Date of Termination, as defined in Section 7(b) hereof. 3. POSITION AND DUTIES. a. During the Employment Period, Executive shall serve as President and Chief Operating Officer of the Company. The Executive shall report directly to the Board and shall have those powers and duties consistent with his positions and such other powers and duties as may be prescribed by the Board, provided that such other powers and duties are consistent with Executive's positions set forth herein. b. Executive agrees to devote substantially his full working time, attention and energies to the performance of his duties for the Company. It shall not, however, be a violation of this Agreement for the Executive to (i) serve on corporate, civic or charitable boards or committees, (ii) give speeches and make media appearances to discuss matters of public interest and (iii) manage his personal investments, so long as the foregoing activities do not interfere substantially with the performance of the Executive's responsibilities in accordance with this Agreement. Specifically, it shall not be a violation of this Agreement for the Executive to serve as a member of the Board of Directors of CCA Industries, Inc. ("CCA"), or to act in an advisory capacity or in such other similar role with respect to CCA in the event the need arises, provided that acting in such capacity does not interfere substantially with the performance of the Executive's responsibilities in accordance with this Agreement. 4. PLACE OF PERFORMANCE. The principal place of performance of the Executive's duties shall be at the Company's corporate offices in Long Island, New York, subject to reasonable travel requirements on behalf of the Company. 5. COMPENSATION AND RELATED MATTERS. a. BASE SALARY. As compensation for the performance by Executive of his obligations hereunder, during the Employment Period, the Company shall pay Executive a base salary at a rate not less than $400,000 per year during the period commencing on the Effective Date and ending on the third anniversary of the Effective Date, and not less than $500,000 per year thereafter (the base salary in effect from time to time, the "Base Salary"). The Base Salary payable hereunder is in respect of services rendered by the Executive in his capacity as President and Chief Operating Officer and is in addition to any other remuneration payable to the Executive. On each anniversary of the Effective Date during the Employment Period, the Base Salary shall be increased at a rate equal to the increase in the cost of living as determined by the Bureau of Labor Statistics in its Consumer Price Index reports. Once increased, the Base Salary shall not be decreased. b. ANNUAL BONUS. As compensation for services rendered during the Employment Period, Executive shall be entitled to the following annual cash incentive awards (collectively, the "Annual Bonus"); PROVIDED, HOWEVER, that (x) the requirement that the Company pay an Annual Bonus in accordance with this Section 5(b) shall not limit the Company's discretionary 2 ability to make additional bonus payments from time to time during the Employment Period and (y) in no event shall the portion of the Annual Bonus otherwise earned pursuant to Section 5(b)(i) below be paid unless the Company has positive cash flow in accordance with generally accepted accounting principles, adjusted for borrowing either for the growth of the Company or for settlement expenditures related to current derivative litigation: i. a lump sum cash payment, payable on or around January 10 following the end of each fiscal year during the Employment Period, equal to 2.5% of EBITDA (defined to mean net income before interest, taxes, depreciation and amortization expense, as determined (A) by the Company's auditors in accordance with generally accepted accounting principles and (B) prior to payment of the Annual Bonus) in respect of such fiscal year; and ii. a lump sum cash payment, payable on or around January 10 following the end of each fiscal year during the Employment Period, equal to the product of (A) the excess, if any, of (1) the aggregate revenues in respect of such fiscal year of (a) the Company, (b) any partnership in which the Company is the general partner, (c) any licensee of the Company and (d) Jara Enterprises (the "Private Company"), over (2) $142 million (such amount being the aggregate revenues of the entities listed in clause (a) through (d), above, for the fiscal year ended August 29, 1998), and (B) 0.001. For purposes of clarification, the amount payable in accordance with this clause (ii) shall equal $1,000 for each $1,000,000 in revenue of the entities listed herein in excess of $142,000,000. c. COMPENSATION PLANS; STOCK OPTIONS. During the Employment Period, Executive shall be eligible to participate in all compensation plans and programs, including, but not limited to, equity based award plans and incentive programs made available generally to employees or to senior executives of the Company; PROVIDED, HOWEVER, that effective as of the Effective Date, the Company shall grant to the Executive an option ("Option") to acquire 300,000 shares of the common stock, par value $0.01 per share, of the Company. The Option shall be granted under the Company's 1991 Amended and Restated Incentive and Non-Qualified Stock Option Plan and shall (i) become exercisable with respect to 100,000 shares subject thereto on each of the first three anniversaries of the Effective Date, (ii) have an exercise price equal to $3.51 per share subject thereto and (iii) to the extent allowable under the Internal Revenue Code of 1986, as amended (the "Code"), be designated as an incentive stock option, as defined in Section 422 of the Code. Executive shall be eligible to receive additional Options at such times and in such amounts as may be determined from time to time by the Option Committee of the Board. 3 d. RETIREMENT AND WELFARE BENEFITS. During the Employment Period, Executive shall participate in all defined contribution and defined benefit retirement plans, and employee welfare benefit plans and programs (including medical, hospitalization, dental, accident and disability insurance) that were in effect for the benefit of the Executive immediately prior to the Effective Date or that may be in effect during the Employment Period; PROVIDED, HOWEVER, that this Section 5(d) shall not prevent the Company from administering such plans and programs in accordance with their terms. Notwithstanding the foregoing, the Company shall provide, at its sole expense, a split-dollar life insurance policy for the benefit of the Executive with a face amount equal to $3 million. e. EXPENSES. The Company shall reimburse Executive for all reasonable business expenses incurred by the Executive; PROVIDED, HOWEVER, that the Executive shall be required to provide itemized statements only to the extent such expenses exceed $15,000 in any given year. f. VACATION. The Executive shall be entitled to at least three (3) weeks paid vacation per year (with a maximum of three (3) weeks unused vacation carrying forward in any given year), in accordance with the Company's vacation policy applicable to senior executives. g. FRINGE BENEFITS AND PERQUISITES. During the Employment Period, the Company shall provide to the Executive all the fringe benefits and perquisites that were in effect for the benefit of the Executive immediately prior to the Effective Date (including but not limited to the use of a Company automobile for business and personal travel and the reimbursement for all automobile-related expenses). 6. TERMINATION. The Executive's employment hereunder may be terminated under the following circumstances, in each case subject to the provisions of this Agreement. a. DEATH. The Executive's employment hereunder shall terminate upon his death. b. DISABILITY. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties hereunder on a full-time basis (i) for a period of six consecutive months or (ii) for shorter periods aggregating six months during any twelve month period, and, in either case, within thirty (30) days after written Notice of Termination (as described in Section 7(a) hereof) is given the 4 Executive shall not have returned to the performance of his duties hereunder on a full-time basis, the Company may terminate the Executive's employment hereunder for "Disability." c. CAUSE. The Company may terminate the Executive's employment hereunder for Cause. "Cause" for termination by the Company of the Executive's employment hereunder shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's Disability or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 6(d) hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties or (ii) the Executive's conviction for the commission of a felony. For purposes of clause (i) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Board establishes, by clear and convincing evidence, that Cause exists. d. GOOD REASON. The Executive may terminate his employment hereunder for "Good Reason" in the event of a material breach by the Company of its obligations under this Agreement, which breach has not been cured within ten (10) days after written notice thereof has been given by Executive to the Company specifying the acts or omissions of the Company alleged to give rise to "Good Reason". e. OTHER TERMINATIONS. The Company may terminate the Executive's employment hereunder (other than for Cause or Disability), and the Executive may terminate his employment (other than for Good Reason) in each case subject to the provisions of this Agreement. 7. TERMINATION PROCEDURE. a. NOTICE OF TERMINATION. Any termination of the Executive's employment by the Company or by the Executive (other than termination pursuant to Section 6(a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 11. 5 b. DATE OF TERMINATION. "Date of Termination" shall mean (i) if the Executive's employment is terminated by his death, the date of his death, (ii) if the Executive's employment is terminated pursuant to Section 6(b), thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period), (iii) if the Executive's employment is terminated pursuant to Section 6(c), the Date of Termination shall be the date set forth in the Notice of Termination (provided that, if the Executive's employment is terminated pursuant to Section 6(c)(i), the Date of Termination shall not be earlier than thirty (30) days after delivery of the Notice of Termination) and (iv) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or any later date (within 30 days) set forth in such Notice of Termination; PROVIDED, HOWEVER, in each case, that if within thirty (30) days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties or by a binding and final arbitration award in accordance with Section 18 hereof. 8. COMPENSATION UPON TERMINATION. a. DEATH OR DISABILITY. If the Executive's employment is terminated by reason of his death or Disability, the Company shall pay to the Executive (or his legal representatives or estate or as may be directed by the legal representatives of his estate, as the case may be) the following: i. a lump sum cash payment, within five (5) days following the Date of Termination, equal to any earned but unpaid Base Salary or Annual Bonus due to the Executive (the "Accrued Amounts"); ii. salary continuation (equal to the Base Salary in effect on the Date of Termination) for the 12-month period following the Date of Termination; iii. a lump sum cash payment, as soon as practicable following the end of the fiscal year in which the Date of Termination occurs (but in no event later than January 10 following the end of such fiscal year), equal to a pro rata portion (through the Date of Termination) of the Annual Bonus, calculated in respect of the fiscal year in which the Date of Termination occurs, based upon the Company's actual performance during such fiscal year (the "Pro Rata Bonus"); and 6 iv. any other death or disability benefits generally available in accordance with the terms and conditions of the various death or disability plans or programs in which the Executive was participating as of the Date of Termination. b. TERMINATION BY COMPANY OTHER THAN FOR DISABILITY OR CAUSE OR BY EXECUTIVE FOR GOOD REASON. If the Executive's employment is terminated by the Company other than for Disability or Cause or by the Executive for Good Reason, the Company shall pay or provide to the Executive the following: i. a lump sum cash payment, within five (5) days following the Date of Termination, equal to the Accrued Amounts; ii. a lump sum cash payment, as soon as practicable following the end of the fiscal year in which the Date of Termination occurs (but in no event later than January 10 following the end of such fiscal year), equal to the Pro Rata Bonus; iii. a lump sum cash payment, within five (5) days following the Date of Termination, equal to three (3) times the sum of the Executive's Base Salary and the highest Annual Bonus earned by the Executive during the Employment Period (or, if no Annual Bonus shall have been earned by the Executive as of the Date of Termination, (A) a lump sum cash payment, within five (5) days following the Date of Termination, equal to three (3) times the Executive's Base Salary and (B) a lump sum cash payment, as soon as practicable following the end of the fiscal year in which the Date of Termination occurs (but in no event later than January 10 following the end of such fiscal year), equal to three (3) times the Annual Bonus that would have been payable to the Executive for the fiscal year in which the Date of Termination occurs, based upon the Company's actual performance during such fiscal year); iv. for three (3) years following the Date of Termination, continuing coverage under all employee welfare benefit plans and programs in which the Executive was entitled to participate immediately prior to the Date of Termination (provided that the Executive's continued participation is possible under the general terms and provisions of such plans and programs); PROVIDED, HOWEVER, that in the event that the Executive's participation in any such plan or program is barred, the Company shall arrange to provide the Executive 7 and his dependents with benefits substantially similar to those which the Executive and his dependents would otherwise have been entitled to receive under such plans and programs; and v. for three (3) years following the Date of Termination, the various fringe benefits and perquisites described in Section 5(g) hereof. c. CAUSE OR BY EXECUTIVE OTHER THAN FOR GOOD REASON. If the Executive's employment shall be terminated by the Company for Cause or by the Executive (other than for Good Reason), then the Company shall pay the Executive, within five (5) days following such Date of Termination, in a lump sum cash payment, the Accrued Amounts. 9. MITIGATION. The Executive shall not be required to mitigate amounts payable pursuant to this Agreement by seeking other employment or otherwise, nor shall such payments be reduced on account of any remuneration earned by the Executive attributable to employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 10. SUCCESSORS; BINDING AGREEMENT. a. SUCCESSORS. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of its businesses and/or assets to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation in the same amount and on the same terms as he would be entitled to hereunder if he terminated his employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, the "Company" shall mean the Company as hereinbefore defined and any successor to the business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 10 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. b. EXECUTIVE'S SUCCESSORS. This Agreement shall not be assignable by the Executive. This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any 8 amounts would still be payable to him hereunder if he had continued to live, all such amounts unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 11. NOTICE. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Rami Abada 2 Kodiak Drive Woodbury, NY 11797 If to the Company: Jennifer Convertibles, Inc. 419 Crossways Park Drive Woodbury, NY 11797 Attn: Ed Seidner, Executive Vice President with a copy to: Squadron Ellenoff Plesent Sheinfeld 551 Fifth Avenue New York, NY 10176 Attn: Kenneth R. Koch, Esq. or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 12. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and an authorized officer of the Company. No waiver by any party hereto at any time of any breach by the other parties hereto of, or compliance with, any condition or provision of this Agreement to be performed by any such other party shall be deemed a waiver of 9 similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York without regard to its conflicts of law principles. Any termination of the Executive's employment or of this Agreement shall have no effect on any continuing obligations arising under this agreement, including without limitation, the right of the Executive to receive payments and/or benefits pursuant to Section 8 hereof and the obligations described in Sections 15 and 16 hereof. 13. VALIDITY. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 15. INDEMNIFICATION. To the fullest extent permitted by law, the Company shall indemnify the Executive (including the advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by the Executive in connection with the defense of any lawsuit or other claim to which he is made a party by reason of being an officer, director or employee of the Company or any of its subsidiaries. During the Employment Period and for at least three (3) years thereafter, the Company shall make every reasonable effort to maintain customary director and officer liability insurance covering the Executive for acts and omissions prior to and during the Employment Period. 16. CONFIDENTIALITY; NON-COMPETITION, ETC. a. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all trade secrets, confidential information, and knowledge or data relating to the Company and its businesses, which shall have been obtained by the Executive during the Executive's employment by the Company and its subsidiaries and which shall not have been or hereafter become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). The Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such trade secrets, information, knowledge or data to anyone other than the Company and those designated by the Company. Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 13(a). Executive agrees to return all confidential information, 10 including all photocopies and summaries thereof, and any such information stored electronically on tapes, computer disks or in any other manner to the Company at any time upon request by the Company and upon the termination of his employment hereunder for any reason. b. NON-COMPETITION. During the Employment Period and, in the event of a termination by the Company for Cause or by the Executive other than for Good Reason, for the one-year period commencing upon the Date of Termination (such periods, collectively, the "Non-Competition Period"), the Executive shall not engage in Competition, as defined below; PROVIDED, HOWEVER, that it shall not be a violation of this Section 16(b) for the Executive to become the registered or beneficial owner of up to two percent (2%) of any class of the capital stock of a competing corporation registered under the Securities Exchange Act of 1934, as amended, provided that the Executive does not actively participate in the business of such corporation until such time as this covenant expires. For purposes of this Agreement, "Competition" by the Executive shall mean the Executive's engaging in, or otherwise directly or indirectly being employed by or acting as a consultant or lender to, or being a director, officer, employee, principal, agent, stockholder, member, owner or partner of, or permitting his name to be used in connection with the activities of any other business or organization that competes, directly or indirectly, in the sofabed and/or leather specialty retailing business within the geographical areas in which the Company conducts its business as of the Date of Termination. c. NON-DISPARAGEMENT. The Executive agrees that, during the Non-Competition Period, he will not make or publish any statement which is, or may reasonably be considered to be, disparaging of the Company, its subsidiaries or affiliates, or directors, officers, employees or the operations, products or services of the Company or any of its subsidiaries or affiliates, except in connection with the performance of his services hereunder to the extent the Executive makes the statement to employees of the Company or its affiliates in good faith furtherance of the Company's business. d. REMEDIES. In the event of a breach or threatened breach of this Section 16, the Executive agrees that the Company shall be entitled to apply for injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach, the Executive acknowledging that damages would be inadequate and insufficient. 17. LEGAL FEES. The Company shall pay to the Executive all legal fees and expenses incurred by the Executive in connection with the negotiation and execution of this Agreement and in disputing in good faith any issue hereunder relating to the termination of the Executive's employment or in seeking in good faith to obtain or enforce any benefit or right provided by this 11 Agreement. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 18. ARBITRATION. Except as otherwise provided herein, all controversies, claims or disputes arising out of or related to this Agreement shall be settled in New York City, New York, under the rules of the American Arbitration Association then in effect, and judgment upon such award rendered by the arbitrator(s) may be entered in any court of competent jurisdiction. All costs of the arbitration shall be borne by the Company. 19. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto; and any prior agreement of the parties hereto in respect to the subject matter contained herein. 20. WITHHOLDINGS. All payments to the Executive under this Agreement shall be reduced by all applicable withholding required by federal, state or local law. 12 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. JENNIFER CONVERTIBLES, INC. /s/ HARLEY J. GREENFIELD -------------------------------- By: Harley J. Greenfield Its: Chief Executive Officer and Chairman of the Board /s/ RAMI ABADA -------------------------------- Rami Abada 13 AMENDMENT Reference is made to the employment agreement dated as of August 15, 1999, between Rami Abada ("Abada") and Jennifer Convertibles, Inc. ("JCI"). Section 5c is hereby amended so that the reference to the number of options granted under the 1991 Incentive and Non-Qualified Stock Option Plan (the "Plan") shall be 26,000 and the remaining options to purchase 274,000 options shall be non-qualified options granted outside of the Plan (the "Outside Options"). Notwithstanding anything to the contrary contained in the employment agreement, such options shall be granted as of the date of this agreement, but shall be vested as if granted on August 15, 1999. If JCI adopts a new Incentive Stock Option Plan and it is permitted by applicable law, Abada shall have the right, within 60 days of stockholder approval of such new plan, to exchange the Outside Options for incentive stock options granted under such plan. JCI shall use its best efforts to register the shares of common stock underlying the options referred to herein. IN WITNESS WHEREOF, the parties hereto have signed this Amendment as of this 30th day of November, 1999. JENNIFER CONVERTIBLES, INC. By: /s/ HARLEY J. GREENFIELD --------------------------- Harley J. Greenfield, Chief Executive Officer /s/ RAMI ABADA --------------------------- Rami Abada 14 EX-10.25 4 EXHIBIT 10.25 AGREEMENT Agreement dated September 1, 1999 between Jennifer Convertibles, Inc., a Delaware corporation ("JCI"), and Jara Enterprises, Inc., a New York corporation ("Jara"). In consideration of $1.00 and other good and valuable consideration, receipt of which is hereby acknowledged, "Jara" hereby agrees that it shall not charge "JCI" for royalties, the 5% warehouse fee, and the fee for fabric protection on new Jennifer Convertibles, Jennifer Leather or combined Jennifer Convertibles/Jennifer Leather Super Stores whether opened in or out of New York on or after July 1, 1999 and "JCI" agrees that when Jara transfers it warehouse system to "JCI" ("Transfer Date") it will begin rebating to "Jara" its share of vendor allowances that "JCI" receives relating to the repair program Klaussner has instituted based on the "JCI" purchases from Klaussner which are in turn sold to "Jara". The parties hereto agree that the number of new Jennifer Convertibles stores or combined Jennifer Convertibles/Jennifer Leather super stores that JCI is permitted to open in New York after June 1, 1999 until the Transfer Date is limited to five. IN WITNESS WHEREOF, the parties have signed this Agreement as of this 1st day of September 1999. JENNIFER CONVERTIBLES, INC. By: /s/ HARLEY J. GREENFIELD ---------------------------- Harley J. Greenfield, Chief Executive Officer JARA ENTERPRISES, INC. By: /s/ FRED LOVE ---------------------------- Fred Love, President EX-10.26 5 EXHIBIT 10.26 AGREEMENT Agreement dated September 1, 1999 between Jennifer Convertibles, Inc., a Delaware corporation ("JCI"), and Jara Enterprises Inc., a New York corporation ("Jara"). In consideration of $1.00 and other good and valuable consideration, receipt of which is hereby acknowledged, Jara hereby agrees to continue to pay JCI $150,000 per month for each calendar month until the date on which Jara transfers its warehouse system to JCI (the "Transfer Date"). As of the date hereof, Jara has made the $150,000 per month payments up to and including the month of August, 1999 and Jara shall make payments under this Agreement in respect of successive months on or before the 70th day after the end of each month, commencing with the payment in respect of September which shall be due on or before December 10, 1999. This Agreement shall terminate on the Transfer Date and any amounts unpaid at such date in excess of $300,000 shall be paid on the 10th of the month in which the Transfer Date occurs (or if the Transfer Date is after the 10th of the month on or before the 10th of the next month). Payments of the $300,000 balance will be evidenced by a note payable in 30 payments of $10,000 per month commencing 30 days after the Transfer Date. The parties hereto agree that the number of new Jennifer Convertibles stores or combined Jennifer Convertibles/Jennifer Leather super stores that JCI is permitted to open in New York after June 1, 1999 until the Transfer Date is limited to five. IN WITNESS WHEREOF, the parties have signed this Agreement as of this 1st day of September 1999. JENNIFER CONVERTIBLES, INC. By: /s/ HARLEY J. GREENFIELD --------------------------- Harley J. Greenfield, Chief Executive Officer JARA ENTERPRISES, INC. By: /s/ FRED LOVE --------------------------- Fred Love, President EX-10.27 6 EXHIBIT 10.27 LOAN AGREEMENT LOAN AGREEMENT entered into as of December 8, 1999, between JENNIFER CONVERTIBLES, INC., a Delaware corporation ("JCI"), and KLAUSSNER FURNITURE INDUSTRIES, INC., a North Carolina corporation (the "Lender"). 1. LOAN TERMS. 1.1 THE LOANS. Subject to the terms and conditions of this Loan Agreement and provided no default then exists under any Loan previously made pursuant to this Agreement or under any other agreement between JCI and Lender, Lender agrees that it will advance to each subsidiary of JCI operating a "New Store" (a "Borrower") a loan in the aggregate principal amount of $150,000 (each, a "Loan") on a date (the "Funding Date") occurring within three business days following the date JCI gives notice that it has opened a "New Store," which shall mean a retail furniture store the location of which and the plans and specifications for which have been approved by Lender in its sole discretion. Each such Loan shall be made against delivery by the Borrower of a Note (as defined below). The parties acknowledge and agree that JCI may open new furniture stores which it chooses, in its sole discretion, to fund otherwise than under this Loan Agreement and that such new stores shall not be deemed "New Stores" hereunder. 1.2 PURPOSE OF EACH LOAN. JCI agrees to cause the Borrower to use the proceeds received from each Loan to open and fund one New Store at the location and in accordance with the plans and specifications approved by Lender with respect to such New Store. 1.3 MATURITY. Each Borrower will agree to repay, on the date corresponding to three calendar years subsequent to the Funding Date of its Loan (the "Maturity Date"), the principal amount of the Loan outstanding in accordance with the promissory note of the Borrower (each, a "Note") in substantially the form attached hereto as Exhibit A, payable to the order of the Lender and bearing interest at the prevailing London Interbank offered rate ("LIBOR") for three-month loans as in effect from time to time, plus 3%. If any Maturity Date falls on a day which is not a Business Day, the payment due on such Maturity Date will be paid on the next succeeding Business Date with the same force and effect as if made on such Maturity Date and no interest shall accrue with respect to such payment for the period from and after such Maturity Date. 1.4 GUARANTY. JCI shall guaranty the payment of each Loan pursuant to a Guaranty in the form of Exhibit B hereto. 1.5 PREPAYMENT OPTION. Each Borrower shall be entitled to prepay the outstanding principal amount of its Loan, in whole or in part, without penalty. 1.6 ADDITIONAL CONSIDERATION BY BORROWER FOR THE LOANS. Both JCI and Lender acknowledge that JCI, its subsidiaries and affiliates (the "Jennifer Group") currently purchase furniture from Lender regularly and in the ordinary course of business to satisfy customer sales orders not originating out of New Stores. As additional consideration for the Lender advancing each Loan to the Borrowers, JCI agrees to pay (or cause to be paid), for furniture purchased by the Jennifer Group from Lender to satisfy customer sales originating out of each New Store, an additional 3% (the "Premium") above the normal, regular and customary cost, net of all discounts and rebates, that the Jennifer Group pays Lender for the same furniture purchased to satisfy customer sales orders NOT originating out of a New Store. All other payment terms relating to furniture purchased from Lender for sale in each New Store shall be consistent with the then current course of dealing between the Jennifer Group and Lender as to the sales originating from furniture stores which are not New Stores. In addition, once Borrower has repaid to Lender the aggregate principal amount of the Loan as to a New Store and all interest due and payable thereon, the Premium as to furniture purchased to satisfy customer orders originating out of such New Store shall drop to 2% for 10 years following such payment in full. After such 10-year period, JCI shall not be obligated to pay any Premium. So long as any Borrower is obligated to pay a Premium, JCI shall furnish to Lender a monthly report by Borrower of New Store purchases in respect of which Lender is entitled to the Premium. Such report shall be furnished by the 15th business day after JCI closes its books for the month which is the subject of such report. 1.7 MAXIMUM AMOUNT OF LOANS. In no event shall the principal amount of all Loans made by the Lender hereunder exceed $1.5 million in the aggregate (10 New Stores). 1.8 JOINDER AND GUARANTY. As a condition to any Loan under this Agreement, the Borrower shall become a party to the Credit and Security Agreement dated as of March 1, 1996, among the Jennifer Group and Lender and guarantee the Obligations of the Jennifer Group thereunder and, for that purpose, will execute such joinder agreements and guaranties as Lender may reasonably request. 2. METHOD OF PAYMENTS. (a) All payments to Lender hereunder and under each Note shall be payable in lawful money of the United States of America and in immediately available funds not later than 11:00 A.M. (New York City time) on the date when due at Lender's executive office in Asheboro, North Carolina, or at such other place as Lender may, from time to time, designate in writing to Borrower. (b) Amounts advanced to Borrower under this Loan Agreement shall be paid by wire transfer to JCI on behalf of Borrower in immediately available funds no later than 12:00 P.M. (New York City time) on the Funding Date to such account or bank as may be designated by JCI or Borrower. 2 3. MISCELLANEOUS. 3.1 NO THIRD-PARTY BENEFICIARIES. This Loan Agreement is for the sole benefit of the parties hereto, and nothing herein expressed or implied shall give or be construed to give to any person, other than the parties hereto, any legal or equitable rights hereunder. 3.2 NOTICES. All notices or other communications required or permitted to be given hereunder shall be in writing and shall be delivered by hand or sent by prepaid telex, cable or telecopy or sent, postage prepaid, by registered, certified or express mail or reputable overnight courier service and shall be deemed given when so delivered by hand, telexed, cabled or telecopied, or if mail, three days after mailing (one business day in the case of express mail or overnight courier service), as follows: (a) If the Lender, Klaussner Furniture Industries, Inc. 405 Lewallen Road Asheboro, North Carolina 27203 Telecopy No. 336-625-5372 Attention: Robert C. Shaffner with a copy to: Schell Bray Aycock Abel & Livingston P.L.L.C. 1500 Renaissance Plaza, P. O. Box 21847 Greensboro, North Carolina 27420 Telecopy No. 336-370-8830 Attention: Michael R. Abel, Esq. (b) If to JCI or a Borrower, Jennifer Convertibles, Inc. 419 Crossways Park Drive Woodbury, New York 11797 Telecopy No.: 516-496-0008 Attention: Harley J. Greenfield with a copy to: Squadron, Ellenoff, Plesent & Sheinfeld, LLP 551 Fifth Avenue New York, New York 10176 Telecopy No.: 212-697-6686 Attention: Kenneth R. Koch, Esq. 3 or such other address as any party may from time to time specify by written notice to the other parties hereto. 3.3 COUNTERPARTS. This Loan Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more such counterparts have been signed by each of the parties and delivered to the other parties. 3.4 GOVERNING LAW. This Loan Agreement shall be governed and construed in accordance with the internal laws of the State of North Carolina applicable to agreements made and to be performed entirely within such State, without regard to the conflicts of law principles of such State. 3.5 NO PARTNERSHIP, ETC. Nothing herein shall be construed to create a partnership, joint venture, franchise or agency between the parties with respect to any New Store. Neither party shall have authority to enter into agreements of any kind on behalf of the other or to obligate the other in any manner to any third party. 3.6 ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties with respect to Loans for New Stores and supersedes any and all prior agreements, oral or written, with respect thereto. 3.7 BINDING EFFECT; NO ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors. This Agreement is not assignable, by operation of law or otherwise. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first written above. KLAUSSNER FURNITURE INDUSTRIES, INC. By: /s/ ROBERT C. SHAFFNER -------------------------------------- Name: Robert C. Shaffner Title: Senior Vice President and Chief Financial Officer JENNIFER CONVERTIBLES, INC. By: /s/ HARLEY J. GREENFIELD -------------------------------------- Name: Harley J. Greenfield Title: Chief Executive Officer 4 EXHIBIT A PROMISSORY NOTE $150,000 New York, New York Date: As of [ ] FOR VALUE RECEIVED, [JENNIFER SUB], a corporation (the Borrower), promises to pay to the order of Klaussner Furniture Industries, Inc., a North Carolina corporation (the "Payee"), pursuant to the terms of the Loan Agreement between Jennifer Convertibles, Inc., a Delaware corporation, and the Payee dated as of [ ], 1999 (the "Loan Agreement"), at its executive office in Asheboro, North Carolina, or at such other address as to which the Payee shall give written notice to the Borrower, in lawful money of the United States of America and in immediately available funds, the aggregate principal amount of One Hundred and Fifty Thousand Dollars ($150,000) on [maturity date - three years subsequent] (the "Maturity Date"), and to pay interest thereon from the date hereof, quarterly on the 15th day of September, December, March and June of each year (each, an "Interest Payment Date") at the rate of % per annum [three-month LIBOR + 3% on the issue date] for the first Interest Period and, for subsequent Interest Periods, at the prevailing London Interbank offered rate ("LIBOR") for three month loans in effect on the first day of such Interest Period, plus 3%. If any Interest Payment Date would otherwise be a day that is not a Business Day (as defined below), such Interest Payment Date will be postponed to the next succeeding day that is a Business Day. Interest payable on each Interest Payment Date will include interest accrued from and including the first day of the Interest Period relating to such Interest Payment Date to and including the last day of such Interest Period. "Interest Period" shall mean the period beginning on and including the issue date of the Note and ending on and including the day preceding the first Interest Payment Date, and thereafter, each successive period beginning on and including each Interest Payment Date and ending on and including the day preceding the next succeeding Interest Payment Date. As used herein, "Business Day" is a day on which dealings in Euro-dollars are carried on in the London Interbank market and on which banks are open for domestic and foreign exchange business in London and New York City. Interest on this Note will be computed and paid on the basis of the actual number of days for which interest accrues in each Interest Period divided by the actual number of days in the relevant year. The Borrower may prepay this Note in whole or in part at any time without premium or penalty. 5 Only the following events shall constitute an event of default under this Note (an "Event of Default"): (i) Borrower makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts as they become due, or commences a voluntary case under the federal bankruptcy laws (as now or hereafter in effect), or is adjudicated a bankrupt or insolvent, or files any petition or answer seeking for itself any liquidation, arrangement, composition, reorganization, readjustment or similar relief under any present or future statute, law or regulation pertaining to insolvency or creditors' rights or files any answer admitting the material allegations of a petition filed against it in any such proceeding, or seeks or consents to or acquiesces in the appointment of any trustee, receiver, liquidator or similar official for itself or all or any substantial part of its properties; (ii) If within 60 days after the commencement of any proceeding against Borrower seeking any liquidation, arrangement, composition, reorganization, readjustment or similar relief under any present or future statute, law or regulation pertaining to insolvency or creditors' rights, such proceeding is not dismissed, or if within 60 days after the appointment without the consent or acquiescence of Borrower or any trustee, receiver, liquidator or similar official for Borrower or of all or any substantial part of its properties, such appointment is not vacated; (iii) Borrower shall fail to pay any interest or other amount due under this Note in accordance with the terms hereof within ten (10) days after such payment is due; (iv) Borrower closes the New Store (as defined in the Loan Agreement) which was funded with the proceeds from this Note or ceases to operate the New Store in accordance with the plans and specifications approved by the Payee pursuant to the Loan Agreement; or (v) Payee and its subsidiaries and affiliates (the "Klaussner Group") cease to be the principal suppliers of upholstered furniture to Jennifer Convertibles, Inc. and its subsidiaries and affiliates (the "Jennifer Group") and, for this purpose, the Klaussner Group shall be the principal suppliers of the Jennifer Group so long as at least 50% by dollar volume of the Jennifer Group's purchases of upholstered furniture is from the Klaussner Group, as reasonably determined from time to time by the Payee. Upon the occurrence of any Event of Default, Payee, may, by written notice to Borrower, at Payee's option, declare the entire unpaid principal amount of this Note, together with accrued interest thereon, to be due and payable, whereupon the same shall forthwith mature and become due and payable, and Payee shall have such other remedies as Payee may have at law, equity or otherwise. Interest shall continue to accrue as hereinabove provided until the principal amount has been paid in full. 6 All parties liable for the payment of this Note, whether principals, sureties, guarantors, endorsers, and other parties, hereby waive presentment, demand, protest, notice of protest, demand, nonpayment, dishonor, and acceleration of maturity of this Note, and agree that the time for payment hereof may be extended from time to time and that any collateral which may secure the payment hereof may be released from time to time, all without notice to them and without affecting their liability hereon in any manner whatsoever. If the holder engages an attorney to enforce any term or provision of this Note or the Loan Agreement, the undersigned agrees to pay the reasonable attorney's fees of the holder hereof, in addition to all other sums owed hereon. This Note shall be governed by and construed in accordance with the internal laws of the State of North Carolina applicable to agreements made and to be performed entirely within such State, without regard to the conflicts of law principles of such State. Borrower and Payee agree that any legal action or proceeding with respect to this Note shall be subject to the jurisdiction of both the state and federal courts in North Carolina and, for that purpose, Borrower hereby submits to the jurisdiction of the state and federal courts in North Carolina and agrees to accept service of process in any legal action or proceeding by registered or certified mail, postage prepaid, addressed to Borrower. Borrower agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in any jurisdiction by suit on the judgment or in any other manner provided by law. Borrower waives any objection to venue in any state or federal court in North Carolina based on the grounds of forum non conveniens. Borrower waives trial by jury in any such action or proceeding. [BORROWER] By: --------------------------------- Name: Title: 7 EXHIBIT B UNCONDITIONAL GUARANTY THIS UNCONDITIONAL GUARANTY, dated as of _____________ (the "Guaranty") is given by Jennifer Convertibles, Inc. (the "Guarantor") and extended to and in favor of Klaussner Furniture Industries, Inc. ("Lender") for the benefit of Jennifer ________________ (the "Debtor"). WHEREAS, the Debtor is a wholly owned subsidiary of Guarantor; and WHEREAS, simultaneously with the execution and delivery of this Guaranty, Lender has made a loan in the principal amount of $150,000 (the "Loan") to Debtor as evidenced by a Promissory Note dated ___________ (the "Note") executed by Debtor in favor of Lender; and WHEREAS, without this Guaranty, Lender would have been unwilling to make the Loan to the Debtor; and WHEREAS, because of the benefit to Guarantor from the Loan, Guarantor has agreed to guarantee to Lender the obligations of the Debtor to Lender under the Note. NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by Guarantor, Guarantor agrees as follows: 8 1. Guarantor absolutely and unconditionally guarantees the payment when due, upon maturity, acceleration or otherwise, of any and all indebtedness of the Debtor to the Lender under the Note and all renewals and extensions thereof (the "Indebtedness"). If the Indebtedness becomes due and payable, Guarantor absolutely and unconditionally promises to pay such Indebtedness to the Lender, or order, on demand, in lawful money of the United States. Guarantor further agrees to pay any and all reasonable expenses which may be incurred or paid by Lender in collecting any and all of the Indebtedness and/or enforcing its rights under this Guaranty or the Note, including all reasonable attorneys' fees, which expenses shall be deemed part of the Indebtedness. This Guaranty (and any security interest securing this Guaranty) shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment, or any part thereof, of the Indebtedness is rescinded or must otherwise be restored by Lender upon the bankruptcy or reorganization of Debtor or otherwise. 2. Guarantor absolutely and unconditionally guarantees the payment of the Indebtedness, and unconditionally promises to pay the Indebtedness to the Lender, or order, on demand, in lawful money of the United States, whether or not then due or payable by the Debtor, upon the dissolution, insolvency, or business failure of, or any assignment for benefit of creditors by, or commencement of any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceedings by or against the Debtor or the appointment of a receiver for, or the attachment, restraint of, or making or levying of any order of court or legal process affecting, a substantial portion of the property of the Debtor. 9 3. The liability of Guarantor hereunder is exclusive and independent of any security for or other guaranty of the Indebtedness of the Debtor, whether executed by Guarantor or by any other party, and the liability of Guarantor hereunder is not affected or impaired by any direction of application of payment by the Debtor or by any other party, any other continuing or other guaranty or undertaking of Guarantor or of any other party as to the Indebtedness, any payment on or in reduction of any such other guaranty or undertaking, or any payment made to the Lender on the Indebtedness which the Lender repays to the Debtor pursuant to court order in any bankruptcy, reorganization, arrangement, moratorium, or other debtor relief proceeding, and Guarantor waives any right to the deferral or modification of its obligations hereunder by reason of any such proceedings. 4. The obligations of Guarantor hereunder are independent of the obligations of the Debtor, and a separate action may be brought and prosecuted against Guarantor, whether or not action is brought against the Debtor and whether or not the Debtor is joined in any such action against Guarantor. 5. Guarantor agrees that the Lender may, without notice or demand (except as shall be required by applicable statue and cannot be waived) and without affecting or impairing Guarantor's liability hereunder, from time to time to (a) renew, compromise, extend, accelerate, or otherwise change the time for payment of, or otherwise change the terms of the Indebtedness or any part thereof, including an increase or decrease of the rate of interest thereon, (b) take and hold security for the payment of this Guaranty or the Indebtedness and exchange, enforce, waive, and release any such security, (c) apply such security and direct the order or manner of sale thereof as the Lender in its discretion 10 may determine, and (d) release or substitute any one or more endorsers, guarantors, borrowers, or other obligors. 6. It is not necessary for the Lender to inquire into the capacity or powers of the Debtor or the officers, directors, partners, or agents acting or purporting to act on its behalf, and the Indebtedness having been made or created in reliance by the Lender upon the professed exercise of such powers shall be guaranteed hereunder. 7. Guarantor waives any right to require the Lender to (a) proceed against the Debtor or any other party, (b) proceed against or exhaust any security held from the Debtor, or (c) pursue any other remedy in the Lender's power whatsoever. Guarantor expressly waives any right conferred upon Guarantor under N.C. Gen. Stat. ss. 26-7, ET SEQ. Guarantor waives any defense based on or arising out of any defense of the Debtor other than payment in full of the Indebtedness, including without limitation any defense based on or arising out of the unenforceability of the Indebtedness, or any part thereof, from any cause, the impairment of any collateral held as security for this Guaranty or the cessation of the liability of the Debtor from any cause other than payment in full of the Indebtedness. The Lender may, at its election, foreclose on any security held by the Lender by one or more judicial or nonjudicial sales or exercise any other right or remedy the Lender may have against the Debtor, or any security, without affecting or impairing in any way the liability of Guarantor hereunder except to the extent the Indebtedness has been paid in full. Guarantor waives any defense arising out of any such election by the Lender, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of Guarantor against the Debtor or any security. 11 Guarantor shall have no right of subrogation, reimbursement, contribution, exoneration or indemnity whatsoever against the Debtor and waives any right to enforce any remedy which the Lender now has or may hereafter have against the Debtor, and waives any benefit of, and any right to participate in any security now or hereafter held by the Lender. This waiver is expressly intended to prevent the existence of any claim (as defined in the Bankruptcy Code) in respect of such rights by Guarantor against the estate of the Debtor and to prevent Guarantor from being a creditor of the Debtor due to such rights. Guarantor waives all presentments, demands for performance, protests and notices, including without limitation notices of nonperformance, notices of protest, notices of dishonor, notices of acceptance of this Guaranty, and notices of the existence, creation or incurring of new or additional Indebtedness. Guarantor agrees that it has sole responsibility for obtaining such information concerning the Debtor's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Indebtedness and the nature, scope and extent of the risks which Guarantor assumes and incurs hereunder, and agrees that the Lender shall have no duty to advise the Guarantor of information known to it regarding such circumstances or risks. 8. This Guaranty and the liability and obligations of Guarantor hereunder are binding upon Guarantor and its successors, transferees and assigns, and inures to the benefit of and is enforceable by the Lender and its successors, transferees, and assigns. 9. No right or power of the Lender hereunder shall be deemed to have been waived by any act or conduct on the part of the Lender, or by any neglect to exercise such right or power, or by any delay in so doing; and every right or power shall continue in full force and effect until specifically waived or released by an instrument in writing executed by the Lender. 10. THIS GUARANTY SHALL BE DEEMED TO BE MADE UNDER AND SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NORTH CAROLINA IN ALL RESPECTS, INCLUDING MATTERS OF CONSTRUCTION, VALIDITY, AND PERFORMANCE, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. THE TERMS AND PROVISIONS HEREOF MAY NOT BE WAIVED, ALTERED, MODIFIED, OR AMENDED EXCEPT IN WRITING DULY SIGNED BY AN OFFICER OF THE LENDER AND BY GUARANTOR. THIS GUARANTY CONSTITUTES THE ENTIRE AGREEMENT OF GUARANTOR WITH RESPECT TO THE SUBJECT MATTER HEREOF, AND THERE ARE NO OTHER AGREEMENTS OR UNDERSTANDINGS, ORAL OR WRITTEN, WITH RESPECT THERETO. GUARANTOR AND THE LENDER AGREE THAT ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF THIS GUARANTY SHALL BE SUBJECT TO THE JURISDICTION OF BOTH THE STATE AND FEDERAL COURTS IN NORTH CAROLINA. FOR THAT PURPOSE GUARANTOR HEREBY SUBMITS TO THE JURISDICTION OF THE STATE AND FEDERAL COURTS IN NORTH CAROLINA. GUARANTOR FURTHER AGREES TO ACCEPT SERVICE OF PROCESS IN ANY SUCH LEGAL ACTION OR PROCEEDING BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, ADDRESSED TO GUARANTOR. GUARANTOR AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY JURISDICTION BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. GUARANTOR WAIVES ANY OBJECTION TO VENUE IN ANY STATE OR FEDERAL COURT IN NORTH CAROLINA BASED ON THE GROUNDS OF FORUM NON CONVENIENS. GUARANTOR FURTHER AGREES THAT ANY ACTION OR PROCEEDING BROUGHT AGAINST THE LENDER SHALL BE BROUGHT ONLY IN A STATE OR FEDERAL COURT IN NORTH CAROLINA, BUT NOTHING HEREIN SHALL AFFECT THE RIGHT OF 12 THE LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF THE LENDER TO BRING ANY ACTION OR PROCEEDING AGAINST GUARANTOR OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. GUARANTOR WAIVES TRIAL BY JURY IN ANY SUCH ACTION OR PROCEEDING. 11. If any of the provisions of this Guaranty shall contravene or be held invalid under the laws of the State of North Carolina, this Guaranty shall be construed as if not containing those provisions and the rights and obligations of the parties hereto shall be construed and enforced accordingly. 12. This Guaranty may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original and all of which counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty as of the date first above written. JENNIFER CONVERTIBLES, INC. By: ______________________________ Title: ______________________________ 13 EX-10.28 7 EXHIBIT 10.28 STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT, dated as of December 8, 1999, between Klaussner Furniture Industries, Inc., a North Carolina corporation ("KFI"), and Harley J. Greenfield, a citizen and resident of the State of New York ("Greenfield"). WITNESSETH: WHEREAS, KFI is the owner of 10,000 shares of the Series A Preferred Stock (the "Preferred Stock") of Jennifer Convertibles, Inc., a New York corporation ("JCI"); and WHEREAS, JCI is a major customer of KFI; and WHEREAS, Greenfield is the Chief Executive Officer of JCI; and WHEREAS, on the terms stated herein, KFI desires to provide Greenfield with an incentive to remain Chief Executive Officer of Jennifer by granting him an option to purchase 2,106 shares of the Preferred Stock owned by KFI for $712.25 per share (the equivalent of 300,000 shares of JCI Common Stock at $5.00 per share if such shares of Preferred Stock were converted into Common Stock on the date hereof); and WHEREAS, at a meeting duly held on November 30, 1999, the Board of Directors of JCI approved this Agreement and consented to the option granted herein; NOW, THEREFORE, KFI and Greenfield agree as follows: 1. OPTION. KFI hereby grants to Greenfield an option to purchase, on the terms and subject to the conditions hereinafter set forth, all or any part of an aggregate of 2,106 shares of the Preferred Stock owned by KFI at the purchase price of $712.25 per share (the "Option"). 2. TERM. The Option may be exercised from and after the date hereof until the earliest of: (a) August 31, 2004; (b) The consummation by JCI of any merger or consolidation in which it is not the surviving corporation or pursuant to which its stockholders exchange their common stock or the dissolution or liquidation of JCI or the sale by JCI of all or substantially all of its assets; or (c) Greenfield ceasing to be Chief Executive Officer of JCI for any reason; provided, however, that in the event of Greenfield's death while he is Chief Executive Officer of JCI, then his estate shall have the right to exercise the Option for a period of one year after his death, but in no event after August 31, 2004, or the occurrence of any of the transactions described in (b) above. Upon the earliest to occur of the foregoing events, the Option shall terminate and all rights of Greenfield hereunder shall expire. 3. EXERCISE OF OPTION. The Option may be exercised from time to time by Greenfield's delivery to KFI of written notice of exercise, which notice shall specify the number of shares to be purchased and be accompanied by payment of the purchase price in immediately available funds. The date of actual receipt by KFI of such notice and such purchase price shall be deemed the date of exercise of the option. Notwithstanding the foregoing, the Option shall not be exercised, in whole or in part, and no transfer of shares of Preferred Stock subject to the Option shall be made, if any requisite approval or consent of any governmental authority having jurisdiction in the matter shall not have been secured or if the transfer would violate any federal, state or local law, regulation or order. 4. TRANSFER OF SHARES UPON EXERCISE OF OPTION. Upon exercise of the Option as provided in Section 3 above, KFI shall take such action as may be reasonably requested by Greenfield to effect a transfer of the shares of Preferred Stock purchased thereby. However, Greenfield recognizes that neither the Option nor the shares of Preferred Stock transferable upon its exercise have been registered under any federal or state laws governing the issuance and sale of securities and that KFI has no obligation to effect registration under any such laws. Therefore, Greenfield agrees that any and all shares of Preferred Stock purchased upon exercise of the Option shall be acquired for investment and not with a view to, or for sale in connection with, any distribution thereof, and that, at the time he exercises all or any portion of the Option, he will furnish to KFI and JCI such documentation as either of them shall reasonably require in order to assure compliance with all applicable securities laws in effect at the time of exercise. Greenfield consents to such other action as KFI or JCI deems necessary or appropriate in order to assure compliance with all such laws, including but not limited to placing restrictive legends on certificates evidencing the shares of Preferred Stock purchased upon exercise of the Option. Notwithstanding the foregoing, subject to JCI's consent, KFI will not unreasonably withhold its consent to the shares of JCI Common Stock transferred or transferable upon exercise of the Option being included in any registration statement filed pursuant to the Registration Rights Agreement dated December 11, 1997 between KFI and JCI; provided, however, that the filing of any such registration statement shall be at the sole discretion of KFI. 5. NO ASSIGNMENT. Except as provided in Section 2(c) with respect to the death of Greenfield, the Option shall not be transferred, assigned, pledged or hypothecated in any way, whether by operation of law or otherwise. In the 2 event of any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of the Option or any right or privilege confirmed hereby contrary to the provisions hereof, the Option and the rights and privileges of Greenfield hereunder shall immediately become null and void. 6. NOTICES. Any notice of exercise shall be delivered to KFI, c/o Senior Vice President and Chief Financial Officer, at 405 Lewallen Street, Post Office Drawer 220, Asheboro, North Carolina 27204, or at such other address as may be specified by KFI from time to time. 7. ADJUSTMENTS. The shares of stock subject to the Option and the option price shall be adjusted in the event KFI converts the Preferred Stock into JCI Common Stock and such adjustment shall reflect any increase or decrease in the Common Stock of JCI that is effected after the date hereof as the result of any stock dividend, subdivision, split-up, combination or similar recapitalization or reclassification. If the Preferred Stock is converted, then the terms and provisions of this Agreement shall apply to the Common Stock received by KFI on conversion and the term "Common Stock" shall be substituted for "Preferred Stock." 8. BINDING EFFECT. This Option Agreement shall be binding upon and inure to the benefit of Greenfield and his personal representatives, but neither this Agreement nor any rights hereunder shall be assignable or otherwise transferrable except as expressly set forth in Section 2(c) of this Agreement. IN WITNESS WHEREOF, this Stock Option Agreement is executed as of December 8, 1999. KLAUSSNER FURNITURE INDUSTRIES, INC. By: /s/ ROBERT C. SHAFFNER ------------------------------------------ Robert C. Shaffner, Senior Vice President and Chief Financial Officer /s/ HARLEY J. GREENFIELD --------------------------------------------- Harley J. Greenfield 3 EX-10.29 8 EXHIBIT 10.29 REGISTRATION RIGHTS AGREEMENT In connection with the Stock Option Agreement, dated as of December 8, 1999, Jennifer Convertibles, Inc. ("JCI") hereby agrees that, if it registers shares of common stock owned by Klaussner Furniture Industries, Inc. under the Securities Act of 1933, it will also permit Harley J. Greenfield to register his shares in such registration. IN WITNESS WHEREOF, JCI has signed this agreement as of this 10th day of December, 1999. JENNIFER CONVERTIBLES, INC. By: /s/ HARLEY J. GREENFIELD ---------------------------- Harley J. Greenfield, Chief Executive Officer EX-27 9 FDS
5 0000806817 JENNIFER CONVERTIBLES, INC. 1 USD 12-MOS AUG-28-1999 AUG-30-1998 AUG-28-1999 1 6,907,000 0 1,215,000 0 9,634,000 18,352,000 14,505,000 (9,128,000) 26,145,000 28,933,000 0 0 0 57,000 (8,093,000) 26,145,000 109,284,000 109,284,000 71,607,000 109,114,000 0 0 106,000 773,000 403,000 0 0 0 0 370,000 .06 .05
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