FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission File number 1-9681
August 30, 1997
JENNIFER CONVERTIBLES, INC.
---------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-2824646
- ---------------------------- ---------------------------------
(State or other jurisdiction (I.R.S. Employer of incorporation
or organization) Identification No.)
419 Crossways Park Drive
Woodbury, New York 11797 5712
- --------------------------------------- ---------------------------
(Address of principal executive office) (Primary Standard
Industrial Classification
Code Number)
Registrant's telephone number, including area code (516) 496-1900
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Securities registered pursuant to Section 12(b) of the Act: NONE Securities
registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01
(Title of class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of registrant as
of November 14, 1997: $12,826,631
Shares of Common Stock outstanding as of November 14, 1997: 5,700,725
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
Item 1. BUSINESS
UNLESS OTHERWISE SET FORTH HEREIN, THE TERM THE "COMPANY" INCLUDES
JENNIFER CONVERTIBLES, INC., A DELAWARE CORPORATION, AND ITS DIRECT OR INDIRECT
SUBSIDIARIES.
BUSINESS OVERVIEW
The Company is the owner and licensor of the largest group of sofabed
specialty retail stores in the United States, with 122 Jennifer Convertibles(R)
stores located on the Eastern seaboard, in the Midwest, on the West Coast and in
the Southwest as of August 30, 1997. As of August 30, 1997, the Company also
operated 36 "Jennifer Leather" ("Jennifer Leather") stores. Of the Jennifer
Convertibles(R) stores, as of August 30, 1997, 48 were owned by the Company and
74 were licensed by the Company.
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<TABLE>
<CAPTION>
NUMBER OF STORES IN OPERATION AS OF AUGUST 30, 1997
======================================================================================
TOTAL LPS AND OTHER PRIVATE TOTAL
CONVERTIBLES LEATHER COMPANY LICENSEES(1) COMPANY(2) STORES
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REGION
TRI-STATE AREA
NEW YORK 6 11 17 3 22 42
NEW JERSEY 9 8 17 4 21
CONNECTICUT 4 1 5 2 7
--------------------------------------------------------------------------------------
SUBTOTAL 19 20 39 9 22 70
ARIZONA 3 3
CALIFORNIA 4 4 22 26
FLORIDA 4 4 9 13
GEORGIA 4 4
ILLINOIS 14 14
INDIANA 3 3 3
KANSAS 1 1 1
MARYLAND 3 1 4 3 7
MASSACHUSETTS 7 5 12 12
MICHIGAN 6 6 6
MISSOURI 4 4 4
NEVADA 2 2
NEW HAMPSHIRE 2 2 2
OHIO 4 4
PENNSYLVANIA 4 4
VIRGINIA 2 1 3 3
WASHINGTON, D.C. 1 1 2 2
--------------------------------------------------------------------------------------
TOTAL 48 36 84 74 22 180
======================================================================================
</TABLE>
(1) These include certain limited partnership licensees ("LPS"), which are
licensees whose accounts are included in the consolidated financial
statements of the Company, and licensees (the "Unconsolidated
Licensees") whose accounts are not so included.
(2) These 22 stores are not owned and do not pay royalties to the Company.
They operate in New York (the "Private Stores") and 20 of such stores
are owned by a company (the "Private Company") that, is owned by an
individual who was a principal stockholder of the Company and the
brother-in-law of Harley J. Greenfield, the Company's Chairman of the
Board, Chief Executive Officer and a director and principal
stockholder. Also, in December 1996, the Private Company purchased the
limited partnership interests in LPS owning 49 of the licensed stores.
In addition, Mr. Greenfield and Edward Seidner (also an officer,
director and principal stockholder of the Company) retain a substantial
economic interest in the Private Company through ownership of
$10,273,204 in the aggregate principal amount of secured Private
Company promissory notes issued in connection with the redemption of
their stock ownership in the Private Company. Accordingly, the Private
Company may be deemed an affiliate of the Company. The remaining two
stores
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are sublicensees of the Private Company and one of such stores is owned
by the father of an executive officer of the Company. The Private
Stores are operated in substantially the same way as the Company-owned
stores. See "Notes to Consolidated Financial Statements - Footnote -
Related Party Transactions."
Jennifer Convertibles(R) stores specialize in the retail sale of a
complete line of sofabeds and companion pieces, such as loveseats, chairs and
recliners, designed and priced to appeal to a broad range of consumers. The
sofabeds and companion pieces are made by several manufacturers and range from
high-end merchandise to relatively inexpensive models. Each store has a kiosk
devoted to mattress sales. The Jennifer Leather stores specialize in the retail
sale of leather livingroom furniture. In fiscal 1997, the Company also opened
two test Jennifer Living Room stores which sell a broad range of livingroom
furniture, including furniture of the type sold in Jennifer Convertibles and
Jennifer Leather stores. The Company is the largest dealer of Sealy(R) sofabeds
in the United States. Merchandise is displayed in attractively decorated model
room settings in the store designed to show the merchandise as it would appear
in the customer's home. In order to generate sales, the Company and its
licensees rely on the attractive image of the stores, competitive pricing,
prompt delivery and extensive advertising.
The table below sets forth information with respect to the number of stores
(Company-owned and licensed) opened since fiscal 1986:
<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Company-owned stores
open at end of
period (1)(2)(3)(4)(5) 84 86 90 55 34 33 33 39 42 31 13
Licensed stores open at
end of period 74 75 79 113 87 42 15 0 0 0 0
--- --- --- --- --- --- --- --- --- --- ---
Total stores open at
end of period 158 161 169 168 121 75 48 39 42 31 13
=== === === === === === === === === === ===
</TABLE>
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(1) Stores acquired from affiliated companies are reflected as opened in
the year they were opened by the affiliate, not in the year they were
acquired by the Company.
(2) For fiscal 1994, includes the 19 Jennifer Leather and two Elegant
Living stores open at the end of such fiscal year.
(3) For fiscal 1995, includes the 38 Jennifer Leather stores and one
Elegant Living store open at the end of such fiscal year.
(4) For fiscal 1996, includes 36 Jennifer Leather stores.
(5) For fiscal 1997, includes 36 Jennifer Leather stores and two Jennifer
Living Room stores.
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Store Image and Merchandise
The Company believes that the image presented by its stores is an important
factor in its overall marketing strategy. Accordingly, stores are designed to
display the Company's merchandise in attractive model room settings. All the
Company's stores are of a similar clearly defined style, are designed as
showrooms for the merchandise and are carpeted, well-lighted and
well-maintained. Inventories for delivery are maintained in separate warehouses.
The Company displays a variety of sofabeds and companion pieces (including
cocktail tables) at each Jennifer Convertibles retail location with carpeting
and accessories. In contrast to certain of its competitors that primarily target
particular segments of the market, the Company attempts to attract customers
covering a broad socio-economic range of the market and, accordingly, offers a
complete line of sofabeds made by a number of manufacturers in a variety of
styles at prices currently ranging from approximately $299 to $2,200. The
Jennifer Leather stores similarly offer a complete line of leather living room
furniture in a variety of styles and colors at prices currently ranging from
approximately $599 to $5,000. The Company generally features attractive price
incentives to promote the purchase of merchandise. In addition to offering
merchandise by brand name manufacturers, the Company offers merchandise at its
Jennifer Convertibles and Jennifer Leather stores under the "Jennifer" brand
name for sofabeds and under the "Bellissimo Collection" brand name for leather
merchandise.
Although each style of sofabed, loveseat, chair and recliner is generally
displayed at Jennifer Convertibles stores in one color and fabric, samples of
the other available colors and fabrics are available. On selected merchandise,
up to 2,000 different colors and fabrics are available on selected items for an
additional charge. To maximize the use of the Company's real estate and to offer
its customers greater selection and value, the Company, as is common in the
mattress industry, sells various sizes of sofabeds with various sizes of
mattresses but displays only one size of sofabed at its stores. Leather
furniture is offered in a number of different grades of leather and colors. The
Company currently emphasizes contemporary and traditional sofabeds and companion
pieces in the Jennifer Convertibles stores and in the Jennifer Leather stores.
The Company generates additional revenue by selling tables and offering related
services, such as fabric protection and a lifetime warranty. Fabric protection
services are obtained from, and the warranty is given by, the Private Company,
which retains approximately 1/3 of the revenues generated from such services.
See "Certain Relationships and Related Transactions."
Merchandise ordered from inventory (approximately 55% of sales in the
Jennifer Convertibles stores and 35% of sales in the Jennifer Leather stores) is
generally available to be delivered within two weeks. Customers who place orders
for items, colors or fabrics not in inventory ("special orders") must generally
wait four to six weeks for delivery, except for Italian leather merchandise
which may take up to 20 weeks. The Company believes that its delivery times on
stocked items and special orders are significantly faster than the usual
delivery times for furniture and that its ability to offer quick delivery of
merchandise represents a significant competitive advantage.
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Operations
Generally, the Company's stores are open seven days per week. Stores are
typically staffed by a manager, one full-time salesperson and in some cases, one
or more part-time salespersons, as dictated by the sales volume and customer
traffic of each particular store. In some cases, where sales volume and customer
traffic so warrant, stores may be staffed with one to three additional full-time
salespersons. The Company's licensed stores are substantially the same in
appearance and operation as the Company-owned stores.
The Company and its licensees have district managers throughout the United
States. The district managers supervise store management and monitor stores
within their assigned district to ensure compliance with operating procedures.
District managers report to and coordinate operations in their district with the
Company's executive management.
An inventory of approximately 70% of the items displayed in the stores, in
the colors and fabrics displayed, is usually stocked at the Private Company's
warehouse facilities (described below.) The Company and its licensees typically
(except in the case of certain financed sales) require a minimum cash, check or
credit card deposit of 50% of the purchase price when a sales order is given,
with the balance, if any, payable in cash or certified or official bank check
upon delivery of the merchandise. The balance of the purchase price is collected
by the independent trucker making the delivery.
Marketing
The Company and its licensees advertise in newspapers, transit, radio and
on television in an attempt to saturate its marketplaces. The Company's approach
to advertising requires the Company to establish a number of stores in each area
it enters. This concentration of stores enables area advertising expenses to be
spread over a larger revenue base and to increase the prominence of the local
advertising program. The Company's and the LPS' expenditures for advertising
were approximately $10,893,000, or 11.1% of sales, in the fiscal year ended
August 30, 1997 as compared to approximately $12,265,000, or 11.6% of sales, in
the prior year.
The Company creates advertising campaigns for use by the Company's stores
which also may be used by the Private Stores. The Private Company bears a share
of advertisement costs in New York. See "Certain Relationships and Related
Transactions." However, the Company also advertises independently of the Private
Company outside of the New York metropolitan area. The Company is entitled to
reimbursement from most of its licensees, which are responsible for their
respective costs of advertising; however, the approach and format of such
advertising is usually substantially the same for the Company and its licensees.
The Company has the right to approve the content of all licensee advertising.
In order to further understand its markets, the Company carefully monitors
its sales, interviews customers and obtains other information reflecting trends
in the furniture industry and changes in customer preferences. The Company also
reviews industry publications, attends trade shows and maintains close contact
with its suppliers to aid in identifying trends and changes in the industry.
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Leasing Strategy and Current Locations
The Company considers the ability to obtain attractive, high-traffic store
locations to be critical to the success of its stores. The Company, together
with outside real estate consultants, selects sites and negotiates leases on
behalf of its licensees. The site selection process involves numerous steps,
beginning with the identification of territories capable of sustaining a number
of stores sufficient to enable such stores to enjoy significant economies of
scale, particularly in advertising, management and distribution. Significant
factors in choosing a territory include market demographics and the availability
of newspapers and other advertising media to efficiently provide an advertising
umbrella in the new territory.
Once a territory is selected, the Company picks the specific locations
within such territory. Although a real estate consultant typically screens sites
within a territory and engages in preliminary lease negotiations, each site is
inspected by an officer of the Company and the Company is responsible for
approval of each location. The leased locations are generally in close proximity
to heavily populated areas, shopping malls, and other competing retail
operations which are on or near major highways or major thoroughfares, are
easily accessible by auto or other forms of transportation and provide
convenient parking.
The locations currently leased by the Company and its licensees range in
size from 1,900 square feet to a little over 8,000 square feet. The Company
anticipates that stores opened in the future will range from approximately 2,000
square feet to 4,000 square feet. Stores may be freestanding or part of a strip
shopping center.
In fiscal 1997, the Company and the LPS closed an aggregate of three
stores. The Company will continue to selectively close stores where the
economics so dictate and it may selectively open additional stores if attractive
opportunities present themselves.
Sources of Supply
The Company currently purchases merchandise, for its stores and the stores
of its licensees and the Private Company, from a variety of domestic
manufacturers generally on 40 to 90 day terms. The Company also purchases from
overseas manufacturers on varying terms. The combined purchasing power of the
Company, its licensees and the Private Company enables them to receive the
right, in some instances, to market exclusively certain products, fabrics and
styles. See "Certain Relationships and Related Transactions."
The Company's principal suppliers of sofabeds are Klaussner Furniture
Industries, Inc. ("Klaussner"), which was recently granted a license to
manufacture furniture under the Sealy(R) brand name, and Ellis Home Furnishings,
Inc. ("Ellis"). Sealy(R) brand name sofabeds are the Company's largest selling
brand name item and the Company believes that Sealy(R) brand name mattresses are
the largest selling mattresses in the world and have the highest consumer brand
awareness. The Company is the largest sofabed specialty retailer and the largest
Sealy(R) sofabed dealer in the United States. During the fiscal year ended
August 30, 1997, the
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Company purchased approximately 81% of its merchandise from Klaussner and
approximately 11% of its merchandise from Ellis. Leather furniture is purchased
primarily from Klaussner and Industries Natuzzi S.p.A. The loss of Klaussner as
a supplier could have a material adverse effect on the Company. In March 1996,
as part of a series of transactions (the "Klaussner Transaction") the Company,
among other things, granted Klaussner a security interest in substantially all
of its assets in exchange for improved credit terms. In addition, in December
1997, Klaussner purchased $5,000,000 of the Company's convertible preferred
stock ("the Klaussner Investment"). In fiscal 1997, Klaussner also gave the
Company certain vendor credits for advertising and repairs. See "Certain
Relationships and Related Transactions" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a fuller
description of the Klaussner Transaction, the Klaussner Investment and other
transactions with Klaussner.
Licensing Arrangements
The Company's arrangements with its licensees typically involve providing
the licensee with a license, bearing a royalty of 5% of sales, to use the name
Jennifer Convertibles(R). The Company's existing licensing arrangements are not
uniform and vary from licensee to licensee. Generally, however, the Company
either manages the licensed stores or, if the licensee is a partnership, has a
subsidiary act as general partner of such partnership, in each case, for 1% of
the licensees' profits. The arrangements generally have a term ranging between
10 and 20 years (and may include options on the licensee's part to extend the
license for additional periods) and involve the grant of exclusivity as to
defined territories. In some cases, the Company also has an option to purchase
the licensee or the licensed stores for a price based on an established formula
or valuation method. Investors in certain licensees have, in certain
circumstances (including a change of control of the Company), the right to put
their investments to the Company for a price based upon an established formula
or valuation method. The Private Company currently provides warehousing, fabric
protection and other services to licensees on substantially the same basis as
such services are provided to the Company and the Company purchases merchandise
for the licensees. The Company also provides certain accounting services to
certain licensees for which it generally charges $6,000 per store, per annum. As
of August 30, 1997, the Company was owed an aggregate of $16,200,000 for
royalties, advances and merchandise by its licensees, a substantial portion of
which was overdue. Of such amount, $9,487,000 due from the LPS is eliminated in
the Company's financial statements as a result of the consolidation of the LPS
and $6,713,000 due from Unconsolidated Licensees was reserved against in such
financial statements due to doubts as to collectibility. Most of the investors
in the licensees have other relationships with the Company or its current or
former management and, in December 1996, the Private Company acquired the
limited partnership interests in LPS owning an aggregate of 49 licensed stores.
See "Certain Relationships and Related Transactions."
As set forth under "Legal Proceedings," the Memoranda of Understanding
("MOUS") and related documents as to the settlement of certain class and
derivative litigation contemplate that, subject to court approval of such
Settlement Agreement, the Company will receive the limited partnership interests
or stock in licensees which now own 55 licensed stores, representing all but 19
of the royalty bearing licensed stores, in connection with the settlement of
certain litigation.
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Although the Company does not believe that certain transactions in which
licenses were granted to operate stores were subject to state and Federal laws
regulating the offer and sale of franchises, the applicability of such laws is
uncertain as applied to the Company's licensing program, and there can be no
assurance that a court would not take the position that the Company should have
complied with such laws in connection with those transactions. In order to
reduce or eliminate this uncertainty, in 1993 the Company offered certain
licensees the opportunity to rescind their license agreements. All such
licensees declined such offers of rescission.
Warehousing and Related Services
Effective January 1, 1994, the Company and the Private Company entered into
a new warehousing agreement (the "New Warehousing Agreement") which terminated
the original Warehousing and Purchasing Agreement (the "Original Warehousing
Agreement") entered into in 1986. Pursuant to the New Warehousing Agreement
(which expires in 2001), the Company currently utilizes the warehousing and
distribution facilities leased and operated by the Private Company consisting of
a 236,000 square foot warehouse facility in North Carolina, and satellite
warehouse facilities in New Jersey and California (collectively, the "Warehouse
Facilities"). The Warehouse Facilities service Company-owned stores, licensed
stores and the Private Stores.
The Company presently uses the Warehouse Facilities to service all of the
Company-owned and licensed stores. Although the Company is not obligated to use
the Warehouse Facilities of the Private Company, it has done so to avoid the
administrative and other costs associated with developing and maintaining the
infrastructure required to manage warehousing and handling independently. The
New Warehousing Agreement provides that the Private Company is not obligated to
provide services for more than 300 Company-owned stores. The Company pays the
Private Company a monthly warehouse fee (the "Warehouse Fee") equal to 5% of the
retail selling price of all merchandise (including the retail selling price of
any related services, such as fabric protection) delivered from the Warehouse
Facilities to customers of the Company-owned stores plus 5% of the retail
selling price of all merchandise delivered from the Warehouse Facilities to
Company-owned stores for display purposes. In addition, the Private Company has
separately contracted with the Company's licensees to provide warehousing and
handling services for licensed stores for a fee equal to 5% of the retail price
of merchandise delivered to the licensees' customers and on other terms
substantially similar to those under the New Warehousing Agreement.
The Private Company also provides a number of other services, including
fabric protection and warranty services. In addition to the Warehouse Fee, the
Company pays the Private Company a portion (approximately one-third) of fabric
protection revenues from its customers. The Company also pays the Private
Company for freight charges based on quoted freight rates. See "Certain
Relationships and Related Transactions."
As described in "Legal Proceedings," the MOUS contemplate that the Company
and the Private Company will enter into a new warehousing agreement pursuant to
which the arrangements described above will be substantially revised and the
Company will take over the warehousing and related functions on
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January 1, 1999. In contemplation of the settlement, in August 1996, the Company
began to take over certain functions, including customer service, cash
processing, order processing and store support.
Trademarks
The trademarks Jennifer Convertibles(R), Jennifer Leather(R), Jennifer
House(R) and With a Jennifer Sofabed, There's Always a Place to Stay(R) are
registered with the U.S. Patent and Trademark Office and now owned by the
Company. An application has been filed for a trademark for "Jennifer Living
Rooms" and "Bellissimo Collection." The Private Company, as licensee, was
granted a perpetual royalty-free license to use and sublicense the proprietary
marks in the State of New York, subject to certain exceptions.
See "Certain Relationships and Related Transactions."
Employees
As of August 30, 1997, the Company had 452 employees, including seven
executive officers. The Company trains personnel to meet its expansion needs by
having its most effective managers and salespersons train others and evaluate
their progress and potential for the Company. The Company believes that its
employee relations are satisfactory. None of the Company's employees are
represented by a collective bargaining unit. The Company has never experienced a
strike or other material labor dispute.
Competition
The Company competes with other furniture specialty stores, major
department stores, individual furniture stores, discount stores and chain
stores, some of which have been established for a long time in the same
geographic areas as the Company's stores (or areas where the Company or its
licensees may open stores). The Company believes that the principal areas of
competition with respect to its business are store image, price, delivery time,
selection and service. The Company believes that it competes effectively with
such retailers because its stores offer a broader assortment of convertible
sofabeds than most of its competitors and, as a result of volume purchasing, it
is able to offer its merchandise at attractive prices. The Company also
advertises more extensively than many of its competitors and offers
substantially faster delivery on most of its items.
Item 2. PROPERTIES
The Company maintains its executive offices in Woodbury, New York
pursuant to a lease which expires in the year 2005.
As of August 30, 1997, the Company and the LPS lease all of their store
locations pursuant to leases which expire between 1998 and 2009. During fiscal
1998, eight leases will expire, although the lessee has an option to renew each
such lease. The leases are usually for a base term of at least five years. For
additional information concerning the leases, see Note 9 of "Notes to
Consolidated Financial Statements."
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Item 3. Legal Proceedings.
------------------
The Company is involved in a number of proceedings described below.
A. The Class Action Litigation
---------------------------
Beginning in December 1994, a series of 11 class actions were
brought against the Company, various of its present and former officers and
directors, and certain third parties, in the United States District Court for
the Eastern District of New York. The complaints in all of these actions alleged
that the Company and the other defendants violated Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder in
connection with the press release (the "Press Release") issued by the Company on
or about December 2, 1994. All of these class actions have been consolidated
under the caption IN RE JENNIFER CONVERTIBLES, Case No. 94 Civ. 5570, pending in
the Eastern District of New York (the "Class Action Litigation").
In March 1996, the parties in the Class Action Litigation
signed a Memorandum of Understanding for the purpose of settling the Class
Action Litigation (the "Class Action MOU"). The terms of the Class Action MOU
(which are described below) are subject to a stipulation of settlement and other
documentation to be submitted to the United States District Court for the
Eastern District of New York, as well as the approval of the terms of the
settlement by that Court.
The Class Action MOU also provides that the settlement of the
Class Action Litigation is contingent upon final Court approval of the proposed
settlement set forth in another Memorandum of Understanding dated March 18, 1996
with respect to certain derivative actions pending in: (a) the United States
District Court for the Eastern District of New York; (b) the Supreme Court of
the State of New York; and (c) the Court of Chancery in the State of Delaware
(the "Derivative Action MOU"). These derivative actions and the terms of the
Derivative Action MOU, are also described below.
The Class Action MOU provides for the payment to certain
members of the class and their attorneys of an aggregate maximum amount of $7
million in cash and preferred stock having a present value of $370,000. The cash
portion of the settlement is to be funded entirely by insurance company
proceeds. The stock portion of the settlement is to be provided by the Company
based on a new issue of preferred stock of the Company having an aggregate
present value of $370,000, which will bear an annual dividend of 7% and which
will be convertible into the Company's Common Stock (at such time as the
Company's Common Stock trades at $7.00 per share or higher) at $7.00 per share.
The settlement of the Class Action Litigation is a claims made
settlement, meaning that the actual amount of cash and stock to be paid out will
depend on the number of persons entitled to participate in the settlement who
actually file valid proofs of claim. All those who purchased Common Stock during
the period from December 9, 1992 through December 2, 1994 and who held their
stock through December 2, 1994, will be entitled to participate in the
settlement.
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The Class Action MOU also provides that the defendants will
not object to an application by plaintiffs' attorneys for fees and expenses of
up to 1/3 of the total of the maximum amount of the cash and stock proceeds of
the settlement, without regard to the number of class members who filed valid
proofs of claim.
In January 1997, documents reflecting the settlement terms set
forth in the Class Action MOU were filed in the United States District Court in
the Eastern District of New York. At that time, Judge Hurley of that court
signed an order providing, INTER ALIA, for notice of the terms of the settlement
to the class, a deadline for the filing of objections by class members, and a
date for the hearing on the fairness of the settlement. No objections to the
settlement were filed by any member of the class. However, the hearing as to the
fairness of the settlement has not yet been held, and the settlement has not yet
been approved, as a result of the pendency of the unresolved objections to the
proposed settlement of the derivative litigation, as is more fully set forth
below.
B. The Derivative Litigation
-------------------------
Beginning in December 1994, a series of six actions were
commenced as derivative actions on behalf of the Company, against Harley J.
Greenfield, Fred J. Love, Edward B. Seidner, Bernard Wincig, Michael J. Colnes,
Michael Rosen, Al Ferarra, William M. Apfelbaum, Glenn S. Meyers, Lawrence R.
Haut, Jara Enterprises, Inc., Jerome I. Silverman, Jerome I. Silverman Company,
Selig Zises and BDO Seidman & Co.1 in: (a) the United States District Court for
the Eastern District of New York, entitled PHILIP E. ORBANES V. HARLEY J.
GREENFIELD, ET AL., Case No. CV 94-5694 (DRH) and MEYER OKUN AND DAVID SEMEL V.
AL FERRARA, ET AL., Case No. CV 95-0080 (DRH); MEYER OKUN DEFINED BENEFIT
PENSION PLAN, ET AL. V. BDO SEIDMAN & CO., Case No. CV 95-1407 (DRH); and MEYER
OKUN DEFINED BENEFIT PENSION PLAN V. JEROME I. SILVERMAN COMPANY, ET. AL., Case
No. CV 95-3162 (DRH); (b) the Court of Chancery for the County of New Castle in
the State of Delaware, entitled MASSINI V. HARLEY GREENFIELD, ET. AL., Civil
Action No. 13936 (WBC); and (c) the Supreme Court of the State of New York,
County of New York, entitled MEYER OKUN DEFINED BENEFIT PENSION PLAN V. HARLEY
J. GREENFIELD, ET. AL., Index No. 95-110290 (collectively, the "Derivative
Litigation").
The complaints in each of these actions assert various acts of
wrongdoing by the defendants, as well as claims of breach of fiduciary duty by
the present and former officers and directors of the Company, including but not
limited to claims relating to the matters described in the Press Release.
In March 1996, all of the parties to the derivative action
(including the Company), except for Selig Zises ("Zises") and BDO Seidman & Co.
("Seidman") signed a Memorandum of Understanding for the purpose of settling all
of the claims involving those parties in the Derivative Litigation (the
"Derivative Litigation MOU"). The terms of the Derivative Litigation MOU (which
are discussed below)
- --------
1 Each of these individuals and entities is named as a defendant in at
least one action.
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<PAGE>
are subject to a stipulation of settlement and other documentation to be
submitted to the appropriate Court(s), as well as Court approval of the terms of
the settlement.
The Derivative Litigation MOU also provides that the
settlement of the Derivative Litigation is contingent upon final Court approval
of the proposed settlement set forth in the Class Action MOU, by the United
States District Court for the Eastern District of New York. The terms of the
Class Action MOU have already been described above.
The Derivative Litigation MOU annexes as Exhibit A thereto a
signed agreement (the "Settlement Agreement") dated March 5, 1996 between the
Private Company and the Company. In February 1997, definitive agreements
reflecting the terms of the Derivative Litigation MOU were submitted to the
United States District Court for the Eastern District of New York. The
Settlement Agreement and the related agreements, although signed, provide that
they too are subject to and dependent upon Court approval of the settlement of
the Derivative Litigation.
The Settlement Agreement and the related agreements are
designed to restructure the relationship between the Private Company and the
Company, in order to reduce and eliminate any alleged actual or potential
conflicts of interest, and to provide tangible benefits to the Company. The
Settlement Agreement and the related agreements contemplate, INTER ALIA, as
follows:
1. From the effective date of the Settlement Agreement until
December 31, 1997, the Private Company will bill the Company for services under
a new warehousing agreement, a warehousing fee of 8.3% of the retail selling
price of merchandise leaving the Warehouse Facilities for Company stores and
their customers and a redelivery fee equal to 3% of the retail selling price of
merchandise which is required to be redelivered to customers, under certain
circumstances. The Company will be entitled to a reduction in the warehousing
fee to the extent, and as of the date, that the Company assumes the costs of
providing certain non-warehousing services presently provided by the Private
Company to the Company. The Settlement Agreement contemplates that once the
Company has assumed all of these services, the warehousing fee shall be reduced
to 7.2%, which will then be the warehousing fee until December 31, 1997, and
that under all circumstances, from January 1, 1998 through December 31, 1998,
the warehousing fee shall be 7.2%. Upon the effective date of the Settlement
Agreement, the Company will no longer pay the Private Company separately for
"fabric protection" services.
2. In the event that the volume of merchandise shipped from
all of the Private Company's warehouses to Company stores during calendar year
1996 fails to equal a retail selling price of $135,000,000, the Company shall
pay the Private Company an additional fee of $65,000 for each million dollars of
the shortfall (the "Shortfall Payments"), but in no event more than $650,000.
The Private Company will repay the Company for the Shortfall Payments in the
following manner: (i) 50% in 1997 if $140,000,000 or more in shipments is
achieved; (ii) 50% in 1998 if $140,000,000 or more in shipments is achieved; and
(iii) the balance of any Shortfall Payments not repaid by the Private Company to
the Company under (i) and (ii) above will be repaid over seven years in equal
monthly installments, without interest, beginning on January 1, 1999. The
Company did not achieve sales of $135,000,000 in calendar
13
<PAGE>
1996 and, accordingly, it will be liable for the Shortfall Payments if the
settlement is approved as contemplated. Provisions of $520,000 and $130,000 have
been made in the financial statements in the fiscal years ended August 31, 1996
and August 30, 1997, respectively. The Shortfall Payments described above are
being credited to the Private Company under the Offset Agreement currently in
anticipation of Court approval of the settlement. The Company also agreed to
give the Private Company a credit under the Offset Agreement (as defined below)
equal to the amount obtained by multiplying the warehouse fee then in effect by
the amount, if any, by which the Company's sales for each of the 12 months
ending December 31, 1997 and 1998 are less than $106,500,000. Such credit is to
be estimated and paid monthly based on target sales for each month and will be
reconciled and adjusted quarterly. Sales in excess of $106,500,000 in 1997 will
be carried over to 1998 and sales in 1998 in excess of $106,500,000 will be
carried back to 1997, if necessary. No provision is currently being made with
respect to such credit.
3. On January 1, 1999, the Private Company will assign to the
Company all of its real property interests in or to the various warehouse
facilities then being operated by the Private Company (including all related
computer hardware), including any fee simple and/or leasehold interest, subject
only to any mortgages, purchase money security agreements, leasehold
obligations, racking and forklifting expenses, and other operation expenses
relating to such property interest and the mortgage on the Inwood, New York
warehouse (the "Inwood Warehouse"). The Inwood Warehouse was sold in 1996. The
Settlement Agreement also provided that, as of December 31, 1998, the aggregate
of all mortgages on the Inwood Warehouse facility would not exceed $2,850,000
and that, to the extent that the aggregate of all such mortgages was less than
$2,850,000 as of that date, the Company would pay the Private Company the
difference between $2,850,000 and the actual amount of such mortgages by way of
set-off against the Private Company's obligation to the Company for warehousing
services.
4. The Settlement Agreement provided that if the Private
Company sold the Inwood Warehouse before December 31, 1998 (as it has already
done), then the Private Company would pay the Company $25,000 per month starting
January 1, 1999 for a period of 84 months. The Settlement Agreement also
provided that if the Inwood Warehouse was sold for more than $4,500,000 (net of
all reasonable and customary expenses and brokerage commissions), the Company
would be entitled to any such excess. However, the Inwood Warehouse was sold in
June 1996 for less than $4,500,000.
5. Commencing January 1, 1999, and continuing for seven years,
the Company will provide the Private Company all warehousing services formerly
provided by the Private Company to the Company for a fee equal to 2% of the
Private Company's deemed retail selling price, plus an additional fee for any
fabric protection services sold by the Private Company to customers, payable at
the then current invoice rate.
6. The Private Company acquired the interest of the limited
partners in the LPS known as Jennifer, LP III, Jennifer, LP IV, Jennifer, LP V
(the "Partnerships") on December 31, 1996. The Private Company will also
purchase the stock of the shareholders of Southeastern Florida Holding Co., Inc.
("S.F.H.C.") upon approval of the settlement. The Private Company will assign
its Partnership interests and stock to the Company at no cost (except as
described below). As of March 5, 1996, S.F.H.C. and the Partnerships owned an
aggregate of 55 licensed Jennifer Convertibles stores which, after such
assignment, will be wholly-owned by the
14
<PAGE>
Company. Upon approval of the settlement, the current shareholders of S.F.H.C.
will receive 10-year warrants to purchase an aggregate of 180,000 shares of
Common Stock at $7.00 per share. In addition, the maturity date of three-year
notes (with an aggregate remaining balance of $300,000) originally entered into
by them in connection with their purchase of warrants (the "Original Warrants"),
expiring June 1998, to purchase an aggregate of 180,000 shares of Common Stock
at $15.625 per share, was extended for 10 years. The extended notes bear
interest at a rate of 7.12% per annum, and 10% of the principal amount of such
notes is due each year. Such notes are secured by the Original Warrants to
purchase an aggregate of 105,636 shares of Common Stock (representing the unpaid
for Original Warrants) and the Company's sole remedy, until the notes mature,
upon any default in the payment of principal of such notes, is to cancel a
proportionate number of Original Warrants.
7. Commencing January 1, 1999, the Private Company agrees to
pay the Company, under the offset agreement described in Paragraph 11 below,
$1,400,000 in resolution of certain intercompany accounts as of August 26, 1995
to be paid, $17,000 per month to be applied toward principal and interest, with
interest computed at 6% annually.
8. Commencing January 1, 1999, the Private Company will
provide a license to the Company permitting the Company to use and change the
Private Company's computer program without fee. As of January 1, 1999, the
Company will also assume the obligations and personnel of the computer
department presently maintained by the Private Company.
9. On or after the effective date of the Settlement Agreement,
and through December 31, 1998, although the Private Company will continue to be
responsible to apply fabric protection (at no additional charge to the Company),
the Company will be responsible for any claims on breach of warranty relating to
fabric protection (irrespective of the date of the sale or whether the sale was
made by the Private Company or the Company), provided, that, as to such claims
made as to merchandise sold by the Private Company, the Company may bill the
Private Company for outside parts and labor directly expended in connection
therewith.
10. The Private Company will assume and pay the $1,200,000
debt of certain stockholders of S.F.H.C. to S.F.H.C. in 84 equal monthly
installments without interest, beginning January 1, 1999.
11. As of the effective date of the Settlement Agreement, the
Private Company and the Company will enter into an offset agreement similar to
the one described under "Certain Relationships and Related Transactions" dealing
with the offset of obligations for the period not covered by the initial offset
agreement and providing for cash payments to the extent that any amounts due
under such agreement exceeds $1,000,000. In contemplation of the settlement, the
Company and the Private Company are
15
<PAGE>
currently operating under the terms of this offset agreement with respect to
cash payments of current amounts due in excess of $1,000,000.
12. Royalties aggregating $100,147 from certain licensees
managed by the Private Company will be paid in 84 equal monthly installments,
commencing January 1, 1999, without interest.
The Derivative Litigation MOU also provides, INTER ALIA, as
follows:
1. All of the plaintiffs in the derivative actions and the
Company will release all of current and former officers and directors, including
Isabelle Silverman, and the defendants in the derivative actions (except for
Zises, KPMG Peat Marwick ("Peat") and Seidman), from all claims which were or
could have been asserted against them in the Derivative Litigation or in any
other Court including, but not limited to: (a) the matters discussed or referred
to in the Final Report of Counsel to the Independent Committee of the Board of
Directors of Jennifer Convertibles, Inc., dated January 26, 1995 (as previously
described in the Company's Annual Reports on Form 10-K for the fiscal years
ended August 27, 1994, August 26, 1995 and August 31, 1996 and as discussed in
Note 9 to the Financial Statements included herein); (b) the draft complaint in
a proposed action entitled ZISES, ET. ANO. V. GREENFIELD, ET AL., (S.D.N.Y.)
dated March 30, 1994; (c) all transactions publicly disclosed by Jennifer
through the date of filing with the SEC of its Annual Report on Form 10-K for
the year ended August 26, 1995; and (d) the negotiation and approval of the
settlement of the Class Action Litigation.
2. Although one or more of the derivative actions may continue
against Peat, Zises and/or Seidman, the Derivative Litigation MOU contains
provisions designed to relieve those receiving releases from any claims by Peat,
Seidman and/or Zises for contribution or indemnification.
3. The defendants in the derivative actions will not object to
an application by counsel for the plaintiffs in the derivative actions for an
award of attorneys' fees and expenses up to an aggregate of $795,000. Of this
amount, the first $500,000 will be funded by an insurance carrier for one of the
defendants other than the Company; $165,000 will be paid in cash by the Private
Company, and the remaining portion of fees and expenses will be paid by the
Company in preferred stock having a present value of up to $130,000. The
preferred stock to be issued by the Company will be of the same type and will be
subject to the same terms and conditions as the preferred stock to be issued in
connection with the Class Action Litigation described above.
In February 1997, documents reflecting the terms of the Derivative MOU
were submitted to the United States District Court in the Eastern District of
New York. At that time, Judge Hurley signed an order which, INTER ALIA, provided
for notice to the shareholders of the Company of the settlement, a deadline for
shareholders of the Company to object to the terms of the settlement and a
proposed hearing date as to the fairness of the proposed settlement of the
derivative litigation.
A group of shareholders claiming to own approximately 8.5% of the
outstanding shares of the Company have filed (as a group) objections to the
fairness of the settlement. This group has requested deposition and document
discovery in advance of any hearing on the fairness of the settlement, and the
16
<PAGE>
Company has provided some document and deposition discovery voluntarily.
However, the group of objectors has made a motion for additional discovery which
the Company has opposed. The motion is still pending.
The Company anticipates that once the Court decides on what additional
discovery, if any, to give the objectors, it will also schedule a hearing date
to determine the fairness of the derivative and class action settlements.
C. SEC Investigation
-----------------
On May 3, 1995, the Securities and Exchange Commission commenced a
formal investigation as to the Company. In connection therewith, subpoenas were
issued to the Company and certain of its current and former management and the
Company and such persons have furnished various contracts, records and
information.
D. Other Litigation
----------------
The Company is also subject, in the ordinary course of business, to a
number of litigations in relation to leases for those of its stores which it has
closed or relocated. Management does not believe the outcome of such litigations
will be material to the Company's financial position.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable
17
<PAGE>
PART II
Item 5: Market For Registrant's Common Equity and Related
Stockholder Matters.
-------------------------------------------------
The principal market for the Common Stock during the two fiscal years ended
August 30, 1997 and August 31,1996 was the NASDAQ Bulletin Board. The following
table sets forth, for the fiscal periods indicated, the high and low bid prices
of the Common Stock on the Bulletin Board. Such quotations since April 17, 1995
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
High Low
---- ---
Fiscal Year 1996:
1st Quarter..................... $ 3 3/4 $ 1 13/16
2nd Quarter..................... 3 3/8 2
3rd Quarter..................... 3 1/4 2 1/16
4th Quarter..................... 3 1/4 2
High Low
---- ---
Fiscal Year 1997:
1st Quarter..................... $ 2 5/8 $ 1 7/8
2nd Quarter..................... 2 9/16 1 3/4
3rd Quarter..................... 2 1/2 1 3/4
4th Quarter..................... 2 15/16 2 3/16
As of November 14, 1997, there were approximately 244 holders of record and
approximately 4,600 beneficial owners for the Common Stock. On November 14,
1997, the closing bid and asked prices of the Common Stock as reported on the
NASDAQ Bulletin Board were $2 5/16 and $2 1/8, respectively.
Dividend Policy
The Company has never paid a dividend on its Common Stock and does not
anticipate paying dividends on the Common Stock at the present time. The Company
currently intends to retain earnings, if any, for use in its business. There can
be no assurance that the Company will ever pay dividends on its Common Stock.
The Company's dividend policy with respect to the Common Stock is within the
discretion of the Board of Directors and its policy with respect to dividends in
the future will depend on numerous factors, including the Company's earnings,
financial requirements and general business conditions.
18
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The following table presents certain selected financial data for Jennifer
Convertibles, Inc. and subsidiaries:
<TABLE>
<CAPTION>
(in thousands, except share data)
-----------------------------------------
OPERATIONS DATA: Year Ended Year Ended Year Ended Year Ended Year Ended
8/30/97 8/31/96 8/26/95 8/27/94 8/31/93
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 97,789 $ 106,041 $ 126,074 $ 97,420 $ 64,348
----------- ----------- ----------- ----------- -----------
Cost of sales, including store occupancy,
warehousing, delivery and fabric protection 67,114 72,708 86,964 67,974 43,898
Selling, general and administrative expenses 32,904 37,618 45,955 34,139 22,652
Depreciation and amortization 1,840 1,852 2,261 2,091 1,583
Termination of consulting agreement,
legal and other costs -- -- 500 6,604 --
Write off of purchased limited partners' interests -- -- -- 3,482 --
(Recovery) provision for losses on amounts due from
Private Company and Unconsolidated Licensees (426) 952 3,088 3,284 --
Loss from store closings 55 191 1,670 -- --
----------- ----------- ----------- ----------- -----------
101,487 113,321 140,438 117,574 68,133
----------- ----------- ----------- ----------- -----------
Operating (loss) (3,698) (7,280) (14,364) (20,154) (3,785)
----------- ----------- ----------- ----------- -----------
Other income (expense)
Royalty income 374 375 523 644 711
Interest income 67 195 311 473 674
Interest expense (28) (47) (48) (61) (640)
Gain on sale of securities -- -- -- 336 61
Other income, net 319 880 1,670 1,374 696
----------- ----------- ----------- ----------- -----------
732 1,403 2,456 2,766 1,502
----------- ----------- ----------- ----------- -----------
(Loss) before income taxes (benefit) and
minority interest (2,966) (5,877) (11,908) (17,388) (2,283)
Income taxes (benefit) 95 146 160 (322) 113
----------- ----------- ----------- ----------- -----------
(Loss) before minority interest (3,061) (6,023) (12,068) (17,066) (2,396)
Minority interest share of losses -- -- -- 2,449 2,902
----------- ----------- ----------- ----------- -----------
Net (loss) earnings ($3,061) ($6,023) ($12,068) ($14,617) $ 506
=========== =========== =========== =========== ===========
Net (loss) earnings per share ($0.54) ($1.06) ($2.12) ($2.56) $ 0.09
=========== =========== =========== =========== ===========
Weighted average number of common shares 5,700,725 5,700,725 5,700,725 5,700,725 6,013,000
=========== =========== =========== =========== ===========
Cash Dividends -- -- -- -- --
=========== =========== =========== =========== ===========
Store data: 8/30/97 8/31/96 8/26/95 8/27/94 8/31/93
- ----------- ----------- ----------- ----------- ----------- -----------
Company-owned stores open
at end of period 84 86 90 55 34
Consolidated licensed stores open
at end of period 63 64 68 99 73
Licensed stores not consolidated
open at end of period 11 11 11 14 14
----------- ----------- ----------- ----------- -----------
Total stores open at end of period 158 161 169 168 121
=========== =========== =========== =========== ===========
BALANCE SHEET DATA: 8/30/97 8/31/96 8/26/95 8/27/94 8/31/93
- ------------------- ----------- ----------- ----------- ----------- -----------
Working capital (deficiency) ($17,258) ($15,757) ($10,988) $ 1,240 $ 11,573
Total assets 22,998 25,435 33,871 44,922 37,488
Long-term obligations 421 230 337 477 118
Total liabilities 36,365 35,741 38,154 37,137 15,305
(Capital deficiency) stockholders' equity (13,367) (10,306) (4,283) 7,785 22,183
(Capital deficiency) stockholders' equity per share ($2.34) ($1.81) ($0.75) $1.37 $3.69
</TABLE>
19
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE U.S. PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, AS AMENDED. THESE STATEMENTS INVOLVE
KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL
RESULTS OR OUTCOMES TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO RISK FACTORS SUCH AS UNCERTAINTY AS TO THE OUTCOME OF THE LITIGATION
CONCERNING THE COMPANY, FACTORS AFFECTING THE FURNITURE INDUSTRY GENERALLY, SUCH
AS THE COMPETITIVE AND MARKET ENVIRONMENT, AND MATTERS WHICH MAY AFFECT THE
COMPANY'S SUPPLIERS OR THE PRIVATE COMPANY. IN ADDITION TO STATEMENTS WHICH
EXPLICITLY DESCRIBE SUCH RISKS AND UNCERTAINTIES, INVESTORS ARE URGED TO
CONSIDER STATEMENTS LABELED WITH THE TERMS "BELIEVES," "BELIEF," "EXPECTS,"
"INTENDS," "PLANS" OR "ANTICIPATES" TO BE UNCERTAIN AND FORWARD-LOOKING.
OVERVIEW
The Company is the owner and licensor of sofabed specialty retail
stores that specialize in the sale of a complete line of sofabeds and companion
pieces such as loveseats, chairs and recliners and specialty retail stores that
specialize in the sale of leather furniture.
For the fiscal years ended August 31, 1992 and August 31, 1993, the
Company did not consolidate the operations of the LP's of which subsidiaries of
the Company served as general partners. In November 1994, during the course of
its audit, KPMG Peat Marwick, the Company's independent auditor at the time,
advised the Company that its method of accounting for the LP's should be changed
and would likely require a restatement of previously announced financial
results. In addition, on December 2, 1994, a special committee of the Company's
Board of Directors delivered a summary report which concluded that the Company
had meritorious claims against three members of its management, the Private
Company and others. The Company announced these matters publicly in a press
release on December 2, 1994. As more fully discussed under "Legal Proceedings,"
the Company and certain of its management became involved in class action and
derivative litigations relating to such matters and, on May 3, 1995, the
Securities and Exchange Commission commenced an investigation relating to such
matters. In November 1994, the Company determined that it should consolidate the
operating losses of such LP's, to the extent they exceeded the capital
contributions of the limited partners, in its financial statements for the
fiscal year ended August 27, 1994 and the Company subsequently determined that
such accounting treatment would have been the appropriate treatment for the 1993
and 1992 fiscal years as well. Accordingly, the 1994, 1995, 1996 and 1997
consolidated financial statements include the operations of such LP's in excess
of capital contributed by the limited partners as well as those of the Company
and its subsidiaries.
20
<PAGE>
The operating losses in excess of capital contributions of the LP's
that are included in the consolidated financial statements are as follows:
<TABLE>
<CAPTION>
Years Ended
------------------------------------
(In Thousands)
8/26/95 8/31/96 8/30/97
------- ------- --------
<S> <C> <C> <C>
Total operating losses before
capital contributions of LP's $(7,288) $(4,206) $(4,234)
------- ------- -------
Total capital contributions -- -- --
------- ------- -------
Net operating losses $(7,288) $(4,206) $(4,234)
======= ======= =======
</TABLE>
Prior to fiscal 1996, the Company relied upon the Private Company to
provide and maintain all data entry processing and other related services that
support its business. Employees of the Private Company provided these services
as well as other related services such as all accounts payable
(non-merchandise), all payroll preparation services, inventory control
reporting, certain store cash recording and initial review of cash activity and
store customer service. Starting in fiscal 1996, the Company has been assuming
these responsibilities.
The Company has for all fiscal years prior to September 1, 1994 engaged
the accounting firm of Jerome I. Silverman Company ("JISCO") to provide general
accounting and tax services. Effective September 1, 1994, the Company terminated
the accounting and tax services of JISCO and hired 19 employees who had
previously worked directly for JISCO. This group, under the direction of a new
Executive Vice President and Chief Financial Officer hired on August 1, 1994,
established the Company's general accounting offices.
RESULTS OF OPERATIONS:
FISCAL YEAR ENDED AUGUST 30, 1997 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1996:
Net sales decreased by 7.8% to $97,789,000 for the fiscal year ended
August 30, 1997 as compared to $106,041,000 for the fiscal year ended August 31,
1996. This decrease is mainly attributable to the closing of three stores since
the prior year period and a decline in net sales of the Jennifer Leather
division of $6,366,000. This decline is partly attributable to an inability to
obtain inventory due to an overseas supplier's production problems.
Additionally, the current fiscal year included 52 weeks as compared to 53 weeks
in the prior year. Comparable store sales (those open for a full year in each
period) decreased by 5.7%.
21
<PAGE>
Cost of sales decreased 7.7% to $67,114,000 for the fiscal year ended
August 30, 1997 from $72,708,000 for the fiscal year ended August 31, 1996. The
dollar decrease of $5,594,000 is primarily attributable to:
1) lower net sales which resulted in lower purchases for the year of
approximately $3,900,000;
2) lower occupancy costs due to closed stores of $508,000;
3) higher net home delivery income of $511,000; and
4) higher costs for customer repairs were offset by vendor allowances
from the Company's principal supplier of $1,166,000 which resulted
in a net decline of $506,000 for total repairs.
Cost of sales as a percentage of sales was 68.6% in fiscal 1997,
unchanged from the prior year because the higher costs of merchandise due to a
change in the product mix offset the items described above. Additionally,
warehouse expenses of $5,021,000 and fabric protection services of $2,543,000
provided by the Private Company in fiscal 1997 decreased from $5,822,000 and
$2,972,000, respectively, from the previous year due to the lower sales volume
in the 1997 fiscal year and reduced warehouse fee "shortfall" payments.
Selling, general and administrative expenses were $32,904,000 (33.6% as
a percentage of sales) for the fiscal year ended August 30, 1997 as compared to
$37,618,000 (35.5% as a percentage of sales) for the fiscal year ended August
31, 1996, a decrease of $4,714,000 or 12.6% from the prior year. This decrease
was due principally to reductions in salaries and related benefits of $1,287,000
(principally because of the lower sales volume which generated lower
commissions, as well as fewer stores in operation during the current fiscal
year) and lower legal fees of $610,000. Legal fees were $1,275,000 in the prior
year (see "Liquidity and Capital Resources" below). Accounting fees declined by
$72,000 to $241,000 for the year in part as the result of improved controls
installed during the current fiscal year. Additionally, during the fiscal year
ended August 30, 1997, selling, general and administrative expenses were reduced
for adjustments related to cancelled customer orders of $817,000, which
adjustments ($344,000) in the prior year were classified in other income.
Additionally, advertising expenses declined by $1,372,000 to $10,893,000 (11.1%
as a percentage of sales) as compared to $12,265,000 (11.6% as a percentage of
sales) in the prior year. Although the Company spent approximately the same
amount on advertising in both fiscal years, the fiscal 1997 amount is net of an
advertising allowance of $1,075,000 the Company received from its principal
supplier.
The Company's receivables from the Private Company ($2,335,000), the
Unconsolidated Licensees (other than S.F.H.C.) ($2,355,000) and S.F.H.C.
($2,208,000) decreased in the aggregate by $426,000 in the fiscal year ended
August 30, 1997 to $6,898,000 which resulted in income of $426,000 from cash
collections. These entities have losses and/or capital deficiencies and,
accordingly, the Company had fully reserved for all amounts due from the Private
Company, the Private Licensees and S.F.H.C. in prior years which totalled
$7,324,000 at August 31, 1996. In connection with the uncertainty of
collectibility and the relationship between the Company, the Private Company,
the Private Licensees and S.F.H.C., the Company accounts for transactions with
these entities on an offset basis. If the result of the offset is a receivable
due from them, then such net amount will be generally recognized only at the
time when cash is received from these entities.
22
<PAGE>
Interest income decreased by $128,000 to $67,000 for the fiscal year
ended August 30, 1997 as compared to the prior year. The decrease reflects the
generally lower level of investments throughout the fiscal year.
Other income decreased to $319,000 in the fiscal year ended August 30,
1997 from $880,000 in the prior year. This decrease is primarily attributable to
adjustments related to cancelled customer orders which have been offset against
selling, general and administrative expenses starting in the current fiscal year
(as described above).
Net (loss) in the fiscal year ended August 30, 1997 was $(3,061,000) as
compared to a net (loss) of $(6,023,000) in the prior year, a decrease of loss
of $2,962,000. The primary reason for the decreased loss was due to expense
reductions, credits received from vendors, as discussed above, together with
lower store closing costs and a recovery of amounts due from the Private Company
and Unconsolidated Licensees which had previously been recorded as losses.
FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED TO FISCAL YEAR ENDED AUGUST 26, 1995:
Net sales decreased by 15.9% to $106,041,000 for the fiscal year ended
August 31, 1996 as compared to $126,074,000 for the year ended August 26, 1995.
This decrease is mainly attributable to the closing of eight stores since the
prior year period, a physical split of 14 Jennifer Convertibles stores into both
a Jennifer Convertibles store and a Jennifer Leather store (thereby
cannibalizing sales), a reduction in the number of credit promotions that the
Company has been able to offer customers to stimulate business and an
industry-wide softness. Comparable store sales (those open for a full year in
each period) decreased by 16.3% partially as a result of the physical split
described above.
Cost of sales decreased 16.4% to $72,708,000 for the year ended August
31, 1996 from $86,964,000 for the fiscal year ended August 26, 1995. The dollar
decrease of $14,256,000 is attributable to the lower sales and lower occupancy
costs due to the closed stores, while the decrease in the cost of sales as a
percentage of sales to 68.6% from 69.0% is essentially due to lower costs of
merchandise. Warehouse expenses of $5,822,000 and fabric protection services of
$2,972,000 provided by the Private Company decreased from $6,304,000 and
$3,804,000, respectively, from the previous year due to the lower sales volume
in the current fiscal year.
Selling, general and administrative expenses were $37,618,000 (35.5% as
a percentage of sales) for the fiscal year ended August 31, 1996 as compared to
$45,955,000 (36.5% as a percentage of sales) for the fiscal year ended August
26, 1995, a decrease of $8,337,000 or 18.1% over the prior year. This decrease
was due principally to reductions in salaries and related benefits of $3,586,000
(principally because of the lower sales volume which generated lower commissions
as well as fewer stores in operation during the current fiscal year) and lower
advertising expenses of $3,464,000. Legal fees increased in the current fiscal
year by $403,000 to $1,275,000 primarily because of the new Credit and Security
Agreement signed with Klaussner (see "Liquidity and Capital Resources" below).
Accounting fees declined by $421,000 to $313,000 for the year in part as the
result of improved controls installed during the current fiscal year. Various
other store expense categories were reduced due to the implementation of the
Company's cost reduction programs.
23
<PAGE>
The Company's receivables from the Private Company, the Private
Licensees and S.F.H.C. increased by $952,000 in the fiscal year ended August 31,
1996 to $7,324,000. These entities have losses and/or capital deficiencies and,
accordingly, the Company has fully reserved for all amounts due from the Private
Company and the Unconsolidated Licensees. This resulted in a provision for loss
of $952,000. In prior years, the Company had reserved the full amounts due which
totalled $6,372,000 at August 26, 1995.
In connection with the uncertainty of collectibility and the
relationship between the Company, the Private Company and the Unconsolidated
Licensees, the Company will account for subsequent transactions with these
entities on an offset basis. However, if the result of the offset is a
receivable due from them, then such net amount will be generally recognized only
at the time when cash is received from these entities.
Interest income decreased by $116,000 to $195,000 for the fiscal year
ended August 31, 1996 as compared to the prior year. The decrease reflects the
generally lower level of investments throughout the fiscal year.
Other income decreased to $880,000 in the fiscal year ended August 31,
1996 from $1,670,000 in the prior year. This decrease is primarily attributable
to adjustments related to cancelled customer orders.
Net (loss) in the fiscal year ended August 31, 1996 was $(6,023,000)
compared to a net (loss) of $(12,068,000) in the prior year, a decrease of loss
of $6,045,000. The primary reason for the decreased loss was due to expense
reductions and operating efficiencies the Company was able to achieve as
discussed above together with lower store closing costs and a substantially
lower provision for losses from the Private Company and Unconsolidated Licensees
reflecting the reduced increase in such amount over the prior year.
LIQUIDITY AND CAPITAL RESOURCES:
As of August 30, 1997, the Company and LP's had an aggregate working
capital deficiency of $17,258,000 compared to a deficiency of $15,757,000 at
August 31, 1996 and had available cash and cash equivalents of $3,405,000
compared to $3,600,000 at August 31, 1996.
The Company is continuing to fund the operations of the LP's which, as
described above, continue to generate operating losses. All such losses have
been consolidated in the Company's consolidated financial statements. The
Company's receivables from the Private Company, the Unconsolidated Licensees,
and S.F.H.C., which had been fully reserved for in prior years, decreased by
$426,000 which has been reflected in income. These entities have operating
losses and capital deficiencies and there can be no assurance that the total
receivables of $6,898,000 at August 30, 1997 will be collected. It is the
Company's intention to continue to fund these operations in the future. The
Company and the Private Company have entered into offset agreements that permit
the two companies to offset their current obligations to each other. As part of
such agreements, the Private Company agreed to assume certain liabilities owed
to the Company by the Unconsolidated Licensees, other than S.F.H.C..
24
<PAGE>
In March 1996, the Company executed a Credit and Security Agreement
("Agreement") with its principal supplier, Klaussner which effectively extended
the payment terms for merchandise shipped from 60 days to 81 days. At various
times during the current fiscal year, the Company exceeded terms by no more than
21 days with such extended amounts owing totalling no more than $2,650,000. As
of August 30, 1997, the amount owed that exceeded terms was $1,990,000 for 14
days. Klaussner has waived the default provisions in the Agreement as to such
violations. As part of the Agreement, the Company granted a security interest in
all of its assets as well as assigning leasehold interests, trademarks and a
licensee agreement to operate the Company's business in the event of default.
Klaussner also lent $1,440,000 to the Private Company (all of which has been
paid at August 30, 1997) to be used to pay down the mortgage balance on the
warehouse property. This paydown also reduced the Company's guarantee to the
mortgagee.
On December 11, 1997, the Company sold to Klaussner 10,000 shares of
Series A Convertible Preferred Stock ("Preferred Stock"), convertible into
1,424,500 shares of the Company's Common Stock for $5,000,000. These shares are
non-voting, have a liquidation preference of $5,000,000 and do not pay dividends
(except if declared on the Common Stock). The Preferred Stock is not convertible
until September 1, 1999, or earlier under certain circumstances (e.g. if another
person or group acquires 12.5% or more of the Common Stock or there are certain
changes in management or the Board of Directors), and has other rights
associated with it. In addition, the Credit and Security Agreement with
Klaussner was modified to include a late fee of .67% per month for invoices the
Company pays beyond the normal 60 day terms. See "Certain Relationships and
Related Transactions."
In June 1996, the Private Company sold its principal New York warehouse
and repaid the mortgage thereon. As a result, the Company's guaranty of a
portion of such mortgage obligation was extinguished without any liability to
the Company.
The Company does not currently have any traditional bank financing and
there can be no assurance such financing will be available in the future.
The proposed settlement of the derivative and class action litigations
(as described elsewhere) will come from insurance company payments and the
issuance of new Preferred Stock by the Company. If approved, there will be no
cash outlays by the Company other than legal costs. Additionally, a new proposed
agreement with the Private Company (as described in the Notes to the
Consolidated Financial Statements) contemplates significant changes to the
operating relationship between the companies.
In fiscal 1996 and 1995, the Company and the LP's closed an aggregate
of 40 stores. In fiscal 1997, three additional stores were closed. Several were
closed for non-performance, but a number of such closings were due to the
Company's decision to combine separate Jennifer Convertibles and Jennifer
Leather stores located in the same demographic areas into one store. The primary
benefit of combining both operations into one store was an elimination of the
real estate expenses and other expenses associated with the closed showroom.
Additional benefits realized included reductions of personnel and, in a number
of cases, elimination of duplicate office equipment and telephone lines.
Although combining two stores into one store generally reduces sales, management
believes that sales at the combined store will generate more profit due to the
elimination or reduction of expenses described above.
25
<PAGE>
The Company anticipates losses for fiscal 1998. However, as a result of
the Credit and Security Agreement with Klaussner and the $5,000,000 sale of
Preferred Stock to Klaussner on December 11, 1997, the Company, in the opinion
of management, will have adequate cash flow to fund its operations for the next
fiscal year.
For the year ended August 30, 1997 and fiscal year ended August 31,
1996, the Company and the LP's spent $206,000 and $989,000, respectively, for
capital expenditures. The Company currently anticipates capital expenditures
totalling no more than $500,000 during fiscal 1998.
INFLATION:
There was no significant impact on the Company's operations as a result
of inflation during the fiscal year ended August 30, 1997.
26
<PAGE>
Item 8. Financial Statements and Supplementary Data.
--------------------------------------------
See Index immediately following the signature page
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
-----------------------------------------------------------------------
None
Item 10. Directors and Executive Officers of the Company.
------------------------------------------------
The names and ages of the Company's directors and the Company's
executive officers as of December 2, 1997 are as follows:
Position(s) with the
Name Age Company
---- --- -----------------------------
Harley J. Greenfield 53 Chairman of the Board and
Chief Executive Officer
Edward G. Bohn 52 Director
Kevin J. Coyle 53 Director
Edward B. Seidner 45 Director and Executive Vice President
Bernard Wincig 66 Director
George J. Nadel 55 Executive Vice President, Chief
Financial Officer and Treasurer
Rami Abada 38 President, Chief Operating Officer and
Director
Ronald E. Rudzin 35 Senior Vice President - Retail Stores
Leslie Falchook 37 Vice President - Administration
Kevin Mattler 40 Vice President - Store Operations
The Company's directors are elected at the Annual Meeting of
stockholders and hold office until their successors are elected and qualified.
The Company's officers are appointed by the Board of Directors and serve at the
pleasure of the Board of Directors. The Company currently has no compensation or
nominating committees.
The Board of Directors held six meetings during the 1997 fiscal year.
None of the directors attended fewer than 75% of the number of meetings of the
Board of Directors or any committee of which he is a member, held during the
period in which he was a director or a committee member, as applicable.
The Board of Directors has a Stock Option Committee, which as of August
30, 1997, consisted of Messrs. Greenfield and Seidner. The Stock Option
Committee had one meeting during the 1997 fiscal year. The Stock Option
Committee is authorized to administer the Company's stock option plans.
27
<PAGE>
The Board of Directors has an Audit Committee, which during the fiscal
year ended August 30, 1997, consisted of Harley Greenfield, Bernard Wincig,
Edward Bohn and Kevin Coyle. During such fiscal year, the Audit Committee held
three meetings. The Audit Committee is responsible for reviewing the adequacy of
the structure of the Company's financial organization and the implementation of
its financial and accounting policies. In addition, the Audit Committee reviews
the results of the audit performed by the Company's outside auditors before the
Annual Report to Stockholders is published.
The Company also has a Monitoring Committee consisting of Edward Bohn,
Kevin Coyle and Bernard Wincig to monitor transactions between the Company and
the Private Company.
Set forth below is a biographical description of each director and
executive officer of the Company as of December 2, 1997.
HARLEY J. GREENFIELD
Mr. Greenfield has been the Chairman of the Board and Chief Executive
Officer of the Company since August 1986 and was the Company's President from
August 1986 until December 1997. Mr. Greenfield has been engaged for more than
25 years in the furniture wholesale and retail business and was one of the
co-founders of the Private Company which established the Jennifer Convertibles
concept in 1975. Mr. Greenfield is a member of the Home Furnishings Association.
EDWARD G. BOHN
Mr. Bohn has been a director of the Company since February 1995. From
March 1995 to May 1997, he was a Consultant for Borlas Sales in Avenel, New
Jersey, an importer/exporter of consumer electronics. Borlas also handles the
sale and installation of software. Since June 1995, he has been a Director of
Nuwave Technologies, Inc. He has also operated as an Independent Consultant in
financial and operational matters since September 1994 through the present. Mr.
Bohn was employed by Emerson Radio Corporation, which designs and sells consumer
electronics, in various capacities from January 1983 through March 1994. From
March 1993 to March 1994, he was the Senior Vice President-Special Projects; he
was Chief Financial Officer from March 1991 through March 1993 and
Treasurer/Vice President of Finance prior to that. Emerson Radio filed in the
United States Bankruptcy Court, District of New Jersey, for protection under
Chapter 11 of the Federal Bankruptcy Act on September 29, 1993 and was
discharged on March 31, 1994.
KEVIN J. COYLE
Mr. Coyle was appointed as a director of the Company in February 1995.
Mr. Coyle is a certified public accountant specializing in litigation support.
Until 1993, Mr. Coyle was President of Olde Kraft Company Ltd. ("Olde Kraft"), a
retail furniture business operating seven stores in the New York Metropolitan
Area. Olde Kraft filed a Chapter XI petition in bankruptcy in October 1993 and
converted to a Chapter VII in October 1994. Mr. Coyle graduated from Queens
College with a BS in accounting and
28
<PAGE>
is a member of the American Institute of Certified Public Accountants and the
New York State Society of Certified Public Accountants.
EDWARD B. SEIDNER
Mr. Seidner became a director of the Company in August 1986 and an
Executive Vice President of the Company in September 1994. From 1977 until
November 1994, Mr. Seidner was an officer and a director of the Private Company.
Mr. Seidner has been engaged for more than 25 years in the furniture wholesale
and retail business. Mr. Seidner is a member of the Home Furnishings
Association.
BERNARD WINCIG
Mr. Wincig became a director of the Company in September 1986. Mr.
Wincig has been an attorney in private practice since 1962. Mr. Wincig received
his Juris Doctor degree from Brooklyn Law School.
GEORGE J. NADEL
Mr. Nadel joined the Company and became Executive Vice President, Chief
Financial Officer and Treasurer on August 1, 1994. Prior to joining the Company,
from October 1989 to July 1994, Mr. Nadel was the Senior Vice President and
Chief Financial Officer of Loehmann's Inc., a retail chain specializing in
ladies clothing and accessories. Mr. Nadel has over thirty years experience in
various senior financial officer positions with companies in the retail industry
and is a Certified Public Accountant.
RAMI ABADA
Mr. Abada became the President and a director of the Company on
December 2, 1997 and has been the Chief Operating Officer since April 12, 1994.
Mr. Abada was the Executive Vice President of the Company from April 12, 1994 to
December 2, 1997. Prior to joining the Company, Mr. Abada had been employed by
the Private Company since 1982. Mr. Abada is also a director of CCA Industries,
Inc., a public company engaged in the manufacture and distribution of health and
beauty aid products.
29
<PAGE>
RONALD E. RUDZIN
Mr. Rudzin became Senior Vice President - Retail Stores on April 12,
1994. Prior to joining the Company, Mr. Rudzin had been employed by the Private
Company since 1979. Mr. Rudzin was, and is, in charge of directing the sales
force of the Company, including the Private Stores and licensed stores.
LESLIE FALCHOOK
Mr. Falchook has been a Vice President of the Company since September
1986. Mr. Falchook is primarily involved with the internal operations of the
Company. Prior to joining the Company, Mr. Falchook had been employed by the
Private Company since 1982.
KEVIN MATTLER
Mr. Mattler became Vice President - Store Operations on April 12, 1994
and has been with the Company since 1988. Mr. Mattler is involved with, and
supervises, the operation of the Company's stores and during his tenure with the
Company Mr. Mattler has been involved in all facets of its operations. Prior to
joining the Company, Mr. Mattler had been employed by the Private Company since
1982.
Certain of the directors and former officers of the Company are
defendants in the litigation described under "Legal Proceedings" above. See also
"Certain Relationship and Related Transactions."
30
<PAGE>
Item 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth compensation paid for the fiscal years ended
August 30, 1997, August 31, 1996 and August 26, 1995 (or such shorter period as
such employees were employed by the Company) of those persons who were (i) the
chief executive officer at August 30, 1997 and (ii) the four other most highly
compensated executive officers of the Company at August 30, 1997 whose total
annual salary and other compensation exceeded $100,000 (collectively, the "Named
Executive Officers").
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------ -------------
SECURITIES
NAME AND UNDERLYING ALL OTHER
PRINCIPAL POSITION FISCAL YEAR SALARY ($) OPTIONS (#) COMPENSATION
- ------------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Harley J. Greenfield, 1997 $320,000 0 0
Chairman of the Board, Chief 1996 352,307 0 0
Executive Officer and President 1995 400,000 0 0
Edward B. Seidner, 1997 $240,000 0 0
Executive Vice President 1996 264,231 0 0
1995 300,000 0 0
George J. Nadel 1997 $225,000 50,000(1) 0
Executive Vice President and 1996 250,000 0 0
Chief Financial Officer 1995 202,083 50,000(2) 0
Leslie Falchook, 1997 $116,000 50,000(3) 0
Vice President - Administration 1996 127,712 0 0
1995 144,670 0 0
Rami Abada 1997 $120,000 100,000(4) 0
Executive Vice President and 1996 132,115 0 0
Chief Operating Officer 1995 150,000 0
Ronald E. Rudzin 1997 $120,000 100,000(5) 0
Senior Vice President Retail 1996 132,115 0 0
Stores 1995 150,000 0 0
</TABLE>
31
<PAGE>
- ---------------------
(1) On May 6, 1997, Mr. Nadel was granted options to purchase 50,000 shares
of Common Stock at $2.00 per share, the market value on the date of
grant, in exchange for the cancellation of the options referred to in
Note (2) below.
(2) On August 1, 1995, Mr. Nadel was granted options to purchase 25,000
shares of Common Stock at $2.50 per share and, on February 1, 1995, Mr.
Nadel was granted options to purchase 25,000 shares of Common Stock at
$3.53 per share, in each case the market value on the date of grant.
(3) On May 6, 1997, Mr. Falchook was granted options to purchase 50,000
shares of Common Stock at $2.00 per share, the market value on the date
of grant, in exchange for the cancellation of options to purchase
20,000 shares of Common Stock at $13.125 per share which were granted
in 1993.
(4) On May 6, 1997, Mr. Abada was granted options to purchase 100,000
shares of Common Stock at $2.00 per share, the market value on the date
of grant.
(5) On May 6, 1997, Mr. Rudzin was granted options to purchase 100,000
shares of Common Stock at $2.00 per share, the market value on the date
of grant.
Non-employee directors currently receive a fee of $10,000 per year,
plus $500 per meeting attended (an aggregate of $78,000 in fiscal 1997).
Directors are reimbursed for out-of-pocket expenses incurred in connection with
their services as such.
Effective February 1, 1996, the salaries of each of the Company's
officers was reduced (other than George J. Nadel), in connection with the
Company's cost-cutting program. The annual salaries of the Company's executive
officers, effective February 1, 1996 are as follows: Harley Greenfield-$320,000;
Edward Seidner - $240,000, George J. Nadel - $225,000, Rami Abada - $120,000,
Ronald E. Rudzin - $120,000, Leslie Falchook - $116,000 and Kevin Mattler -
$96,000.
32
<PAGE>
STOCK OPTION PLANS
The Company has Incentive and Non-Qualified Stock Option Plans (the
"Plans"), pursuant to which, as of August 30, 1997, options to purchase an
aggregate of 837,047 shares of Common Stock were outstanding and under which
options to purchase an aggregate of 9,953 shares of Common Stock were available
for grant. In addition, options granted outside of the Plans to purchase an
additional 392,000 shares of Common Stock (not including options to purchase
1,200,000 shares of Common Stock owned by JCI Consultants, L.P.) were
outstanding as of August 30, 1997 and options to purchase an additional 100,000
shares of Common Stock outside of the Plans were granted in December 1997. The
Plans are administered by a Stock Option Committee (the "Committee") consisting
of two persons appointed by the Board of Directors. As of August 30, 1997, the
Committee consisted of Harley Greenfield and Edward B. Seidner. The Committee
has full and final authority (a) to determine the persons to be granted options,
(b) to determine the number of shares subject to each option and whether or not
options shall be incentive stock options or non-qualified stock options, (c) to
determine the exercise price per share of the options (which, in the case of
incentive stock options, may not be less per share than 100% of the fair market
value per share of the Common Stock on the date the option is granted or, in the
case of a stockholder owning more than 10% of the stock of the Company, not less
per share than 110% of the fair market value per share of the Common Stock on
the date the option is granted), (d) to determine the time or times when each
option shall be granted and become exercisable and (e) to make all other
determinations deemed necessary or advisable in the administration of the Plans.
In determining persons who are to receive options and the number of shares to be
covered by each option, the Committee considers the person's position,
responsibilities, service, accomplishments, present and future value to the
Company, the anticipated length of his future service and other relevant
factors. Members of the Committee are not eligible to receive options under the
Plans or otherwise during the period of time they serve on the Committee and for
one year prior thereto, but may receive options after their term on the
Committee is over. Officers and directors, other than members of the Committee,
may receive options under the Plans. The exercise price of all options granted
under or outside of the Plans equaled or exceeded the market value of the
underlying shares on the date of grant.
1997 STOCK OPTION PLAN
On May 6, 1997 the Board of Directors adopted the 1997 Stock Option
Plan (the "1997 Plan"). The Stockholders will be asked to approve the 1997 Plan
at the 1997 Annual Meeting of Stockholders.
The purpose of the 1997 Plan is to attract and retain the services or
advice of selected employees, directors, agents, consultants and independent
contractors of the Company or any parent or subsidiary. The 1997 Plan provides
for the grant of options to acquire a maximum of 500,000 shares of the Common
Stock, and permits the granting of qualified incentive stock options ("ISOs") or
nonqualified stock options ("NSOs"), at the discretion of the administrator of
the 1997 Plan (the "Plan Administrator"). The Board of Directors has appointed
the Committee as the Plan Administrator. Subject to the terms of the 1997 Plan,
the Plan Administrator determines the terms and conditions of options granted
under the 1997 Plan. Options granted under the 1997 Plan are evidenced by
written agreements which contain such terms, conditions, limitations and
restrictions as the Plan Administrator deems advisable and which are not
inconsistent with the 1997 Plan.
33
<PAGE>
ISOs may be granted to individuals who, at the time of grant, are
employees of the Company or its affiliates. NSOs may be granted to directors,
employees, consultants, agents or other independent contractors of the Company
or its affiliates.
The 1997 Plan provides that the Plan Administrator must establish an
exercise price for ISOs that is not less than the fair market value per share of
the Common Stock at the date of grant and an exercise price for NSOs of not less
than the par value per share of the Common Stock at the date of grant. Each ISO
must expire within ten years of the date of grant. However, if ISOs are granted
to persons owning more than 10% of the voting stock of the Company, the 1997
Plan provides that the exercise price may not be less than 110% of the fair
market value per share at the date of grant and that the term of such ISOs may
not exceed five years. Unless otherwise provided by the Plan Administrator,
options granted under the 1997 Plan vest at a rate of 25% per year over a
four-year period, but vesting is accelerated in the event of a change of
control.
An optionee whose relationship with the Company or any related corporation
ceases for any reason (other than termination for cause, death or total
disability, as such terms are defined in the 1997 Plan) may exercise options in
the three-month period following such cessation (unless such options terminate
or expire sooner by their terms), or in such longer period determined by the
Plan Administrator in the case of NSOs. Unexercised options granted under the
1997 Plan terminate upon a merger (other than a stock merger), reorganization or
liquidation of the Company; however, immediately prior to such a transaction,
optionees may exercise such options without regard to whether the vesting
requirements have been satisfied.
The option exercise price must be paid in full at the time the notice of
exercise of the option is delivered to the Company and must be tendered in cash,
by bank certified or cashier's check or by personal check. Options may also be
exercised in "cashless exercises" (delivery of such shares of stock of the
Company having a fair market value equal to the exercise price). Unless
otherwise provided by the Plan Administrator, options are nontransferable. The
Board of Directors has certain rights to suspend, amend or terminate the 1997
Plan provided shareholder approval is obtained.
34
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
Pursuant to the 1991 Amended and Restated Incentive and Non-Qualified
Stock Option Plan, in May 1997, options for an aggregate of 425,000 shares of
Common Stock were granted at an exercise price of $2.00 per share, the market
value on the date of grant, to certain employees of the Company, including Mr.
Falchook (50,000 shares), Mr. Nadel (50,000 shares), Mr. Abada (100,000 shares)
and Mr. Rudzin (100,000 shares). Also in May 1997, options for an aggregate
307,000 shares of Common Stock were granted not pursuant to any plan at an
exercise price of $2.00 per share, the market value on the date of grant, to
certain employees of the Company, certain employees of the Private Company
(subject to their joining the Company if offered comparable positions) and
certain consultants of the Company. In exchange for certain of such grants,
options for an aggregate of 264,500 shares of Common Stock, which had exercise
prices ranging from $2.50 to $13.125, were canceled, including options which had
been granted to Mr. Falchook (20,000 shares) and Mr. Nadel (50,000 shares). In
December 1997, in connection with his appointment as President and a director of
the Company, Mr. Abada received options to purchase 100,000 shares of Common
Stock at $2.44 per share, the market value of the Common Stock on the date of
grant.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rate of Stock
Price Appreciation
for
Individual Grants Option Term
-------------------------------------------------------------- -----------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(1) FISCAL YEAR ($/SHARE) DATE 5% 10%
- ---- ---------- ------------ --------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
George J. Nadel 50,000 11.76% $2.00 5/6/07 $62,889 $159,374
Leslie Falchook 50,000 11.76% $2.00 5/6/07 $62,889 $159,374
Rami Abada 100,000 23.53% $2.00 5/6/07 $125,779 $318,748
Ronald E. Rudzin 100,000 23.53% $2.00 5/6/07 $125,779 $318,748
</TABLE>
----------
(1) ALL OPTIONS WERE GRANTED AT AN EXERCISE PRICE EQUAL TO THE FAIR MARKET
VALUE OF THE COMMON STOCK ON THE DATE OF GRANT.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Name of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
August 30, 1997 August 30, 1997(1)
Shares
Acquired on Value
Name Exercise (#) Realized Unexercisable Exercisable Unexercisable Exercisable
---------------------- ------------ -------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Harley J. Greenfield (2)(4) N/A N/A 0 297,047 $0 $0
Edward B. Seidner N/A N/A 0 0 0 0
George J. Nadel(3)(4) N/A N/A 50,000 0 25,000 0
Leslie Falchook(4)(5) N/A N/A 50,000 0 25,000 0
Rami Abada N/A N/A 100,000 0 50,000 0
Ronald E. Rudzin N/A N/A 100,000 0 50,000 0
</TABLE>
35
<PAGE>
- -------------------
(1) Amount reflects the market value of the underlying shares of Common
Stock as reported on the Bulletin Board on August 29, 1997 (a bid price
of $2.50) less the exercise price of each option.
(2) Includes (i) 122,047 options granted on September 17, 1991 at an
exercise price of $4.88 per share, (ii) 150,000 options granted on
April 6, 1992, at an exercise price of $8.375 per share, in connection
with Mr. Greenfield's employment agreement, and (iii) 25,000 options
granted on January 25, 1993 at an exercise price of $13.125 per share.
(3) Includes 50,000 options granted on May 6, 1997 to Mr. Nadel at an
exercise price of $2.00 per share in exchange for cancellation of
25,000 options previously granted on August 1, 1995 at an exercise
price of $2.50 per share and 25,000 options granted on February 1, 1995
at an exercise price of $3.53 per share.
(4) All options were granted at an exercise price equal to the market value
of the underlying Common Stock on the date of grant.
(5) Includes 50,000 options granted on May 6, 1997 to Mr. Falchook at an
exercise price of $2.00 per share in exchange for the cancellation of
20,000 options granted on January 25, 1993 to Mr. Falchook at an
exercise price of $13.125 per share.
(6) Includes 100,000 options granted on May 6, 1997 to Mr. Abada at an
exercise price of $2.00 per share.
(7) Includes 100,000 options granted on May 6, 1997 to Mr. Rudzin at an
exercise price of $2.00 per share.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
The following table sets forth, as of December 12, 1997, information
regarding the beneficial ownership of the Company's Common Stock by (i) each
person who is known to the Company to be the owner of more than five percent of
the Company's Common Stock, (ii) each of the Company's directors, (iii) each of
the Named Executive Officers (as defined in Item 11) and (iv) by all directors
and executive officers of the Company as a group. Information as to David A.
Belford and the Pacchia, Grossman, Shaked, Wexford group is based on Schedules
13D filed by such person and group:
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Amount and Nature Percent (%) of Class
of Beneficial Outstanding as of
Beneficial Owner Ownership(1) December 12, 1997
---------------- ----------------- --------------------
Harley J. Greenfield 835,336 (2)(3) 13.9%
Fred J. Love 585,662 (2)(5)(6) 10.3
Edward B. Seidner 553,914 (2)(4) 9.7
Jara Enterprises, Inc. ("Jara") 343,579 (6) 6.0
JCI Consultants, L.P 1,200,000 (3)(7) 17.4
David A. Belford 329,000 (8) 5.8
Pacchia, Grossman,
Shaked, Wexford Group 482,100 (9) 8.5
Bernard Wincig 144,573 (10) 2.5
Edward G. Bohn 16,667 (11) 0.3
Kevin J. Coyle 17,917 (11) 0.3
Leslie Falchook 25,000 (12) 0.4
George J. Nadel 0 (13) 0.0
Rami Abada 53,000 (14) 1.0
Ronald E. Rudzin 12,500 (15) 0.2
Hans J. Klaussner
and Klaussner 2,510,123 (17) 35.2
All directors and executive 1,658,907 (2)(3)(4)(5)(6) 27.4
officers as a group (10)(11)(12)(13)
(ten (10) persons) (14)(15)(16)
--------------------
* Less than 0.1%
(1) All of such shares are owned directly with sole voting and investment
power, unless otherwise noted below.
(2) The address of Messrs. Greenfield and Seidner is c/o Jennifer
Convertibles, 419 Crossways Park Drive, Woodbury, New York 11797. The
address of Fred J. Love is One Ames Court, Plainview, New York 11803. Mr.
Greenfield and Mr. Love are brothers-in-law. See "Certain Relationships
and Related Transactions." The shares of Common Stock owned by Messrs.
Greenfield, Seidner and Love and the Private Company were pledged to
Klaussner as part of the Klaussner Transaction. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Includes (a) 292,831 shares underlying options granted to Mr. Greenfield
by Mr. Love (the Greenfield Option"), over which Mr. Greenfield has no
voting power but has shared dispositive power, as such shares may not be
disposed of without the consent of Mr. Greenfield, and (b) 297,047
shares of Common Stock underlying vested options granted to Mr.
Greenfield by the Company, with respect to which shares Mr. Greenfield
would have sole voting and dispositive power
37
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upon exercise of such options. See "Executive Compensation." Does not
include 1,200,000 shares of Common Stock underlying options which became
exercisable on April 1, 1996 and which are owned by JCI Consultant, L.P.
("JCI"). Mr. Greenfield does not have the power to cause the exercise of
such options by JCI. However, Mr. Greenfield would be the voting trustee
for the shares of Common Stock upon exercise of such options and would
have, subject to certain exceptions, the right to vote the shares issued
upon such exercise. See "Certain Relationships and Related Transactions."
(4) Includes 292,831 shares underlying the options granted to Mr. Seidner by
Mr. Love and the Private Company (the "Seidner Option"), over which Mr.
Seidner has no voting power but has shared dispositive power, as such
shares may not be disposed of without the consent of Mr. Seidner.
(5) Includes 343,579 shares of Common Stock owned by the Private Company,
over which Mr. Love has sole voting and dispositive power, which are
subject to the Greenfield Option and the Seidner Option (the "Options")
granted to Messrs. Greenfield and Seidner, respectively (the
"Optionees"), and which may not be disposed of without the consent of the
relevant Optionee.
(6) All of such shares are beneficially owned by Mr. Love, the sole
stockholder of Jara. Includes shares of Common Stock owned by three of
Jara's wholly-owned subsidiaries. Jara's address is One Ames Court,
Plainview, New York 11803. Mr. Love has sole voting and shared
dispositive power over such shares, as such shares are subject to the
Options and may not be disposed of without the consent of the relevant
Optionee.
(7) Represents 1,200,000 shares of Common Stock underlying exercisable
options referred to in footnote (3).
(8) The address of David A. Belford is 2097 S. Hamilton Road, Suite 200,
Columbus, Ohio 43232.
(9) Represents the shares of Common Stock owned by a group which was formed
to object to the proposed settlement of the derivative litigation
referred to in "Legal Proceedings." The group consists of the following
persons and entities, each of which has the sole and shared power to vote
and dispose, and total beneficial ownership, of the shares of Common
Stock set forth opposite such persons' or entity's name: (1) Anthony J.
Pacchia ("Pacchia") - sole 11,000, shared 20,700, total 31,700; (2)
F&Co., Inc. as Custodian for Pacchia under IRA Account - sole 16,000,
shared 15,700, total 31,700; (3) Anthony J. Pacchia, P.C., (Money
Purchase) fbo Pacchia - sole 2,500, shared 29,200, total 31,700; (4)
Sandra Pacchia Custodian for Lee Pacchia - sole 1,100, shared 30,600,
total 31,700; (5) Sandra Pacchia Custodian for Tom Pacchia - sole 1,100,
shared 30,600, total 31,700; (6) Anthony T. Pacchia and Gloria Pacchia -
sole 1,000, shared 15,000, total 16,000; (7) Anthony T. Pacchia, IRA
Rollover - sole 15,000, shared 1,000, total 16,000; (8) Kenneth S.
Grossman Trustee, Profit Sharing Plan DLJSC -
38
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Custodian fbo Kenneth S. Grossman - sole 96,400, shared 3,500, total
99,900; (9) Kenneth S. Grossman - 3,500, sole 96,400 shared, total
99,900; (10) IRA fbo Patricia Berger, DLJSC as custodian - sole 3,500,
shared 0, total 3,500, (11) Ellen Grossman, Custodian for Andrew Grossman
UGMA/ NY - sole 5,000, shared 0, total 5,000; (12) IRA fbo Howard Berger,
DLJSC as custodian - sole 3,500, shared 0, total 3,500; (13) IRA fbo Jill
Berger, DLJSC as custodian, Rollover Account - sole 3,500, shared 0,
total 3,500; (14) IRA fbo Herbert Berger, DLJSC as custodian - sole
5,000, shared 0, total 5,000; (15) Marilyn Levy - sole 5,000, shared 0,
total 5,000; (16) Ellen Grossman, Custodian for Joshua Grossman UGMA/NY -
sole 5,000, shared 0, total 5,000; (17) Amir Shaked ("Shaked") - sole
37,700, shared 1,300, total 39,000; (18) IRA fbo Shaked - sole 1,300,
shared 37,700, total 39,000; (19) Wexford Special Situations 1996, L.P. -
sole 0, shared 142,783, total 142,783; (20) Wexford Special Situations
1996 Institutional L.P. - sole 0, shared 25,764, total 25,764; (21)
Wexford Special Situations 1996 Limited - sole 0, shared 7,859, total
7,859; (22) Wexford-Euris Special Situations 1996, L.P. - sole 0, shared
36,094, total 36,094; (23) Wexford Management LLC - sole 0, shared
212,500, total 212,500; (24) IRA fbo Zachery Goldwyn - sole 52,500,
shared 0, total 52,500. The address for group members (a) 1-5 is 602
Orchard Street, Cranford, New Jersey 07106, (b) 6 and 7 is 31 Center
Board Drive, Bayville, New Jersey 08721, (c) 8-9, 11, 16, 17 and 18 is
620 Fifth Avenue, 7th Floor, New York, New York 10020, (d) 10 and 14 is
31 Wisconsin Avenue, N. Massapequa, New York 11578, (e) 12 and 13 is 58
Alpine Way, Dix Hills, New York 11746, (f) 15 is 155 East 76th Street,
New York, New York 10022, (g) 19-21 and 23-24 is 411 West Putnam Avenue,
Greenwich, Connecticut 06830, and (h) 22 is c/o Hemisphere Fund Managers
Ltd., Harbour Centre, Georgetown, Grand Cayman Islands, B.W.I.
(10) Includes 8,800 shares of Common Stock owned by Mr. Wincig's wife and
25,000 shares of Common Stock underlying exercisable options. Does not
include 4,000 shares of Common Stock underlying options which have not
yet vested.
(11) Includes, as to each individual, 16,667 shares of Common Stock underlying
exercisable options, but does not include, as to each individual, 8,333
shares of Common Stock underlying options granted, which options have not
yet vested.
(12) Does not include 50,000 shares of Common Stock underlying options which
are not currently exercisable.
(13) Does not include 50,000 shares of Common Stock underlying options which
are not currently exercisable.
(14) Does not include 200,000 shares of Common Stock underlying options which
are not currently exercisable.
39
<PAGE>
(15) Does not include 100,000 shares of Common Stock underlying options which
are not currently exercisable.
(16) Does not include 50,000 shares of Common Stock underlying options granted
to an officer of the Company other than a Named Executive Officer, which
options are not yet vested.
(17) Represents shares pledged to Klaussner by Messrs. Greenfield, Seidner and
Love and Jara as part of the Klaussner Transaction and 1,424,500 shares
underlying convertible preferred stock issued to Klaussner in connection
with the Klaussner Investment. The pledged shares secure a guarantee by
the pledgors of approximately $1,000,000 owed to Klaussner by the Private
Company as of August 30, 1997. The preferred stock is not convertible
until September 1, 1999, except that such convertibility will be
accelerated upon the occurrence of certain events, including acquisitions
of 12.5% or more of the Company's voting stock by third parties,
commencement of a proxy solicitation or tender offer, mergers, asset
sales, certain changes in the constitution of the Company's Board of
Directors or if Harley Greenfield is no longer the Company's Chief
Executive Officer and similar events. See "Certain Relationships and
Related Transactions." Based on information contained in the Schedule 13D
filed by Hans J. Klaussner and Klaussner, Hans J. Klaussner is the sole
stockholder of the parent of Klaussner and, accordingly, may be deemed
the beneficial owner of shares owned by Klaussner. The principal address
of Klaussner is 405 Lewallen Street, Asheboro, North Carolina 27203. Hans
J. Klaussner's address is 7614 Gegenbach, Germany.
Based on the Company's review of reports filed by directors, executive
officers and 10% shareholders of the Company on Forms 3, 4 and 5 pursuant to
Section 16 of the Securities and Exchange Act of 1934, all such reports were
filed on a timely basis during fiscal year 1997.
Item 13. Certain Relationships and Related Transactions.
-----------------------------------------------
The Private Company
-------------------
Until November 1994 when Messrs. Greenfield and Seidner sold their
interests in the Private Company for a long-term note (the "Jara Notes") and
options to purchase the Common Stock owned by Mr. Love, Mr. Greenfield's
brother-in-law and the Private Company, Harley J. Greenfield (the Chairman of
the Board, Chief Executive Officer, President and a principal stockholder of the
Company), Fred J. Love (a director of the Company until August 10, 1995 and
principal stockholder of the Company as of August 30, 1997) and Edward B.
Seidner (a director, officer and principal stockholder of the Company) each
owned 33-1/3% of Jara, which, together with its subsidiaries, comprises the
Private Company, which owns or licenses the Private Stores. Following such sale,
Mr. Love beneficially owns 100% of the Private Company. The Private Company is
responsible for the warehousing for the Company-owned stores, the
40
<PAGE>
Company's licensed stores and the Private Stores, and leases and operates the
Warehouse Facilities. Until December 31, 1993, the Private Company was also
responsible for the purchasing and for certain advertising and promotional
activities for the Company-owned stores, the Company's licensed stores and the
Private Stores. Effective January 1, 1994, the Company assumed the
responsibility for purchasing and advertising for itself, its licensees, and the
Private Stores. The Private Company is responsible for an amount which
approximates its pro-rata share of all advertising production costs and costs of
publication of promotional material within the New York area. Until October 28,
1993, a corporation of which Messrs. Greenfield, Seidner and Love each owned
33-1/3% (the "Licensor") owned the trademarks "Jennifer Convertibles(R)" and
"With a Jennifer Sofabed, There's Always a Place to Stay(R)" (collectively the
"Marks"). On October 28, 1993, the Marks were assigned to the Company from the
Licensor for nominal consideration, and the Company agreed to license such Marks
to Jara in New York, as described below. Mr. Love is, and until November 1994,
Mr. Seidner was, an executive officer and director of Jara and the Licensor.
During the fiscal year ended August 30, 1997, Mr. Greenfield and Mr. Seidner
each received approximately $310,000 of interest on the Jara Notes from the
Private Company. Beginning in April 1997, each of Mr. Greenfield and Mr. Seidner
agreed to a $10,000 a month deferral of the amounts paid to them under the Jara
Notes. The shares of Common Stock owned by Messrs. Greenfield, Love, and Seidner
and Jara were pledged to Klaussner as part of the Klaussner transaction. In
November 1994, Mr. Greenfield and Mr. Seidner sold their interests in the
Private Company in exchange for the Jara Notes and options (the "Buy-Out
Options") to purchase the Common Stock owned by Mr. Love and the Private
Company. The Jara Notes are $10,273,204 in aggregate principal amount
($5,136,602 owned by Mr. Greenfield and $5,136,602 owned by Mr. Seidner), bear
interest at a rate of 7.5% per annum (although, as described above, a portion of
such interest is being deferred on a month-to-month basis) and are due in
December 2023. Only interest is payable on the Jara Notes until December 1, 2001
and, thereafter principal is payable monthly through the maturity date. The Jara
Notes are secured by (i) a security interest in the Private Company's personal
property, (ii) Mr. Love's personal guarantee of the Private Company's
performance under the Jara Notes, and (iii) a stock pledge by Mr. Love of his
stock in the Private Company to secure his obligations under the guarantees.
Subject to court approval of the Settlement Agreement, Messrs. Greenfield and
Seidner have agreed to subordinate, until January 1, 1999, their right to
receive payments in respect of the Jara Notes, if the Private Company is in
default in the payment of any cash obligation to the Company arising after
August 7, 1996. Such subordination does not apply to any distribution in respect
of a disposition of substantially all of the assets of the Private Company. The
Buy-Out Options are exercisable for an aggregate of 585,662 shares of Common
Stock (292,831 by Mr. Greenfield and 292,831 by Mr. Seidner) at a price of
$15.00 per share until they expire on November 7, 2004.
THE LICENSE
Pursuant to a license agreement between the Company and Jara, Jara has
the perpetual, royalty-free right to use, and to sublicense and franchise the
use of, the Marks in the State of New York. The license is exclusive in such
territory, subject to certain exceptions.
41
<PAGE>
THE PURCHASING AND WAREHOUSING AGREEMENT
Prior to January 1, 1994, the Private Company and the Company were
parties to a Warehousing and Purchasing Agreement (the "Original Warehousing
Agreement") pursuant to which the Private Company was obligated to make
merchandise available to the Company on the same basis as such merchandise was
made available to the Private Stores and was obligated to promptly order
merchandise requested by the Company to fill special orders. The Original
Warehousing Agreement provided that the Private Company would sell such
merchandise to the Company at the Private Company's cost. Additionally, the
Private Company was obligated to provide certain warehousing and handling
services to the Company for up to 100 Company-owned stores and 200 Company
licensed stores. In return, the Company paid the Private Company a fee equal to
5% of the retail selling price of all merchandise (including the retail selling
price of any related services, such as fabric protection) delivered to customers
of the Company's stores from the warehouse facilities operated by the Private
Company, plus 5% of the retail selling price of all merchandise delivered from
such warehouse facilities to Company-owned stores for display purposes.
Effective January 1, 1994, the Company assumed the responsibility for purchasing
for itself, its licensees and the Private Company on substantially the same
terms as it was receiving from the Private Company prior to 1994. However, the
Private Company continued to provide warehousing and handling services as
described above. During the fiscal year ended August 30, 1997 the Company and
the LPS paid warehouse fees under the Offset Agreement (as defined below) to the
Private Company aggregating approximately $5,021,000. During the fiscal year
ended August 30, 1997, the Private Company purchased from the Company
approximately $10,081,000 of merchandise (net of discounts and allowances),
which was paid under the Offset Agreement. Under the terms of the Warehousing
Agreement, however, the Company was not obligated to use the Private Company's
warehouse facilities or purchase through the Private Company. As part of the
transfer of the purchasing function, the Private Company, on May 29, 1994,
agreed to pay the Company $1,000,000 representing discounts and allowances
received from suppliers with respect to merchandise previously delivered. Such
payment was in the form of a note, dated May 29, 1994, calling for payments in
36 equal monthly installments and bearing interest at 8% per annum. The Private
Company made the final payments of $305,555 on such note during the fiscal year
ended August 30, 1997.
As set forth in "Business-Warehousing," the Private Company also provides
certain other services at the Warehouse Facilities, including arranging for
goods to be delivered to the Warehouse Facilities and customers and providing
fabric protection and warranty services. The Private Company is reimbursed by
the Company and its licensees for freight charges on deliveries to the Warehouse
Facilities at predetermined freight rates. The Private Company also provides
fabric protection services, including a life-time warranty, to customers of the
Company and its licensees. The Company retains approximately 2/3 of the revenues
from fabric protection and the warranty. During the fiscal year ended August 30,
1997, the Company and the LPS paid under the Offset Agreement $2,827,000 for
freight charges and $2,543,000 for fabric protection to the Private Company. See
"The Committee Report" below.
42
<PAGE>
The Company guarantees the lease for the Private Company's satellite
warehouse in California. Such lease expires September 30, 1998 and the annual
base rent is $133,000. Pursuant to an agreement dated September 1, 1993, the
Company is indemnified against any liability arising under such guaranty by the
Private Company.
THE OFFSET AGREEMENT
By agreement dated November 1, 1995, the Private Company and the Company
acknowledged that as of August 26, 1995 the Private Company owed the Company
$9,267,962, certain licensees (consisting of the Unconsolidated Licensees other
than S.F.H.C. and hereinafter referred to as the "Private Licensees") owed the
Company $2,117,616 for merchandise purchased (of which $1,865,813 was past due)
and the Company owed the Private Company $11,459,677. In addition, the Private
Company agreed to assume the obligations of the Private Licensees referred to
above and to offset the amounts owed to the Company by the Private Company
against the amounts owed to the Private Company by the Company. By agreement
dated March 1, 1996 (the "Offset Agreement"), the Private Company and the
Company agreed to continue to offset, on a monthly basis, amounts owed by the
Private Company and the Private Licensees to the Company for purchasing,
advertising, and other services and matters against amounts owed by the Company
to the Private Company for warehousing services, fabric protection, freight and
other services and matters. In contemplation of the settlement, the parties are
currently operating under the terms of the offset agreement to become effective
upon court approval of the settlement which provides for cash payments of
current amounts due in excess of $1,000,000. The Private Company paid for all
current charges under the Offset Agreement during fiscal 1997. Amounts owed by
the Private Company and certain licensees to the Company as of August 30, 1997
(consisting of unpaid amounts from fiscal 1996 and prior years) are reserved
against in the accompanying consolidated financial statements due to uncertain
collectibility. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
THE ADVERTISING AGREEMENT
Under the advertising agreement with the Private Company, the Private
Company bears a share of all advertising production costs and costs of
publication of promotional advertising material within the New York area. During
the fiscal year ended August 30, 1997, the Company charged the Private Company
$1,800,000 in respect of the Private Company and the Private Licensees and
charged S.F.H.C. $418,000 for advertising.
43
<PAGE>
JENNIFER LIVING ROOMS
In September 1996, the Company, opened two test "Jennifer Living Rooms"
stores in St. Louis, Missouri. As part of its license with the Private Company,
the Private Company also has the royalty free right to open "Jennifer Living
Rooms" stores in New York. In October 1996, the Private Company began operating
a test store in New York under the name "Jennifer Living Rooms."
OTHER MATTERS
As described under the heading "The Committee" below, a committee of the
Board of Directors consisting of Michael Colnes concluded that the Company had
claims against Messrs. Greenfield, Love, Seidner and the Private Company. During
fiscal 1997, the Company paid legal fees for Harley J.
Greenfield of $24,298 in connection with these matters.
JCI
Related parties of JCI, which is the holder of options to purchase
1,200,000 shares of Common Stock, also own the limited partnership interest in
Jennifer Chicago, L.P. (the "Chicago Partnership"), an LP which operates,
pursuant to a license agreement with the Company, 14 Jennifer Convertibles
stores in the Chicago, Illinois area, and, until the Company purchased it as of
September 1, 1994, Jennifer L.P. II ("L.P. II"), an LP which operated, pursuant
to a license agreement with the Company, 21 Jennifer Convertible stores in the
Detroit, St. Louis, Indianapolis, Milwaukee and Kansas City metropolitan areas.
During the fiscal year ended August 30, 1997, the Company earned $485,000 of
royalties from the Chicago Partnership, which are not separately shown in the
financial statements due to the consolidation of the LPS for financial statement
purposes.
OTHER MATTERS
In January 1994, Rami Abada, the Company's President and Chief Operating
Officer, joined the Company. Mr. Abada owns interests in certain licensed
Jennifer Convertibles stores, which he acquired when he was an employee of the
Private Company. As of October 1996, Mr. Abada owned a 20% interest in S.F.H.C.,
which owns six licensed Jennifer Convertibles stores, and owned a 20% interest
in each of two corporations which each own a licensed Jennifer Convertibles
store. In October 1996, Mr. Abada entered into an agreement pursuant to which he
exchanged his 20% interest in S.F.H.C. for the remaining 80% interest in the two
corporations referred to above. During the year ended August 30, 1997, S.F.H.C.
incurred and paid approximately $166,000 in royalties and $1,565,000 for
merchandise purchases to the Company. Such entity did not make any payments to
the Company in respect of a 9%
44
<PAGE>
secured note, due December 31, 2001, in the original principal amount of
$810,000 (which principal amount was $637,743 as of August 30, 1997). In
addition, such corporation owes the Company $500,000 principal amount under a
Revolving Credit Agreement pursuant to which all available revolving credit
loans have been drawn down. Such loans bear interest at prime plus 3% and were
due on June 1, 1995. As of August 30, 1997, S.F.H.C. also owed the Company
$1,069,842 for advertising and merchandise purchases. During the year ended
August 30, 1997, the two corporations wholly-owned by Mr. Abada incurred and
paid under the Offset Agreement an aggregate of approximately $74,000 in
royalties and $678,000 for merchandise purchases owed to the Company. Such
corporations have received financing from the Private Company (with a balance of
$323,174 as of August 30, 1997) and, by a letter agreement dated March 14, 1997
among the Private Company, the Company and the two corporations, all amounts
owed by the two corporations to the Company incurred subsequent to September 1,
1996 were paid through the allocation of amounts to be credited to the Private
Company under the Offset Agreement. During the fiscal year ended August 30,
1997, Mr. Abada received $312,448 of salary, severance pay, distributions and
other payments from such licensees and the Private Company.
In January 1994, Ronald Rudzin, the Company's Senior Vice President -
Retail Stores, joined the Company. Mr. Rudzin also owns interests in stores
acquired while an employee of the Private Company. Mr. Rudzin owns one licensed
Jennifer Convertibles store and his father owns two licensed Jennifer
Convertibles stores which during the fiscal year ended August 30, 1997 incurred
and paid under the Offset Agreement approximately $36,000 (for Mr. Rudzin's
stores) and $95,000 (for Mr. Rudzin's father's stores) of royalties and $336,000
(for Mr. Rudzin's store) and $876,000 (for Mr. Rudzin's father's stores) for
merchandise purchases. Mr. Rudzin received approximately $214,983 of salary,
distributions and other payments from such licensees and the Private Company.
Amounts owed to the Company by the corporate licensees referred to above,
(each of which is a Private Licensee) have been fully reserved against in the
accompanying financial statements for the 1995, 1996 and 1997 fiscal years due
to uncertain collectibility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Subject to court approval of the
Settlement Agreement, Mr. Rudzin has agreed, to personally guarantee the
merchandise purchases and royalty obligations incurred after the date of such
approval of the Private Licensees in which he has an ownership interest. Mr.
Abada has entered into a similar agreement as to the Private Licensees owned by
him effective upon court approval, termination of the Offset Agreement and prior
written notification.
The Company uses and the Private Company from time to time, also uses
Wincig & Wincig, a law firm of which Bernard Wincig, a director of the Company
and a stockholder, is a partner. Mr. Wincig received approximately $164,000 of
legal fees from the Company and the LPS and an aggregate of approximately
$55,131 from the Private Company during the fiscal year ended August 30, 1997.
On December 11, 1997, Klaussner purchased 10,000 shares of the Company's
Series A Convertible Preferred Stock (the "Preferred Stock") for $5,000,000. In
connection with such purchase, Klaussner waived
45
<PAGE>
any defaults under the Credit and Security Agreement and approximately
$2,965,650 of the proceeds of such investment were used to pay all balances due
to Klaussner which had been billed and outstanding for more than 60 days. The
Preferred Stock is non-voting and is convertible, commencing on September 1,
1999 (subject to acceleration as described below), into 1,424,500 shares of
Common Stock (an effective conversion price of $3.51 per share), subject to
adjustment for stock splits, stock dividends and similar events. The Common
Stock underlying the Preferred Stock represents approximately 19.9% of the
outstanding Common Stock as of December 11, 1997, after giving effect to such
conversion. The Preferred Stock has a liquidation preference of $5,000,000. No
cash dividends are to be paid on the Common Stock unless the holders of the
Preferred Stock receive the same dividend on the Preferred Stock on an
"as-converted" basis. The convertibility of the Preferred Stock can be
accelerated under certain circumstances, including (i) if any person or group
(other than Harley J. Greenfield, Edward B. Seidner, Fred Love or Jara
Enterprises, Inc.) becomes the beneficial owner of 12.5% or more of the
Company's voting stock, (ii) the execution of an agreement providing for the
acquisition of the Company or substantially all of its assets or the acquisition
of a subsidiary or subsidiaries which generate in excess of 10% of the Company's
revenues, (iii) if Harley Greenfield is no longer the Company's Chief Executive
Officer or if the Continuing Directors (as defined) do not constitute a majority
of the Board of Directors, (iv) the commencement by a third party of a tender or
exchange offer for the Common Stock, (v) the adoption of a plan of liquidation,
or (vi) if any person commences a proxy solicitation without the approval of the
Company's Board of Directors. In connection with the Klaussner Investment,
Klaussner received the right of first refusal (the "Right"), if the Company
sells Common Stock or Common Stock equivalents (such as options or convertible
securities) at a price (or an effective price in the case of equivalents) of
less than $3.51 per share to purchase of Common Stock (or equivalents such as
options or convertible securities). Klaussner will have the Right so long as it
owns at least 10% of the outstanding Common Stock (on an as converted basis).
Klaussner also received certain demand registration rights to require the
Company, at the Company's expense, to register the shares of Common Stock
underlying the Preferred Stock and any shares it acquires upon exercise of the
Right.
In connection with the Klaussner Investment, the Credit and Security
Agent was modified to provide a late payment fee at a rate of .67% per month for
invoices the Company pays later than 60 days.
In fiscal 1997, Klaussner gave the Company $1,075,000 of vendor
allowances for advertising and $1,166,000 of allowances for a repair program and
in December 1997, Klaussner made the Klaussner Investment. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
also see "Business- Sources of Supply" for other transactions with Klaussner.
46
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K.
--------------------------------------------------------------
(a) Financial Statements. See the Index immediately following the
signature page.
(b) Reports on Form 8-K.
During the quarter ended August 30, 1997, the Company did not
file Current Reports on Form 8-K.
(c) EXHIBITS.
3.1 - Certificate of Incorporation of the Company
(Incorporated herein by reference to Exhibit 3.1 to
the Company's Registration Statement -File Nos.
33-22214 and 33-10800 (the "Registration
Statement")).
3.2 - Certificate of Designations, Preferences and Rights
of Series A Preferred Stock.
3.3 - By-Laws of the Company. (Incorporated herein by
reference to Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended August 26,
1995).
4.1 - Form of Underwriter's Warrant for the purchase of
shares of Common Stock (Incorporated herein by
reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-2 - File No.
33-47871 (the "Registration Statement on Form S-2")).
10.1 - Incentive and Non-Qualified Stock Option Plan, as
amended (Incorporated herein by reference to Exhibit
10.4 to the Registration Statement).
10.2 - Stock Option Agreement, dated March 21, 1991, between
Jennifer Convertibles, Inc. and JCI Consultant L.P.
(Incorporated herein by reference to Exhibit 2 to the
Company's Current Report on Form 8-K dated March 21,
1991).
47
<PAGE>
10.3 - Voting Trust Agreement, dated March 21, 1991, between
Harley J. Greenfield, Jennifer Convertibles, Inc. and
JCI Consultant L.P. (Incorporated herein by reference
to Exhibit 3 to the Company's Current Report on Form
8-K dated March 31, 1991).
10.4 - Registration and Sales Agreement, dated March 21,
1991, between Jennifer Convertibles, Inc. JCI
Consultant, L.P., Harley J. Greenfield, Fred J. Love,
Edward B. Seidner and Jara Enterprises, Inc.
(Incorporated herein by reference to Exhibit 4 to the
Company's Current Report on Form 8-K dated March 21,
1991).
10.5 - Agreement of Limited Partnership of Jennifer Chicago,
L.P. (the "Partnership"), dated July 24, 1991
(Incorporated herein by reference to Exhibit 1 to the
Company's Current Report on Form 8-K dated July 24,
1991 - related to series of agreements related to
Limited Partnership of Jennifer Chicago L.P.).
10.6 - Purchase Option Agreement, dated July 24, 1991,
between Jennifer Convertibles, Inc. and the limited
partner of the Partnership (Incorporated herein by
reference to Exhibit 2 to the Company's Current
Report on Form 8-K dated July 24, 1991).
10.7 - Omnibus Agreement, dated July 24, 1991, between
Jennifer Convertibles, Inc. and the Partnership
(Incorporated herein by reference to Exhibit 3 to the
Company's Current Report on Form 8-K dated July 24,
1991).
10.8 - Warehousing and Purchasing Agreement, dated July 24,
1991, between Jennifer Convertibles Inc., and the
Partnership (Incorporated herein by reference to
Exhibit 4 to the Company's Current Report on Form 8-K
dated July 24, 1991).
10.9 - Amended and restated 1991 Incentive and Non-Qualified
Stock Option Plan (Incorporated herein by reference
to Exhibit 10.29 to the Registration Statement on
Form S-2).
10.10 - Amendment to Stock Option Agreement dated February
25, 1992 between the Company and JCI (Incorporated
herein by reference to Exhibit 1 to the Company's
Current Report on Form 8-K dated February 25, 1992).
10.11 - Letter Agreement dated February 25, 1992 among the
Company, JCI and Harley J. Greenfield, amending a
Voting Trust Agreement (Incorporated herein by
48
<PAGE>
reference to Exhibit 2 to the Company's Current
Report on Form 8-K dated February 25, 1992).
10.12 - Amended and Restated Registration and Sale Agreement
dated as of February 25, 1992 among the Company, JCI,
Harley J. Greenfield, Fred J. Love, Edward B. Seidner
and Jara (Incorporated herein by reference to Exhibit
3 to the Company's Current Report on Form 8-K dated
February 25, 1992).
10.13 - Warehousing Agreement, dated as of December 31, 1993,
between Jennifer Convertibles, Inc. and Jennifer
Warehousing, Inc. (Incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for
the quarterly period ending February 26, 1994).
10.14 - Purchasing Agreement, dated as of December 31, 1993,
between Jennifer Convertibles, Inc. and Jara
Enterprises, Inc. (Incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for
the quarterly period ending February 26, 1994).
10.15 - Advertising Agreement, dated as of December 31, 1993,
between Jennifer Convertibles, Inc. and Jara
Enterprises, Inc. (Incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for
the quarterly period ending February 26, 1994).
10.16 - Amendment No. 1 to Warehousing Agreement, dated as of
May 28, 1994, amending the Warehousing Agreement
referred to in 10.29 and the related Rebate Note.
(Incorporated herein by reference to Exhibit 10.34 to
the Company's Annual Report on Form 10-K for the
fiscal year ended August 27, 1994).
10.17 - Amendment No. 1 to Purchasing Agreement, dated as of
May 28, 1994, amending the Purchasing Agreement
referred to in 10.30. (Incorporated herein by
reference to Exhibit 10.35 to the Company's Annual
Report on Form 10-K for the fiscal year ended August
27, 1994).
10.18 - License Agreement, dated as of October 28, 1993,
among Jennifer Convertibles Licensing Corp. and Jara
Enterprises, Inc. (Incorporated herein by reference
to Exhibit 2 to the Company's Current Report on Form
8-K dated November 30, 1993).
49
<PAGE>
10.19 - Letter Agreement with JCI Consultant, L.P.
(Incorporated herein by reference to the Company's
Current Report on Form 8-K dated August 1, 1994).
10.20 - Agreement, dated as of May 19, 1995, among Jennifer
Convertibles, Inc., Jennifer Purchasing Corp., Jara
Enterprises, Inc. and the licensees signatory
thereto. (Incorporated herein by reference to Exhibit
10.38 to the Company's Annual Report on Form 10-K for
the fiscal year ended August 26, 1995.)
10.21 - Agreement, dated as of November 1, 1995, among
Jennifer Convertibles, Inc., Jennifer Purchasing
Corp., Jara Enterprises, Inc. and the licensees
signatory thereto. (Incorporated herein by reference
to Exhibit 10.39 to the Company's Annual Report on
Form 10-K the for fiscal year ended August 26, 1995.)
10.22 - Settlement Agreement, dated as of March 8, 1996,
between Jennifer Convertibles, Inc. and Jara
Enterprises, Inc. (Incorporated by reference to
Exhibit 3 to the Company's Current Report on Form 8-K
dated March 18, 1996).
10.23 - Memorandum of Understanding for Settlement of
Jennifer Convertibles Securities Litigation
(Incorporated by reference to Exhibit 1 to the
Company's Current Report on Form 8-K dated March 18,
1996).
10.24 - Memorandum of Understanding for Settlement of Certain
Derivative Claims (Incorporated by reference to
Exhibit 2 to the Company's Current Report on Form 8-K
dated March 18, 1996).
10.25 - Form of Note, dated November 1994, made by Jara
Enterprises, Inc. to Harley J. Greenfield and Edward
B. Seidner. (Incorporated herein by reference to
Exhibit 10.43 to the Company's Annual Report on Form
10-K for the fiscal year ended August 26, 1995.)
10.26 - Form of Option, dated November 7, 1994 to purchase
Common Stock from Fred Love, Jara Enterprises, Inc.
and certain subsidiaries to Harley J. Greenfield and
Fred Love. (Incorporated herein by reference to
Exhibit 10.44 to the Company's Annual Report on Form
10-K for the fiscal year ended August 26, 1995.)
10.27 - Form of Subordination Agreement, dated as of August
9, 1996, by Harley J. Greenfield and Edward B.
Seidner. (Incorporated herein by reference to Exhibit
50
<PAGE>
10.45 to the Company's Annual Report on Form 10-K for
the fiscal year ended August 26, 1995.)
10.28 - Credit and Security Agreement, dated as of March 1,
1996, among Klaussner Furniture Industries, Inc.
("Klaussner") and Jennifer Convertibles, Inc. and the
other signatories thereto (Incorporated by reference
to Exhibit 4 to the Company's Current Report on Form
8-K dated March 18, 1996).
10.29 - 1997 Stock Option Plan
10.30 - Stock Purchase Agreement, dated December 11, 1997,
between Klaussner and the Company.
10.31 - Registration Rights Agreement, dated December 11,
1997 between Klaussner and the Company.
10.32 - Waiver and Modification Agreement, dated December 11,
1997, between Klaussner and related entities and
Jennifer Purchasing Corp., Jennifer Convertibles,
Inc., Jennifer Convertibles Licensing Corp., and
Jennifer L.P. III.
11.1 - Statement re computation of Net (Loss) Per Share (for
fiscal years ended August 30, 1997, August 31, 1996
and August 26, 1995).
22.1 - Subsidiaries of the Company. (Incorporated herein by
reference to Exhibit 22.1 on the Company's Annual
Report on Form 10-K for fiscal year ended August 27,
1994.)
(d) Financial Statement Schedules.
All Schedules are omitted for the reason that they are not
required or are not applicable, or the required information is
shown in the consolidated financial statements or notes
thereto.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JENNIFER CONVERTIBLES, INC.
By: /S/ HARLEY J. GREENFIELD
-----------------------------------
Harley J. Greenfield, Chairman
of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated below.
<TABLE>
<CAPTION>
NAME POSITION DATE
---- -------- ----
/S/ HARLEY J. GREENFIELD
- --------------------------------------
<S> <C> <C>
Harley J. Greenfield Chairman of the Board and Chief Executive December 11, 1997
Officer (Principal Executive Officer)
/S/ GEORGE J. NADEL
- --------------------------------------- Executive Vice President, Chief Financial December 11, 1997
George J. Nadel Officer and Treasurer (Principal Financial
Officer and Principal Accounting Officer)
/S/ EDWARD B. SEIDNER
-------------------------------------
Edward B. Seidner Director December 11, 1997
/S/ BERNARD WINCIG Director December 11, 1997
----------------------------------
Bernard Wincig
/S/ EDWARD BOHN Director December 11, 1997
----------------------------------
Edward Bohn
/S/ KEVIN J. COYLE Director December 11, 1997
----------------------------------
Kevin J. Coyle
/S/ RAMI ABADA President and Director December 11, 1997
----------------------------------
Rami Abada
</TABLE>
52
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Index to Financial Statements
Independent Auditors' Report.........................................F1
Consolidated Balance Sheets at August 30, 1997 and
August 31, 1996 ...................................................F3
Consolidated Statements of Operations for the years ended
August 30, 1997, August 31, 1996 and August 26, 1995.................F4
Consolidated Statements of Stockholders' Equity
(Capital Deficiency) for the years ended August 30, 1997,
August 31, 1996 and August 26, 1995..................................F5
Consolidated Statements of Cash Flows for the years ended
August 30, 1997, August 31, 1996 and August 26, 1995.................F6
Notes to the Consolidated Financial Statements.......................F7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Jennifer Convertibles, Inc.
Woodbury, New York
We have audited the accompanying consolidated balance sheets of Jennifer
Convertibles, Inc. (the "Company") and subsidiaries as at August 30, 1997 and
August 31, 1996, and the related consolidated statements of operations,
stockholders' equity (capital deficiency) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Jennifer Convertibles, Inc. and subsidiaries at August 30, 1997 and August 31,
1996, and the consolidated results of their operations and their cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
We were also engaged to audit the accompanying consolidated statements of
operations, stockholders' equity (capital deficiency) and cash flows of the
Company for the year ended August 26, 1995. These financial statements are the
responsibility of the Company's management.
The Company recorded significant charges and credits in the fiscal year ended
August 26, 1995 as to which it was unable to furnish us with sufficient
documentation to enable us to determine whether any portion of such charges and
credits was applicable to the year ended August 27, 1994.
As discussed in Notes 1 and 3, a company owned by three officers of the Company
(the "Private Company") performed certain services (including purchasing,
warehousing and inventory control, distribution, fabric protection, advertising
and data processing) on behalf of the Company for all or part of the year ended
August 26, 1995. The Private Company was unable to provide us with documentation
for certain of the transactions performed by the Private Company on behalf of
the Company for the year ended August 26, 1995.
The Company did not have an adequate system of internal accounting control over
the financial information processed for the Company by the Private Company prior
to August 26, 1995. Further, the chief financial officer of the Company has
stated that he was unable to maintain internal controls over the financial data
processed by the Private Company on behalf of the Company and that the Company
was seriously deficient regarding the adequacy of internal controls that support
its operations prior to August 26, 1995. As a result of this lack of control,
the chief financial officer has stated that he was unable to provide certain
representations we requested regarding the Company's statements of operations
and cash flows for the year ended August 26, 1995.
F1
<PAGE>
Because of the matters discussed in the preceding three paragraphs, the scope of
our work was not sufficient to enable us to express, and we do not express, an
opinion on the results of operations, and cash flows for the year ended August
26, 1995.
As discussed in Note 9, in December 1994 and January 1995, the Company and
certain of its officers became defendants in class and derivative actions. The
Company is attempting to settle the above litigations and has agreed to terms
which, subject to the court approval, would settle the class action and
derivative litigations. Further, in May 1995, the Securities and Exchange
Commission commenced an investigation relating to the aforementioned matters.
The outcome of these matters is not presently determinable.
Attention is directed to Note 1 with respect to various operational problems
which the Company has experienced in the past three years and management's plans
for contending with these problems. Attention is also directed to Notes 1, 3 and
9 with respect to various related party transactions.
Richard A. Eisner & Company, LLP
New York, New York
November 21, 1997
Except for the second paragraph of Note 12,
December 11, 1997
F2
<PAGE>
<TABLE>
<CAPTION>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except for share data)
ASSETS
(SEE NOTE 5) AUGUST 30, 1997 AUGUST 31, 1996
--------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,405 $ 3,600
Accounts receivable 1,149 1,588
Merchandise inventories 7,943 8,221
Refundable income taxes 0 23
Prepaid expenses and other current assets 477 454
-------- --------
Total current assets 12,974 13,886
Store fixtures, equipment and leasehold improvements,
at cost, net 7,669 8,739
Due from Private Company and Unconsolidated Licensees, net
of reserves of $6,898 and $7,324 at August 30, 1997
and August 31, 1996 -- --
Deferred lease costs and other intangibles, net 1,001 1,317
Goodwill, at cost, net 553 568
Other assets (primarily security deposits) 801 925
-------- --------
$ 22,998 $ 25,435
======== ========
LIABILITIES AND (CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable, trade $ 16,614 $ 15,746
Customer deposits 8,841 8,875
Accrued expenses and other current liabilities 4,777 5,022
-------- --------
Total current liabilities 30,232 29,643
Deferred rent and allowances 5,712 5,868
Long-term obligations under capital leases 421 230
-------- --------
Total liabilities 36,365 35,741
-------- --------
Commitments and contingencies
(Capital deficiency)
Preferred stock, par value $.01 per
share. Authorized 1,000,000 shares;
no shares issued -- --
Common stock, par value $.01 per share
Authorized 10,000,000 shares; issued and
outstanding 5,700,725 shares at August 30, 1997
and August 31, 1996 57 57
Additional paid-in capital 22,911 22,911
Notes receivable from warrant holders (300) (300)
Accumulated (deficit) (36,035) (32,974)
-------- --------
(13,367) (10,306)
-------- --------
$ 22,998 $ 25,435
======== ========
</TABLE>
Attention is directed to the foregoing Accountants' Report and
to the accompanying Notes to the Consolidated Financial Statements.
F3
<PAGE>
<TABLE>
<CAPTION>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data)
Year ended Year ended Year ended
August 30, 1997 August 31, 1996 August 26, 1995
--------------- --------------- ---------------
(52 Weeks) (53 Weeks) (52 Weeks)
<S> <C> <C> <C>
Net sales $ 97,789 $ 106,041 $ 126,074
----------- ----------- -----------
Cost of sales, including store occupancy,
warehousing, delivery and fabric protection
(including charges from Private Company of
$10,390, $11,836, and $13,883) 67,114 72,708 86,964
Selling, general and administrative expenses 32,904 37,618 45,955
Depreciation and amortization 1,840 1,852 2,261
Provision for litigation settlement costs -- -- 500
(Recovery) provision for losses on amounts due from
Private Company and Unconsolidated Licensees (426) 952 3,088
Loss from store closings 55 191 1,670
----------- ----------- -----------
101,487 113,321 140,438
----------- ----------- -----------
Operating (loss) (3,698) (7,280) (14,364)
----------- ----------- -----------
Other income (expense):
Royalty income 374 375 523
Interest income 67 195 311
Interest expense (28) (47) (48)
Other income, net 319 880 1,670
----------- ----------- -----------
732 1,403 2,456
----------- ----------- -----------
(Loss) before income taxes (2,966) (5,877) (11,908)
Income taxes 95 146 160
----------- ----------- -----------
Net (loss) ($3,061) ($6,023) ($12,068)
=========== =========== ===========
Net (loss) per common share ($0.54) ($1.06) ($2.12)
=========== =========== ===========
Weighted average number of common shares 5,700,725 5,700,725 5,700,725
=========== =========== ===========
</TABLE>
Attention is directed to the foregoing Accountants' Report and to the
accompanying Notes to the Consolidated Financial Statements.
F4
<PAGE>
<TABLE>
<CAPTION>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Capital Deficiency)
Fiscal Years ended August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands, except for share data)
Notes
Common Stock Additional Receivable
------------------------- paid-in from warrant Accumulated
Shares Par value capital holders (deficit) Totals
------ --------- ------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balances at August 27, 1994 5,700,725 $ 57 $ 22,911 $ (300) $ (14,883) $ 7,785
Net (loss) -- -- -- -- (12,068) (12,068)
--------- -------- --------- --------- --------- ---------
Balances at August 26, 1995 5,700,725 57 22,911 (300) (26,951) (4,283)
Net (loss) -- -- -- -- (6,023) (6,023)
--------- -------- --------- --------- --------- ---------
Balances at August 31, 1996 5,700,725 57 22,911 (300) (32,974) (10,306)
Net (loss) -- -- -- -- (3,061) (3,061)
--------- -------- --------- --------- --------- ---------
Balances at August 30, 1997 5,700,725 $ 57 $ 22,911 $ (300) $ (36,035) $ (13,367)
========= ======== ========= ========= ========= =========
Attention is directed to the foregoing Accountants' Report and to
the accompanying Notes to the Consolidated Financial Statements.
F5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Year Ended Year Ended Year Ended
August 30, 1997 August 31, 1996 August 26, 1995
--------------- --------------- ---------------
(52 Weeks) (53 Weeks) (52 Weeks)
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) ($ 3,061) ($ 6,023) ($12,068)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,840 1,852 2,261
(Recovery) provision for losses on amounts due from
Private Company and Unconsolidated Licensees (426) 952 3,088
Loss from store closings 40 191 1,670
Deferred rent (62) 246 656
Provision for warranty costs 204 -- --
Changes in operating assets and liabilities:
Decrease in merchandise inventories 278 1,211 716
Decrease in refundable income taxes 23 108 2,127
(Increase) decrease in prepaid expenses (30) 315 956
Decrease (increase) in accounts receivable 439 916 (785)
Decrease in other current assets 7 93 1,374
Decrease (increase) in due from Private Company
and Unconsolidated Licensees 426 (952) (1,256)
Decrease (increase) in other assets 124 46 (567)
Increase (decrease) in accounts payable trade 868 (362) 717
(Decrease) in customer deposits (34) (142) (443)
(Decrease) increase in accrued expenses and
and other current liabilities (501) (1,499) 1,206
-------- -------- --------
Net cash provided by (used in) operating activities 135 (3,048) (348)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (206) (989) (4,292)
Deferred lease costs and other intangibles 64 15 (1,580)
Decrease in due from limited partners -- -- 1,000
-------- -------- --------
Net cash (used in) investing activities (142) (974) (4,872)
-------- -------- --------
Cash flows from financing activities:
Payments of obligations under capital leases (188) (107) (140)
-------- -------- --------
Net cash (used in) financing activities (188) (107) (140)
-------- -------- --------
Net (decrease) in cash and cash equivalents (195) (4,129) (5,360)
Cash and cash equivalents at beginning of year 3,600 7,729 13,089
-------- -------- --------
Cash and cash equivalents at end of year $ 3,405 $ 3,600 $ 7,729
======== ======== ========
Supplemental disclosure of cash flow information:
Income taxes paid (refunded) during the year $ 95 $ 108 ($ 2,127)
======== ======== ========
Interest paid $ 28 $ 47 $ 48
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Acquisition of equipment through capital lease financing $ 379 -- --
======== ======== ========
See Note 9 - Commitments, Contingencies and other Matters
Attention is directed to the foregoing Accountants' Report and to
the accompanying Notes to the Consolidated Financial Statements.
F6
</TABLE>
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
(1) BUSINESS AND BASIS OF PREPARATION
The consolidated financial statements include the accounts of Jennifer
Convertibles, Inc. and subsidiaries (the "Company") and as described below,
certain licensees. The Company is the owner and licensor of domestic sofabed
specialty retail stores that specialize in the sale of a complete line of
sofabeds and companion pieces such as loveseats, chairs and recliners and
specialty retail stores that specialize in the sale of leather furniture. As at
August 30, 1997 and August 31, 1996, 84 and 86 Company-owned stores operated
under the Jennifer Convertibles, Jennifer Leather and Jennifer Living Rooms
names.
Commencing in the latter part of the fiscal year ended August 31,
1992, the Company began licensing stores to limited partnerships ("LP's") of
which a subsidiary of the Company is the general partner. The Company's
subsidiary made nominal capital contributions to the LP's and the limited
partners contributed approximately $6,660. All of the LP's have had losses since
inception and the Company has made advances to them to fund such losses. The
Company has control of the LP's and, as a result, consolidates the accounts of
the LP's in its financial statements. Included in the Company's Consolidated
Statement of Operations are the losses of the LP's in excess of the limited
partners' capital contributions. As at August 30, 1997 and August 31, 1996, the
LP's operated 63 and 64 stores under the Jennifer Convertibles name.
The Company has also licensed stores to parties which may be deemed
affiliates ("Unconsolidated Licensees"). Under the applicable license
agreements, the Company is entitled to a royalty of 5% of sales. As at August
30, 1997 and August 31, 1996, 11 stores were operated by such Unconsolidated
Licensees and the results of their operations are not included in the
consolidated financial statements (See Notes 3 and 9).
Also not included in the consolidated financial statements are the
results of operations of 22 stores in the New York Metropolitan Area which are
owned by a company (the "Private Company") which, until November 1994, was owned
by three of the officers/directors/principal stockholders of the Company. In
November 1994, the Private Company redeemed the stock in the Private Company of
two of the principal stockholders (Harley Greenfield and Edward Seidner) for a
note in the amount of $10,273 collateralized by the assets of the Private
Company and due in 2023 (See Note 9). In connection with such transaction, Fred
Love, the remaining principal stockholder, granted Messrs. Greenfield and
Seidner options expiring in November 2004 to purchase the 585,662 shares of the
Company's Common Stock owned by him and the Private Company for $15.00 per
share.
The Company, the LP's, the Private Company and the Unconsolidated
Licensees have had numerous transactions with each other as more fully discussed
in Note 3. Further, the Company had made advances to the Private Company and the
Unconsolidated Licensees which have been reserved for in full due to uncertainty
of collection. Because of the numerous related party transactions, the results
of operations are not necessarily indicative of what they would be if all
transactions were with independent parties.
F7
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company incurred net losses in
each of the last three fiscal years ended August 30, 1997. In addition, at such
date, the Company has both a working capital deficiency of $17,258 and a capital
deficiency of $13,367. Further, at such date, the Company is in default of the
provisions of a Credit and Security Agreement with its largest supplier and has
obtained a waiver of such default. Operating losses have continued subsequent to
that date through October 1997, resulting in increases in the deficiencies.
Additionally, as more fully discussed in Note 9, the Company is involved in the
following unresolved matters which may have a significant impact on the
Company's operations and financial condition:
a) Potential claims by the Company to recover damages recommended
in a report by an independent committee of the Board of
Directors appointed to investigate a complaint relating to
transactions between the Company and the Private Company.
b) Litigation consisting of 11 class action complaints and six
derivative action lawsuits.
c) A formal investigation into the affairs of the Company
commenced on May 3, 1995 by the Securities and Exchange
Commission.
Management has addressed certain of the aforementioned issues, as follows:
o As discussed in Note 9, the Company has agreed to terms
which, subject to court approval, would not only settle the
class action and derivative litigations but change its
operating relationship with the Private Company and resolve
outstanding disputes relating to transactions between the
Company and the Private Company.
o Approximately 40 unprofitable stores have been closed in
1995 and 1996 and expense reduction plans have been
implemented throughout all operational areas of the Company.
o As discussed in Note 5, the Company has entered into a
credit and security agreement with its largest supplier,
Klaussner Furniture Industries, Inc. ("Klaussner") (which
accounts for approximately 81% of the Company's purchases of
merchandise) which, based on current terms, effectively
extended the payment terms for merchandise shipped from 60
days to 81 days. Additionally, allowances of $2,241 were
obtained from Klaussner for fiscal 1997 of which $1,166
reduced cost of goods sold and $1,075 reduced selling, general
and administrative expenses.
o As discussed in Note 12, the Company sold to Klaussner
10,000 shares of convertible preferred stock for $5,000.
F8
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Jennifer
Convertibles, Inc., its subsidiaries and the LP's. A subsidiary of the Company
is the general partner of each of the LP's.
FISCAL YEAR
The Company has adopted a fiscal year ending on the last Saturday in
August which would be either 52 or 53 weeks long.
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid instruments with a
maturity of three months or less to be cash equivalents.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost (determined on
the first-in, first-out method) or market and are physically located, as
follows:
8/30/97 8/31/96
------- -------
Showrooms $4,271 $ 3,963
Warehouses 3,672 4,258
------ -------
$7,943 $ 8,221
====== =======
Vendor discounts and allowances in respect to merchandise purchased by the
Company are included as a reduction of inventory and cost of sales.
STORE FIXTURES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Store fixtures and equipment, including property under capital leases,
are carried at cost less accumulated depreciation and amortization. Depreciation
is computed using the straight-line method over estimated useful lives or, when
applicable, the life of the lease, whatever is shorter. Betterments and major
remodeling costs are capitalized. Leasehold improvements are capitalized and
amortized over the shorter of their estimated useful lives or the terms of the
respective leases.
GOODWILL
Goodwill consists of the excess of cost of the Company's investments
in certain subsidiaries over the fair value of net assets acquired. Impairment
is assessed based on cash flows of the related stores. Goodwill is being
amortized over forty years from the acquisition date using the straight-line
method. Accumulated amortization at August 30, 1997 and August 31, 1996 amounted
to $574 and $556, respectively.
F9
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
DEFERRED LEASE AND OTHER INTANGIBLE COSTS
Deferred lease costs, consisting primarily of lease commissions and
payments made to assume existing leases are deferred and amortized over the term
of the lease.
Pre-opening costs are expenses associated with the opening of new
stores are deferred and amortized over a one-year period.
DEFERRED RENT AND ALLOWANCES
Pursuant to certain of the Company's leases, rent expense charged to
operations differs from rent paid because of the effect of free rent periods and
work allowances granted by the landlord. Accordingly, the Company has recorded
deferred rent and allowances of $5,712 and $5,868 at August 30, 1997 and August
31, 1996, respectively. Rent expense is calculated by allocating total rental
payments, including those attributable to scheduled rent increases reduced by
work allowances granted, on a straight-line basis, over the respective lease
term.
REVENUE RECOGNITION
Sales are recognized upon delivery of the merchandise to the customer. A
minimum deposit of 50% is typically required upon placing a non-financed sales
order.
(LOSS) PER SHARE
(Loss) per share for the years ended August 30, 1997, August 31, 1996
and August 26, 1995 were computed by dividing the net (loss) by the weighted
average number of shares of Common Stock outstanding. Options and warrants
outstanding are not included because their effect is anti-dilutive.
ADVERTISING
Advertising costs are expensed as incurred.
WARRANTIES
Estimated warranty costs are expensed in the same period that sales
are recognized.
CONCENTRATION OF RISKS
The Company purchases 92% of its inventory from two suppliers (81% and
11%, respectively) under normal or extended trade terms. The larger supplier,
Klaussner, has executed a Credit and Security Agreement with the Company (See
Note 5).
The Company utilizes many local banks as depositories for cash
receipts received at its showrooms. Such funds are transferred weekly to
concentration accounts maintained at one commercial bank. At August 30, 1997 and
August 31, 1996, amounts on deposit with this one bank totalled 76% and 86%,
respectively, of total cash.
F10
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
USE OF ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include accounts receivable, accounts payable
and customer deposits. The carrying amount of these instruments approximate fair
value due to their short-term nature.
RECENT PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share". SFAS
128 established new standards for computing and presenting earnings per share.
SFAS 128 is effective for periods ending after December 15, 1997. The above
pronouncement will not have an effect on the net (loss) per share information
presented in the consolidated financial statements.
(3) RELATED PARTY TRANSACTIONS
Prior to January 1, 1994, merchandise was purchased and warehoused for
the Company and the LP's by the Private Company under a 15-year Warehousing
Agreement dated November 3, 1986. In connection with this agreement, the Private
Company also provided services relating to purchasing, distribution, customer
service, data entry processing and other related services. All such services
have been transferred to the direct control of the Company's management except
for distribution, inventory control reporting and its data processing. The
Company and LP's pay a monthly warehousing fee (unchanged since 1986) based on
5% of the retail sales prices and a portion of fabric protection revenue
collected from customers. Additionally, the Private Company provides fabric
protection, lifetime warranty services and freight services at pre-determined
rates. The Company's cost of sales includes these charges. Revenue from
customers for fabric protection services is included in net sales.
Indicated below are the amounts charged by the Private Company:
Year Ended
-----------------------------
8/30/97 8/31/96 8/26/95
------- ------- -------
INCLUDED IN COST OF SALES:
Freight $ 2,827 $ 3,042 $ 3,775
Fabric protection services 2,543 2,972 3,804
Warehousing fees at 5% 4,890 5,302 6,304
Additional warehouse fees (Note 9) 130 520 --
------- ------- -------
TOTAL $10,390 $11,836 $13,883
----- ======= ======= =======
The Company has negotiated new operating arrangements with the Private
Company, subject to court approval of the settlement of various class and
derivative actions (See Note 9).
F11
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
Effective January 1, 1994, the Company assumed the responsibility from
the Private Company for purchasing merchandise for itself, the LP's, the
Unconsolidated Licensees and the Private Company. During the years ended August
30, 1997, August 31, 1996 and August 26, 1995, approximately $10,671, $10,471
and $12,500, respectively, of inventory at cost (before rebates) was purchased
by the Private Company through the Company and $1,883, $1,900 and $3,105,
respectively, of inventory at cost (before rebates) was purchased by the
Unconsolidated Licensees through the Company. In addition, effective January 1,
1994, the Private Company transferred to the Company the right to receive the
benefit of any vendor discounts and allowances in respect to merchandise
purchased by the Company on behalf of the LP's and certain other licensees. The
Company had always been entitled to the benefit of such discounts in respect to
merchandise purchased by the Company for its stores. To evidence its obligation
for certain accrued discounts, the Private Company executed a promissory note in
the amount of $1,000. This note, which bears interest at 8% per annum, is
payable in equal monthly installments over three years commencing August 1, 1994
and was repaid in full in the year ended August 30, 1997. In addition, since the
Private Company retained the right to receive the benefit of any discounts
refunded or credited by suppliers in respect of merchandise purchased by the
Private Company through the Company for the year ended August 26, 1995, an
amount equal to $692 was credited to the Private Company on account of discounts
for such period, $583 was credited for the year ended August 31, 1996 and $590
was credited for the year ended August 30, 1997.
Prior to January 1, 1994, the Company was party to Advertising Agreements
with the Private Company. Effective January 1, 1994, the Company assumed the
responsibility of advertising for itself, the LP's, the Unconsolidated Licensees
and the Private Company. Under the new arrangement, the Private Company and
Unconsolidated Licensees are charged a share of advertising costs. Such charges
aggregated $2,218, $2,374 and $2,498 for the years ended August 30, 1997, August
31, 1996 and August 26, 1995, respectively.
Two executive officers of the Company own interests in certain
Unconsolidated Licensee stores. Rami Abada, Executive Vice President and Chief
Operating Officer of the Company, owned a 20% interest (until October 1996) in
Southeastern Florida Holding Corp. ("S.F.H.C.") which owns six licensed stores.
During the years ended August 30, 1997, August 31, 1996 and August 26, 1995,
S.F.H.C. incurred approximately $166, $160 and $185, respectively, in royalty
expense to the Company. The same executive also owned (until October 1996) a 20%
interest in two other corporations that are also part of the Unconsolidated
Licensees. During the years ended August 30, 1997, August 31, 1996 and August
26, 1995, such corporations incurred approximately $74, $81 and $97,
respectively, in royalty expense to the Company. Ronald Rudzin, Senior Vice
President - Retail Stores of the Company, owns one licensed store and his father
owns two licensed stores which, during the years ended August 30, 1997, August
31, 1996 and August 26, 1995 incurred royalty expense aggregating approximately
$131, $134 and $239, respectively, to the Company (See Note 10).
In October 1996, Rami Abada transferred his 20% interest in S.F.H.C.
to individuals who are also limited partners in LP's III, IV and V (see Note
11). In turn, he received the remaining 80% equity interest in the two corporate
Unconsolidated Licensees, described in the preceding paragraph, that were owned
by such individuals.
F12
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
By agreement (the "Offset Agreement") dated November 1, 1995, the
Private Company and the Company acknowledged that as of August 26, 1995 the
Private Company owed the Company $9,268, certain Unconsolidated Licensees owed
the Company $2,118 for merchandise purchased (of which $1,866 was past due) and
the Company owed the Private Company $11,455 for warehousing fees, freight and
fabric protection services. In addition, the Private Company agreed to assume
the obligations of certain Unconsolidated Licensees in the amount of $1,866 and
to offset the amounts owed to the Company by the Private Company and such
licensees against the amounts owed to the Private Company by the Company.
By agreement dated March 1, 1996, the Private Company and the Company
agreed to continue to offset, on a monthly basis, amounts owed by the Private
Company and certain Unconsolidated Licensees to the Company for purchasing,
advertising and other services and matters against amounts owed by the Company
to the Private Company for warehousing services, fabric protection, freight and
other services and matters. The proposed settlement agreement contemplates that
the Offset Agreement will be modified to provide that to the extent either party
owes the other an amount in excess of $1,000 for current obligations, such
excess will be paid in cash.
All amounts due from the Private Company and Unconsolidated Licensees
are fully reserved since these entities have losses and/or capital deficiencies.
In connection with the uncertainty of collectibility and in
consideration of the potential additional financial support that the Company may
provide to the Private Company and the Unconsolidated Licensees, the Company
will account for subsequent transactions with these entities on an offset basis.
However, if the result of the offset is a receivable due from them, then such
net amount will be generally recognized only at the time when cash is received
from these entities. A reserve has been provided in the consolidated financial
statements for amounts due from these entities, as follows:
<TABLE>
<CAPTION>
Unconsolidated
Licensees
Private (Other Than
Company S.F.H C.) S.F.H.C. Totals
------- --------- -------- ------
<S> <C> <C> <C> <C>
AT AUGUST 30, 1997:
Gross amount due $ 2,335 $ 2,355 $ 2,208 $ 6,898
Reserves (2 335) (2,355) (2,208) (6,898)
------- ------- ------- -------
Net Amount $ -0- $ -0- $ -0- $ -0-
======= ======= ======= =======
AT AUGUST 31, 1996:
Gross amount due $ 2,486 $ 2,537 $ 2,301 $ 7,324
Reserves (2,486) (2,537) (2,301) (7,324)
------- ------- ------- -------
Net Amount $ -0- $ -0- $ -0- $ -0-
======= ======= ======= =======
AT AUGUST 26, 1995:
Gross amount due $ 2,410 $ 1,167 $ 2,795 $ 6,372
Reserves (2,410) (1,167) (2,795) (6,372)
------- ------- ------- -------
Net Amount $ -0- $ -0- $ -0- $ -0-
======= ======= ======= =======
</TABLE>
F13
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
The Private Company has stated that, if the settlement described in
Note 9 is not consummated, it may assert claims of approximately $1,200 against
the Company for various additional amounts owed from prior years. The Company
believes the claims are either without merit or would be exceeded by the amount
of counter-claims the Company would make under such circumstances. Accordingly,
the Company has not provided for any losses that may occur as a result of this
assertion.
Until October 28, 1993, the Private Company owned certain trademarks
and had granted the Company a royalty-free license to use and to sublicense and
franchise the use of such trademarks throughout the world, except New York
State. On October 28, 1993, the licensor, for nominal consideration, assigned
these trademarks to the Company. The Company then granted the Private Company a
perpetual, royalty-free license to use and to sublicense and franchise the use
of such trademarks in the State of New York. The license is exclusive in such
territory, subject to certain exceptions.
Effective September 1, 1994, Harley Greenfield, the President and
Chief Executive Officer, and Edward Seidner, who became an Executive Vice
President on such date, began receiving a salary of $400 and $300 per annum,
respectively, from the Company. Such amounts were reduced, effective February 1,
1996 to $320 and $240 per annum, respectively. In addition, they receive
substantial economic benefits from the Private Company (see Note 3).
Effective January 1, 1994, Rami Abada, Executive Vice President and
Chief Operating Officer, and Ronald Rudzin, Senior Vice President - Retail
Stores, each began receiving a salary of $150 per annum from the Company. Such
amounts were reduced, effective February 1, 1996 to $120 each per annum. In
addition, they receive substantial economic benefits from the Private Company
and certain Unconsolidated Licensees.
Another director (and stockholder) of the Company received
approximately $164, $188 and $336 in legal fees in the fiscal years ended in
1997, 1996 and 1995, respectively. Further, he owned, until May 1995, a 20%
interest in each of two Private Company stores and receives economic benefits
from the Private Company.
(4) STORE FIXTURES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
August 30, August 31,
1997 1996
---------- ----------
Automobiles $ 68 $ 68
Store fixtures and furniture 6,097 6,129
Leasehold improvements 6,498 6,434
Computer equipment 1,446 1,026
-------- --------
14,109 13,657
Less: Accumulated depreciation
and amortization (6,440) (4,918)
-------- --------
$ 7,669 $ 8,739
======== ========
At August 30, 1997 and August 31, 1996, equipment cost includes $1,286
and $907, and accumulated depreciation and amortization includes $608 and $465
on equipment under capital leases.
F14
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
(5) CREDIT AND SECURITY AGREEMENT WITH KLAUSSNER:
On March 5, 1996, the Company and Klaussner executed a Credit and
Security Agreement that provides that Klaussner effectively extended the payment
terms for merchandise shipped from 60 days to 81 days and was provided with
security interest in all the Company's assets including accounts receivable,
inventory, store fixtures and equipment, as well as the assignment of
leaseholds, trademarks and a license agreement to operate the Company's business
in the event of default and non-payment.
At August 30, 1997, the Company owed Klaussner $10,677, of which
$1,990 exceeds the extended payments terms referred to above. On December 11,
1997, Klaussner formally waived the default.
In addition, Klaussner loaned $1,440 to the Private Company. The $1,440
was used to pay down the mortgage obligation on the warehouse owned by the
Private Company. The $1,440 (all of which has been paid at August 30, 1997) is
in addition to $3,500 (outstanding balance $1,000 at August 30, 1997) loaned to
the Private Company by Klaussner prior to January 1, 1994.
(6) INCOME TAXES
Components of income tax expense are as follows:
Year Ended
-----------------------------------
8/30/97 8/31/96 8/26/95
------- ------- -------
Current:
Federal $ -- $ -- $ --
State 95 146 160
Deferred:
Federal -- -- --
State -- -- --
---- ---- ----
$ 95 $146 $160
==== ==== ====
Expected tax expense (benefit) based on the statutory rate is
reconciled with actual tax expense (benefit) as follows:
<TABLE>
<CAPTION>
Percent of Pre-Tax Earnings (Loss)
Year Ended
----------------------------------
8/30/97 8/31/96 8/26/95
------- ------- -------
<S> <C> <C> <C>
"Expected" tax (benefit) ( 34.0)% (34.0)% (34.0)%
Increase (reduction) in taxes resulting from:
State income tax, net of
federal income tax benefit 2.0% 1.6 % 1.4 %
Non-deductible items 1.7% 1.0 % .5 %
Other 2.0% (2.7)% (1.8)%
Increase in valuation allowance 31.3% 36.6 % 35.2 %
------ ------- -------
3.0% 2.5 % 1.3 %
====== ======= =======
</TABLE>
F15
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
The principal components of deferred tax assets, liabilities and the
valuation allowance are as follows:
<TABLE>
<CAPTION>
August 30, 1997 August 31, 1996
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Federal and state net operating
loss carryforwards $ 6,160 $ 5,378
Reserve for losses on loans and
advances 2,759 2,928
Accrued partnership losses 1,420 1,385
Deferred rent expense 1,235 1,326
Inventory capitalization 198 216
Other expenses for financial
reporting, not yet deductible
for taxes 656 578
-------- --------
Total deferred tax assets, before
valuation allowance 12,428 11,811
Less: Valuation allowance (11,073) (10,113)
-------- --------
Total deferred tax assets $ 1,355 $ 1,698
======== =======
Deferred tax liabilities:
Difference in book and tax basis
of fixed assets $ 1,295 $ 1,571
Other 60 127
-------- --------
Total deferred tax liabilities 1,355 1,698
-------- --------
Net deferred tax assets $ -0- $ -0-
======== =======
</TABLE>
The Company's deferred tax asset has been fully reserved since it is
considered more likely than not that the amount will not be realized. During the
years ended August 30, 1997, August 31, 1996 and August 26, 1995, the valuation
allowance increased by $960, $2,144 and $4,202, respectively.
As of August 30, 1997, the Company has a net operating loss
carryforward of approximately $15,000, expiring $6,000 in the year 2010, $7,000
in the year 2011 and $2,000 in the year 2012.
Federal income tax returns filed for the 1993 and 1994 tax years are
being examined by the Internal Revenue Service. In managements' opinion, the
outcome of these examinations are not expected to have a material effect on the
Company's financial position.
F16
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
(7) WARRANTS
In the fiscal year ended August 27, 1994, under the terms of the
limited partnership agreements for LP III, LP IV and LP V (see Note 11), the
three limited partners each purchased for $170 five-year warrants to purchase
60,000 shares of the Company's Common Stock at an exercise price of $15.625 per
share. Each of the limited partners paid approximately $70 in 1994 and issued a
$100 term note to the Company as payment for the warrants. These notes bear
interest at a rate of 7.12% per annum and are payable over ten years (with 10%
of principal due annually). For each annual principal payment which is not made,
10,564 of the warrants shall be cancelled. The notes receivable from warrant
holders are recorded in (Capital Deficiency).
(8) STOCK OPTIONS PLANS
In November 1986, the Company adopted an Incentive and Non-Qualified
Stock Option Plan (the "1986 Plan") under which 150,000 shares of Common Stock
were reserved for issuance to selected management and other key employees of the
Company. The Amended and Restated 1991 Incentive and Non-Qualified Stock Option
Plan (the "1991 Plan" and together with the 1986 Plan hereinafter referred to as
the "Plans") was adopted by the Company in September 1991 and amended in April
1992. Under the 1991 Plan, 700,000 shares of Common Stock were reserved for
issuance to selected management and other key employees of the Company. The
terms of both Plans are substantially similar. The exercise price with respect
to qualified incentive options may not be less than 100% of the fair market
value of the Common Stock at the date of grant.
From time to time, the Company grants additional stock options outside
of the Plans to individuals or entities in recognition of contributions made to
the Company.
Additional information with respect to the Company's stock options
under and outside the Plans is as follows:
<TABLE>
<CAPTION>
Options Exercisable Options
--------------------------- ---------------------------
Weighted Weighted
Average Average
Exercise Exercise
Number of Price Number of Price
Shares Per Share Shares Per Share
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at 8/27/94 736,547 $ 7.73 545,053 $ 6.83
======= ======
Granted 137,500 $ 3.43
Cancelled ( 37,500) $10.67
---------- ------ ------- ------
Outstanding at 8/26/95 836,547 $ 6.89 628,051 $ 7.01
---------- ------ ======= ======
Granted - $ -
Cancelled ( 25,000) $ 2.75
---------- ------ ------- ------
Outstanding at 8/31/96 811,547 $ 6.80 706,883 $ 7.07
---------- ------ ======= ======
Granted 732,000 $ 2.00
Cancelled ( 264,500) $ 8.00
Expired ( 50,000) $ 2.75 - -
---------- ------ ------- ------
Outstanding at 8/30/97 1,229,047 $ 3.99 480,381 $ 7.07
========== ====== ======= ======
</TABLE>
F17
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
See Note 11 with respect to options outstanding held by JCI to
purchase 1,200,000 shares of Common Stock of the Company.
The number of shares of Common Stock reserved for options available
for grant under the Plans was 9,953 at August 30, 1997. The weighted average
remaining contractual life of the outstanding options is 7.6 years.
In May 1997, the Company adopted the 1997 Stock Option Plan (the "1997
Plan") under which 500,000 shares of common stock were reserved for issuance.
The 1997 Plan is subject to shareholder approval.
The Company applies APB No. 25 in accounting for its stock option
plan, which requires the recognition of compensation expense for the difference
between the fair value of the underlying common stock and the grant price of the
option at the grant date. Had the compensation expense been determined based
upon the fair value at the grant date, as prescribed under SFAS No. 123, the
Company's net loss for the year ended August 30, 1997 would have been as
follows:
Net (Loss):
As reported $(3,061)
Pro forma under SFAS 123 $(3,141)
(Loss) per share:
As reported $( .54)
Pro forma under SFAS 123 $( .55)
The fair value of each option granted is estimated at $1.22 on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
Risk-free interest rate 6.95%
Expected life of options 5
Expected stock price volatility 69%
Expected dividend yield 0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options.
F18
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
(9) COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
LEASES
The Company and LP's lease retail store locations under operating
leases for varying periods through 2009 which generally are renewable at the
option of the lessee. Certain leases contain provisions for additional rental
payments based on increases in certain indexes. Future minimum lease payments
and future minimum sublease rentals for all noncancelable leases with initial
terms of one year or more consisted of the following at August 30, 1997:
YEAR ENDING AUGUST
--------------------------------------
1998......................... $ 11,570
1999......................... 11,293
2000......................... 10,779
2001......................... 10,042
2002......................... 9,344
Thereafter................... 19,795
--------
$ 72,823
========
The Company has guaranteed the lease obligation of the California
warehouse which is operated by the Private Company. The annual lease obligation
for this location is $133 and the lease expires on September 30, 1998.
Rental expense for all operating leases amounted to approximately
$13,657, $14,166 and $15,770, net of sublease income of $166, $170 and $301, for
the years ended August 30, 1997, August 31, 1996 and August 26, 1995,
respectively.
The Company and LP's have long-term capital leases for certain equipment.
The leases are for periods of three to five years with an option to purchase at
the end of the lease periods for a nominal price.
The following is a schedule of future lease payments for the capital
leases at August 30, 1997:
YEAR ENDING AUGUST
----------------------------------------
1998.............................. $ 286
1999.............................. 261
2000.............................. 42
-----
589
Amount representing interest...... ( 24)
-----
Present value of minimum
lease payments................... 565
Less: Current portion............ 144
-----
$ 421
=====
F19
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The components of accrued expenses and other current liabilities are:
8/30/97 8/31/96
------- -------
Advertising $1,419 $ 958
Payroll 809 744
Legal 162 216
Accounting 217 356
Store closings 248 455
Settlement costs 500 500
Sales tax 424 778
Warranty 204 --
Other 794 1,015
------ ------
$4,777 $5,022
====== ======
ADVERTISING EXPENSE
Advertising expense for the years ended August 30, 1997, August 31,
1996 and August 26, 1995 aggregated $10,893, $12,265 and $15,729, respectively.
OTHER
CONCLUSIONS OF THE INDEPENDENT COMMITTEE
A draft complaint ("Complaint") on behalf of an unnamed plaintiff was
delivered to the Company in March 1994. The Complaint raised certain issues and
potential causes of action that may exist in favor of the Company against the
Private Company and others. The Company's President advised the Board of
Directors that, in his view, the Complaint was without merit. The Board
appointed an independent committee (the "Committee") consisting of one director
to investigate the allegations in the Complaint and certain other matters.
On November 22, 1994, the same director who was on the Committee
submitted a letter to the President of the Company which contained information
relevant to the (1) Funding of S.F.H.C. (See Note 11) and (2) the funding of
Limited Partnerships (LP's) III through V (See Note 11). The letter essentially
detailed the flow of funds from the Private Company, certain Unconsolidated
Licensees and the Company to S.F.H.C. and its subsidiary ("Summit").
Additionally, it disclosed that as of August 27, 1994, S.F.H.C. had a receivable
from officers of $1,861. It asserted that neither (a) the payment to fund
S.F.H.C.'s purchase of the stock of Summit nor (b) the capital contributions to
LP's III through V were obtained from sources outside the Company or the Private
Company.
On December 2, 1994, the Board of Directors of the Company received
the Summary Report of Counsel to the Independent Committee which, amongst other
matters, concluded that it "has reviewed many significant related party
transactions and recommends to the Board that the Company assert claims to
recover damages for harm caused the Company". On January 26, 1995, the Board of
Directors received the "Final Report of Counsel to the Independent Committee of
the Board of Directors" which reached the same conclusions and recommendations.
F20
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
On March 10, 1995, the Board of Directors received the "Response of
Harley Greenfield to the January 26, 1995 Final Report of Counsel to the
Independent Committee" that asserted that there were no valid claims. On April
3, 1995, it received a similar response from a financial consultant to the
Company to the letter dated November 22, 1994 from Michael Colnes to Harley
Greenfield that asserted that there was nothing improper.
CLASS ACTION AND DERIVATIVE ACTION LAWSUITS
Between December 6, 1994 and January 5, 1995, the Company was served
with eleven class action complaints and six derivative action lawsuits which
deal with losses suffered as a result of the decline in market value of the
Company's stock as well as the Company having "issued false and misleading
statements regarding future growth prospects, sales, revenues and net income".
The ultimate outcome of these matters is not presently determinable (see below).
PROPOSED SETTLEMENT OF DERIVATIVE LITIGATION
In March 1996, the Company signed a Memorandum of Understanding
("Derivative Memorandum") for the purpose of settling all of the claims
involving those parties in the derivative litigation. The Derivative Memorandum
is subject to a settlement of all claims against the Company, its present and/or
former officers, directors, certain accountants, consultants and
representatives, the Private Company, its present and/or former officers,
directors, employees, accountants, consultants and/or representatives and the
discontinuance of the class action litigation presently pending. It also is
conditioned upon mutual releases between the Company and the Private Company.
Attorney's fees will be funded by an insurance carrier for one of the defendants
other than the Company for $500. The Private Company will pay $165 in cash and
the Company will pay the remaining portion of fees and expenses in "Preferred
Stock". The Preferred Stock will have an aggregate value of $130, paying an
annual dividend of 7% and convertible into Common Stock (at such time as the
Company's Common Stock trades at $7.00 per share or higher) at $7.00 per share.
This settlement is subject to final court approval. In accordance with FASB
Statement No. 5, the $130 value of the Preferred Stock has been accrued in the
fiscal year ended August 31, 1995 as part of estimated settlement costs.
A group of shareholders claiming to own approximately 8.5% of the
outstanding shares of the Company have filed (as a group) objections to the
fairness of the settlement in the Derivative Memorandum. The group has requested
deposition and document discovery in advance of any hearing on the fairness of
the settlement, and the Company has provided some document and deposition
discovery voluntarily. However, the group of objectors has made a motion for
additional discovery which the Company has opposed. The motion is still pending.
PROPOSED SETTLEMENT OF CLASS ACTION LITIGATION
In March 1996, the Company and the parties in the class action
litigation signed a Memorandum of Understanding ("Class Memorandum") which is
subject to a Stipulation of Settlement to be submitted to the court for final
approval. The Class Memorandum provides that settlement of the class action
litigation is contingent upon final court approval of the proposed settlement of
the derivative litigation referred to above.
F21
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
The Class Memorandum provides for the payment to certain members of
the class and their attorneys of an aggregate maximum amount of $7,000 in cash
and Preferred Stock having a value of $370. (Terms and conditions of such
Preferred Stock are described above.) The cash portion of the settlement will be
funded entirely by insurance company proceeds. In accordance with FASB Statement
No. 5, the $370 value of the Preferred Stock has been accrued in the fiscal year
ended August 26, 1995.
The proposed settlement of the class action litigation is a claims
made settlement. All claimants who purchased the Company's Common Stock during
the period from December 9, 1992 through December 2, 1994 and who held their
stock through December 2, 1994, will be entitled to participate in the
settlement.
PROPOSED SETTLEMENT WITH THE PRIVATE COMPANY
The Company signed an agreement ("Settlement Agreement") with the
Private Company subject to court approval and settlement of the derivative and
class action litigation. The Settlement Agreement restructures the relationship
between the Private Company and the Company in order to reduce and eliminate any
alleged actual or potential conflicts of interest.
A) (Warehouse Services):
The Settlement Agreement contemplates that until December 31, 1997,
the Company will pay the Private Company for all services under the warehousing
agreement 8.3% of the retail sales prices, less the costs of certain services
that will be assumed by the Company previously provided by the Private Company,
but no lower than 7.2% of sales. For 1998, the fee will be 7.2% (see B below).
Upon the effective date, the Company will no longer pay the Private Company
separately for "fabric protection" services. The Company has also agreed to pay
an additional warehouse fee up to $650 related to the calendar year 1996 because
the total retail sales of the Company were less than $135 million. Of such
amount, $520 was expensed during the year ended August 31, 1996 and $130 was
expensed during the year ended August 30, 1997. The Company has also agreed to
pay a re-delivery fee to the Private Company of 3% of selling price for customer
deliveries that have to be re-delivered to customers under certain
circumstances. In calendar 1997 and 1998, if an annual sales level of $140
million is achieved, the Private Company will pay back 50% of the additional
warehouse fee described above in each of such years. To the extent such
additional fee is not so repaid in full, starting on January 1, 1999, the
Private Company will repay the balance of such additional fee over seven years
without interest.
The Company believes the effective date of such changes will be the
date court approval is obtained. The Private Company has stated that the
effective date is March 1996. The Company believes this claim is without merit
and has not provided for any losses that may accrue as a result of this
assertion which could approximate $1,200.
B) (Assignment of Real Property Interests of Warehouses):
The Settlement Agreement contemplates that, effective January 1, 1999,
the Company will receive all real property interests in the various warehouses
serving the business along with the leasehold interests subject to mortgages and
other security agreements.
F22
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
On June 30, 1996, the Private Company sold the Inwood, New York
warehouse which has been the principal warehouse in the distribution system. In
connection with this sale, the Settlement Agreement contemplates that the
Company will receive from the Private Company payments of $25 per month for 84
months commencing January 1, 1999. The Agreement also contemplates that,
effective December 1, 1996, the warehouse fee will be reduced to 7.2% of the
retail sales prices and fabric protection revenue collected from customers.
C) (Warehouse Services to the Private Company):
Commencing January 1, 1999 through December 31, 2005, the Company will
provide the Private Company all warehousing services for 2% of the Private
Company's delivered retail selling prices, plus a fee for "fabric protection"
services.
D) (Freight Charges):
The Company will continue to pay all freight charges (for inventory
delivered to warehouses) through December 31, 1998, based upon an agreed
schedule with the Private Company.
E) (Assignment of Interest in Certain Limited Partnerships and
Other Corporate Licensee):
The Settlement Agreement contemplates that the Private Company will
purchase the limited partnership interests of the limited partnerships known as
LP III, LP IV and LP V and the equity interest of the shareholders of S.F.H.C.
and assign these interests to the Company. (On December 31, 1996, the purchase
of these limited partnership interests was completed by the Private Company and
the purchase of S.F.H.C. will occur upon court approval of the settlement.) The
Company, in turn, will release the limited partners and the shareholders,
officers and directors of S.F.H.C. from all claims and/or obligations owed to
S.F.H.C. The former shareholders of S.F.H.C. will receive new ten year warrants
to purchase an aggregate of 180,000 shares of Common Stock at $7.00 per share.
F) (Inter-Company Accounts):
The Settlement Agreement contemplates that commencing January 1, 1999,
the Private Company will pay the Company under the offset agreement (described
in J, below) $1,400 in resolution of certain inter-company account balances as
of August 26, 1995 at $17 per month to be applied toward principal and interest
at 6%, until repaid.
G) (License of Computer Programs):
Commencing January 1, 1999, the Private Company will license the
Company to use and change the Private Company's computer programs without fee.
The Company will also assume the obligations and personnel of the Computer
Department, presently maintained by the Private Company.
F23
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
H) (Warranty and Fabric Protection):
Upon execution of the Settlement Agreement, the Company will be
responsible for any claims for breach of warranty relating to "fabric
protection" in connection with sales by both the Company and the Private
Company.
I) (Amounts Due From Officers of S.F.H.C. of $1,200):
The Settlement Agreement contemplates that the Private Company will
assume and pay $1,200 of the debt of the officers of S.F.H.C. owed to S.F.H.C.
This amount will be paid to the Company in 84 equal monthly installments,
without interest, beginning January 1, 1999.
J) (Offset Agreements):
On November 1, 1995 and March 1, 1996, the Company and the Private
Company entered into offset agreements. Such offset agreements permit the two
companies to offset their current obligations to each other for merchandise
purchases, warehouses fees, fabric protection fees and freight. The Settlement
Agreement contemplates that amounts owing in excess of $1,000 at any time will
be paid in cash. As part of the offset agreement, the Private Company agreed to
assume certain liabilities owed to the Company by the Unconsolidated Licensees.
The Company, the Private Company and the Unconsolidated Licensees have been
accounting for current obligations in this manner since the start of the fiscal
year ended August 26, 1995. On February 21, 1997, the Company and the Private
Company entered into a Shortfall and Old Account Agreement (Shortfall Agreement)
which will become effective upon court approval. This Shortfall Agreement grants
a credit to the Private Company under previous offset agreements of the amount,
if any, by which the Company's consolidated sales (including the consolidated
sales of S.F.H.C.) in any month commencing January 1, 1997 to December 31, 1998
are less than the target sales for such month times the warehousing fee
percentage (presently 5%). Actual sales in excess of target sales may be carried
over (and back) and added to actual sales of succeeding or preceding months. As
of August 30, 1997, the Company (including the consolidated sales of S.F.H.C.),
was $1,948 short of target sales which, at the 5% warehouse fee, would equate to
a $97 payment.
K) (Royalties):
The Settlement Agreement contemplates that the Unconsolidated
Licensees will pay to the Company any royalties owed under the offset agreement.
The Private Company will pay royalties owed of $100 for stores that the
Unconsolidated Licensees have closed commencing January 1, 1999 in 84 equal
monthly installments without interest.
L) (Subordination):
Subject to court approval of the Settlement Agreement, Messrs.
Greenfield and Seidner have agreed to subordinate, until January 1, 1999, their
right to receive payments in respect of the $10,273 owed to them by the Private
Company, if the Private Company is in default in the payment of any cash
obligation to the Company arising after August 7, 1996 after giving effect to
any offsets as between Messrs. Greenfield and Seidner and the Private Company.
Such subordination does not apply to any distribution in respect of a
disposition of substantially all of the assets of the Private Company.
F24
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
On December 9, 1994, the Company was advised that the Securities and
Exchange Commission (SEC) was conducting an inquiry of the Company's affairs "to
determine whether there have been violations of the federal securities laws".
The SEC requested that the Company voluntarily provide certain documents in
connection with its December 2, 1994 press release "concerning the adjustment in
the valuation of certain subsidiaries on the Company's balance sheet". Since
that date, the SEC has also requested the Final Report of Counsel to the
Independent Committee of the Board of Directors and the November 22, 1994 letter
from a director of the Company to the President (as more fully described above).
Additionally, the SEC requested the "responses" to these documents and the
Company furnished them with the "Response of Harley Greenfield to the January
26, 1995 Final Report of Counsel to the Independent Committee" dated March 10,
1995 and the "Response of Jerome I. Silverman to the letter dated November 22,
1994 from Michael Colnes to Harley Greenfield" dated April 3, 1995.
On May 3, 1995 the SEC commenced a formal investigation into the
affairs of the Company. Subpoenas have been issued to the Company and certain of
its current and former management to furnish various contracts and accounting
records which have been complied with. The outcome of the SEC investigation is
not presently determinable.
NASDAQ DELISTING
Effective April 17, 1995, the NASDAQ Listing Qualifications Committee
(the "Qualifications Committee") reviewed the request of the Company for an
extension of its current exception to the filing requirements for continued
listing on the NASDAQ National Market. The Qualifications Committee determined
to deny the Company's request and accordingly, the Company's Common Stock was
delisted from the NASDAQ stock market.
(10) SALE OF SUBSIDIARIES
In September 1990, the Company sold two of its stores to a licensee of a
New York store, and effective December 27, 1990, the Company sold four of its
stores for the assumption of certain liabilities and $10 in cash per store to
the same licensee. During the fiscal year ended August 27, 1994, one of the
purchasers of such stores, formerly an employee of the Private Company, became
an executive officer of the Company. The Company also entered into a ten-year
license agreement with the purchasers pursuant to which such stores pay the
Company a royalty of 5% of their sales for the right to use the "Jennifer
Convertibles" name (See Note 3).
F25
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
The purchasers assumed the liabilities owed by such stores, including
liabilities owed to the Company, in the form of six ten-year, non-interest
bearing promissory notes with aggregate annual payments of approximately $150,
with additional payments required based upon sales in excess of certain minimum
amounts. The balance of the notes, net of imputed interest at the rate of 8%,
which have been reserved for in full in the consolidated financial statements,
are as follows:
August 30, August 31,
---------- ----------
1997 1996
---- ----
Notes receivable $ 434 $ 554
Less: imputed interest ( 67) (120)
----- -----
Notes receivable, net $ 367 $ 434
===== =====
(11) OTHER AGREEMENTS
JCI CONSULTING AGREEMENT
On July 29, 1994, the Company reached an agreement with JCI
Consultant, L.P. ("JCI") to terminate a February 25, 1992 consulting agreement
with JCI pursuant to which, among other things, JCI rendered advice on the
establishment and financing of Company-owned and licensed stores.
JCI has retained all rights in and to the options to purchase
1,200,000 shares of Common Stock at $8.00 per share which were previously
granted to JCI. Such options terminate on March 21, 2001 and became exercisable
on April 1, 1996. Under a ten-year Voting Trust Agreement expiring March 21,
2001, the Chief Executive Officer and President of the Company will be the
voting trustee for the shares of Common Stock which may be received by JCI upon
the exercise of the option. Furthermore, in connection with the termination of
the Consulting Agreement, JCI agreed that, except for the aforementioned option
shares, it would not at any time acquire, directly or indirectly, more than 5%
of the issued and outstanding shares of Common Stock of the Company for a period
ending July 29, 2000.
Contemporaneous with the granting of the options to JCI, the Company,
JCI, the Principal Stockholders and the Private Company entered into a
registration and sale agreement (the "Registration Agreement") pursuant to which
JCI has certain demand and "piggy-back" registration rights. Subject to certain
exceptions, the Registration Agreement grants a right of first refusal to the
Company to purchase all option shares which are proposed to be sold. If the
Company declines to exercise such right of first refusal, the Principal
Stockholders and the Private Company will have the right of first refusal.
CHICAGO PARTNERSHIP AGREEMENT
In July, 1991, the Company entered into agreements pursuant to which a
limited partnership, Jennifer Chicago, L.P. (the "Chicago Partnership"), was
established for the purpose of operating Jennifer Convertibles stores in the
Chicago, Illinois metropolitan area. Pursuant to a 20-year License Agreement,
the Company receives a royalty of 5% of sales from the Chicago Partnership's
stores and has given the Chicago Partnership the exclusive right to open
Jennifer Convertibles stores in the defined territory.
F26
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
Pursuant to the Partnership Agreement, the limited partner (a party
related to JCI) contributed $990 to the Partnership and agreed to make
additional capital contributions of up to $100. The Company, as general partner,
made a capital contribution of $10. Under the Partnership Agreement, allocations
and distributions shall, subject to certain exceptions, be made 99% to the
limited partner and 1% to the General Partner. The Company has consolidated and
recorded the operating losses of the Partnership in excess of the limited
partner's capital contributions in the Consolidated Statements of Operations
(see Note 1). Under a Purchase Option Agreement, the Company has the right to
purchase all the limited partners' interests in the Partnership for a price
equal to the fair market value thereof, as determined by one or more investment
bankers selected by the Company and the limited partners. Also, the limited
partner can put its interest to the Private Company if certain executives of the
Company and the Private Company own less than 700,000 shares of the Company's
common stock.
LP III, LP IV AND LP V
In 1992, the Company entered into three additional Limited Partnership
Agreements (the "Agreements") establishing LP's III, IV and V which required the
limited partners to invest $1,000 in each partnership. The Agreements called for
the opening of 25 Jennifer Convertible stores in each partnership. Under the
terms of the Agreements, the Company was to receive a fee of $10 per store, plus
a royalty of 5% of the partnership's sales. The Company has recorded the
operating losses of the LP's in excess of the limited partners capital
contributions in the Consolidated Statements of Operations (see Note 1). As part
of the Agreements, the Company received options to purchase the limited
partners' interest commencing January 1999 at a price of five times the
partnership's earnings before income taxes for the prior year, as defined. Also,
pursuant to the agreement, the limited partners can put their interest to the
Company for either 100,000 shares of stock of the Company or $1,000 compounded
at 25% if there is a change in management, as defined, through the year 2002.
The investors have also purchased, for approximately $510, warrants ("Original
Warrants") exercisable between June 1994 and June 1998 to purchase 180,000
shares of the Company's Common Stock at an exercise price of $15.625 per share.
As of August 30, 1997, the limited partners have paid approximately $210 and
signed ten year notes to pay $300 as payment for these warrants (See Note 7).
In connection with the proposed settlement with the Private Company
(see Note 9), on December 31, 1996, the Private Company acquired the limited
partners' interest in these partnerships.
(12) SUBSEQUENT EVENTS
In September and November 1997, the Company opened letters of credit
in favor of an Italian supplier of leather furniture aggregating $1,350 by
depositing these funds into an interest bearing money market account. The
supplier draws down on these letters of credit as shipments are made. These
letters of credit expire over various dates to June 30, 1998. As of November 20,
1997, $850 of these credits remain outstanding.
F27
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
On December 11, 1997, the Company sold to Klaussner 10,000 shares of
Series A Preferred Stock ("Preferred Stock"), convertible into 1,424,500 shares
of the Company's common stock for $5,000. These shares are non-voting, have a
liquidation preference of $5,000 and do not pay dividends (except if declared on
the common stock). The preferred stock is not convertible until September 1,
1999, or earlier under certain circumstances (e.g. if another person or group
acquires 12.5% or more of the common stock or there are certain changes in
management or the Board of Directors), and has other rights associated with it.
In addition, the Credit and Security Agreement with Klaussner was modified to
include a late fee of .67% per month for invoices the Company pays beyond the
normal 60 day terms.
F28
CERTIFICATE OF DESIGNATIONS,
PREFERENCES, AND RIGHTS OF
SERIES A PREFERRED STOCK
(ADOPTED BY JENNIFER CONVERTIBLES, INC.)
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES A PREFERRED STOCK
OF
JENNIFER CONVERTIBLES, INC.
Pursuant to Section 151 of the General Corporation
Law of the State of Delaware
JENNIFER CONVERTIBLES, INC., a Delaware corporation (the
"CORPORATION"), certifies that pursuant to the authority contained in Article
Fourth of its Certificate of Incorporation, and in accordance with the
provisions of Section 151 of the General Corporation Law of the State of
Delaware, its Board of Directors has adopted the following resolution creating a
series of its Preferred Stock, par value $0.01 per share, designated as Series A
Preferred Stock:
RESOLVED, that a series of the class of authorized Preferred Stock, par
value $0.01 per share, to be known as "SERIES A PREFERRED STOCK", of the
Corporation be hereby created, and that the designation and amount thereof and
the voting powers, preferences and relative, participating, optional and other
special rights of the shares of such series, and the qualifications, limitations
or restrictions thereof are as follows:
A. DESIGNATION AND AMOUNT. The shares of this series shall be
designated as "Series A Preferred Stock" (the "SERIES A PREFERRED STOCK") and
the number of shares constituting such series shall be 10,000.
B. Terms of Series A Preferred Stock.
----------------------------------
1. Dividends
---------
So long as any shares of Series A Preferred Stock shall be outstanding,
the Corporation shall not declare or pay any dividend, or order or make any
other distribution, upon any Junior Stock or Liquidation Parity Stock (other
than a dividend payable in such
1
<PAGE>
Junior Stock or Liquidation Parity Stock) unless the Corporation shall first
pay, or simultaneously therewith declare and set apart a sum sufficient for the
payment of, a dividend upon the Series A Preferred Stock in a per share amount
at least equal to the per share amount of such dividend or other distribution
upon such Junior Stock or Liquidation Parity Stock and, in connection therewith,
each share of Series A Preferred Stock shall be deemed to be that number of
shares of Common Stock into which it is then convertible as provided in Section
4 hereof, rounded to the nearest whole number.
The Company shall not make any distributions on its Common Stock other
than in the form of cash or additional shares of Common Stock and all such
distributions shall be made in accordance with the terms hereof.
2. Liquidation Preference.
-----------------------
In the event of any voluntary or involuntary liquidation, dissolution
or winding-up of the Corporation, the assets of the Corporation available for
distribution to its stockholders, whether from capital, surplus or earnings,
shall be distributed in the following order of priority:
The holders of Series A Preferred Stock shall be entitled to receive,
prior and in preference to any distribution to the holders of any Junior Stock
but PARI PASSU with any distribution to the holder of any Liquidation Parity
Stock, an amount per share equal to the Series A Preferred Original Issuance
Price (subject to appropriate adjustment upon the occurrence of any stock split,
stock dividend or combination of the outstanding shares of Series A Preferred
Stock) and, in addition, an amount equal to any dividends declared but unpaid on
the Series A Preferred Stock. If the assets of the Corporation available for
distribution to the holders of Series A Preferred Stock shall be insufficient to
permit the payment of the full preferential amount set forth herein, then the
holders of shares of Series A Preferred Stock shall share ratably in any
distribution of the assets of the Corporation (A) as to any Liquidation Parity
Stock, in proportion to the respective liquidation preferences of the Series A
Preferred Stock and such Liquidation Parity Stock and (B) as to the other
holders of the Series A Preferred Stock, in proportion to their respective
number of shares of Series A Preferred Stock.
The Corporation shall not authorize the issuance of any preferred stock
senior to the Series A Preferred Stock unless required in connection with the
settlement of the class action and derivative action described in the Company's
Annual Report on Form 10-K for the fiscal year ended August 31, 1996; provided,
further, that notwithstanding the foregoing, the liquidation preference of any
such senior preferred stock shall not exceed an aggregate of $1,000,000.
3. Voting Rights.
--------------
2
<PAGE>
Except as may otherwise be provided by law or in the Certificate of
Incorporation or By-laws of the Corporation, the holders of shares of Series A
Preferred Stock shall have no voting rights.
4. Conversion.
-----------
(a) The shares of Series A Preferred Stock shall not be
convertible until the earlier of September 1, 1999 or the date on which an
"Acceleration Event" occurs (an "Event of Conversion"). An Acceleration Event is
defined as the occurrence of any of the following:
(i) when any "person" as defined in Section 3(a)(9)
of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and as used in Section 13(d) and 14(d) thereof, including a
"group" as defined in Section 13(d) of the Exchange Act, but excluding
the Corporation or any subsidiary or any affiliate of the Corporation
or any employee benefit plan sponsored or maintained by the Corporation
or any subsidiary of Corporation (including any trustee of such plan
acting as trustee) or Harley Greenfield, Fred Love, Edward Seidner or
Jara Enterprises, Inc., becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act) of securities of the Corporation
representing 12.5% or more of the combined voting power of the
Corporation's then outstanding securities; or
(ii) the execution of an agreement providing for the
acquisition of the Corporation or for the acquisition of all or
substantially all of its assets or for the acquisition of all or
substantially all of the stock or assets of any subsidiary or
subsidiaries of the Corporation which generate in excess of 10% of the
consolidated revenues of the Corporation, individually or in the
aggregate, by an entity other than the Corporation or a subsidiary or
an affiliated company of the Corporation through the purchase of stock
or assets, by consolidation, merger, or otherwise; or
(iii) any time Harley Greenfield shall no longer be
the Chief Executive Officer of the Corporation or the Continuing
Directors shall not constitute a majority of the Board of Directors of
the Corporation. "Continuing Director" means at any date a member of
the Corporation's Board of Directors (A) who is a member of such Board
as of the date hereof or (B) who was nominated or elected by at least
two-thirds of the directors who were Continuing Directors at the time
of such nomination or election of whose election to the Corporation's
Board of Directors was recommended or endorsed by at least two-thirds
of the directors who were Continuing Directors at the time of such
election; or
(iv) commencement of a tender or exchange offer for
shares of the Corporation's Common Stock other than a tender or
exchange offer by the Corporation on its own behalf; or
3
<PAGE>
(v) the adoption of any plan of liquidation; or
(vi) solicitation of any proxy without the approval
of the Corporation's Board of Directors.
(b) Upon the occurrence of an Event of Conversion, the holder
of any shares of Series A Preferred Stock shall have the right to convert such
Series A Preferred Stock into such whole number of fully paid and nonassessable
shares of Common Stock as is equal the quotient obtained by dividing (A) the
product obtained by multiplying the Series A Preferred Original Issuance Price
by the number of shares of Series A Preferred Stock being converted, by (B) the
Series A Preferred Conversion Price, as last adjusted and then in effect, by
surrender of the certificates representing the shares of Series A Preferred
Stock so to be converted in the manner provided in Section 4(c) hereof. The
holder of any shares of Series A Preferred Stock exercising the aforesaid right
to convert such shares into shares of Common Stock shall be entitled to payment
of any dividends declared but unpaid with respect to such shares of Series A
Preferred Stock.
(c) The holder of any shares of Series A Preferred Stock may
exercise the conversion right pursuant to Sections 4(a) and (b) hereof as to any
part thereof by delivering to the Corporation during regular business hours, at
the office of the Corporation or any transfer agent of the Corporation for the
Series A Preferred Stock as may be designated by the Corporation, the
certificate or certificates for the shares to be converted, duly endorsed or
assigned in blank or to the Corporation (if required by it), accompanied by
written notice stating that the holder elects to convert such shares and stating
the name or names (with address) in which the certificate or certificates for
the shares of Common Stock are to be issued. Conversion shall be deemed to have
been effected on the date when the aforesaid delivery is made (the "Conversion
Date"). As promptly as practicable thereafter, the Corporation shall issue and
deliver to or upon the written order of such holder, to the place designated by
such holder, a certificate or certificates for the number of full shares of
Common Stock to which such holder is entitled and a check or cash in respect of
any fractional interest in a share of Common Stock as provided in Section 4(d)
hereof and a check or cash in payment of all dividends declared but unpaid, if
any (to the extent permissible under law), with respect to the shares of Series
A Preferred Stock so converted. The Person in whose name the certificate or
certificates for Common Stock are to be issued shall be deemed to have become a
holder of record of Common Stock on the applicable Conversion Date unless the
transfer books of the Corporation are closed on that date, in which event he
shall be deemed to have become a holder of record of Common Stock on the next
succeeding date on which the transfer books are open, but the Series A Preferred
Conversion Price shall be that in effect on the Conversion Date. Upon conversion
of only a portion of the number of shares covered by a certificate representing
shares of Series A Preferred Stock surrendered for conversion, the Corporation
shall issue and deliver to or upon the written order of the holder of the
certificate so surrendered for conversion, at the expense of the Corporation, a
new certificate covering the number of shares of Series A
4
<PAGE>
Preferred Stock representing the unconverted portion of the certificate so
surrendered, which new certificate shall entitle the holder thereof to dividends
on the shares of Series A Preferred Stock represented thereby to the same extent
as if the portion of the certificate theretofore covering such unconverted
shares had not been surrendered for conversion.
(d) No fractional shares of Common Stock or scrip shall be
issued upon conversion of shares of Series A Preferred Stock. If more than one
share of Series A Preferred Stock shall be surrendered for conversion at any one
time by the same holder, the number of full shares of Common Stock issuable upon
conversion thereof shall be computed on the basis of the aggregate number of
shares of Series A Preferred Stock so surrendered. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of any
shares of Series A Preferred Stock, the Corporation shall pay a cash adjustment
in respect of such fractional interest in an amount equal to the then Current
Market Price of a share of Common Stock multiplied by such fractional interest.
Fractional interests shall not be entitled to dividends, and the holders of
fractional interests shall not be entitled to any rights as stockholders of the
Corporation in respect of such fractional interest.
(e) The Series A Preferred Conversion Price shall be subject
to adjustment from time to time as follows:
(i) If, at any time after the Series A Preferred
Original Issuance Date, the number of shares of Common Stock
outstanding is increased by a stock dividend payable in shares of
Common Stock or by a subdivision or split-up of shares of Common Stock,
then, following the record date fixed for the determination of holders
of Common Stock entitled to receive such stock dividend, subdivision or
split-up, the Series A Preferred Conversion Price shall be
appropriately decreased so that the number of shares of Common Stock
issuable on conversion of each share of Series A Preferred Stock shall
be increased in proportion to such increase in outstanding shares.
(ii) If, at any time after the Series A Preferred
Original Issuance Date, the number of shares of Common Stock
outstanding is decreased by a combination of the outstanding shares of
Common Stock, then, following the record date for such combination, the
Series A Preferred Conversion Price shall be appropriately increased so
that the number of shares of Common Stock issuable on conversion of
each share of Series A Preferred Stock shall be decreased in proportion
to such decrease in outstanding shares.
(iii) In case, at any time after the Series A
Preferred Original Issuance Date, of any capital reorganization, or any
reclassification of the stock of the Corporation (other than a change
in par value or from par value to no par value or from no par value to
par value or as a result of a stock dividend or subdivision, split-up
or combination of shares), or the consolidation or merger of the
Corporation
5
<PAGE>
with or into another Person (other than a consolidation or merger in
which the Corporation is the continuing company and which does not
result in any change in the Common Stock) or of the sale or other
disposition of all or substantially all the properties and assets of
the Corporation as an entirety to any other Person, each share of
Series A Preferred Stock shall, after such reorganization,
reclassification, consolidation, merger, sale or other disposition, be
convertible into the kind and number of shares of stock or other
securities or property of the Corporation or of the company resulting
from such consolidation or surviving such merger or to which such
properties and assets shall have been sold or otherwise disposed to
which the holder of the number of shares of Common Stock deliverable
(immediately prior to the time of such reorganization,
reclassification, consolidation, merger, sale or other disposition)
upon conversion of such share of Series A Preferred Stock would have
been entitled upon such reorganization, reclassification,
consolidation, merger, sale or other disposition. The provisions of
this Section 4 shall similarly apply to successive reorganizations,
reclassifications, consolidations, mergers, sales or other
dispositions.
(f) Whenever the Series A Preferred Conversion Price shall be
adjusted as provided in Section 4(e) hereof, the Corporation shall forthwith
file, at the office of Corporation or any transfer agent designated by the
Corporation for the Series A Preferred Stock, a statement, signed by its Chief
Financial Officer, showing in detail the facts requiring such adjustment and the
Series A Preferred Conversion Price then in effect. The Corporation shall also
cause a copy of such statement to be sent by first-class certified mail, return
receipt requested, postage prepaid, to each holder of shares of Series A
Preferred Stock at his or its address appearing on the Corporation's records.
Where appropriate, such copy may be given in advance and may be included as part
of a notice required to be mailed under the provisions of Section 4(g) hereof.
(g) In the event the Corporation shall propose to take any
action of the types described in clauses (i), (ii) or (iii) of Section 4(e)
hereof, the Corporation shall give notice to each holder of shares of Series A
Preferred Stock, in the manner set forth in Section 4(f) above, which notice
shall specify the record date, if any, with respect to any such action and the
date on which such action is to take place. Such notice shall also set forth
such facts with respect thereto as shall be reasonably necessary to indicate the
effect of such action (to the extent such effect may be known at the date of
such notice) on the Series A Preferred Conversion Price and the number, kind or
class of shares or other securities or property which shall be deliverable or
purchasable upon the occurrence of such action or deliverable upon conversion of
shares of Series A Preferred Stock. In the case of any action which would
require the fixing of a record date, such notice shall be given at least ten
(10) days prior to the date so fixed, and in case of any other action, such
notice shall be given at least fifteen (15) days prior to the taking of such
proposed action. Failure to give such notice, or any defect therein, shall not
affect the legality or validity of any such action.
6
<PAGE>
(h) The Corporation shall pay all documentary, stamp or other
transactional taxes attributable to the issuance or delivery of shares of Common
Stock upon conversion of any shares of Series A Preferred Stock, but shall not
be responsible for any transfer taxes.
(i) The Corporation shall reserve, free from preemptive
rights, out of its authorized but unissued shares of Common Stock a sufficient
number of shares of Common Stock to provide for the conversion of all
outstanding shares of Series A Preferred Stock.
(j) All shares of Common Stock which may be issued in
connection with the conversion provisions set forth herein will, upon issuance
by the Corporation, be validly issued, fully paid and nonassessable, with no
personal liability attaching to the ownership thereof, and free from all taxes,
liens or charges with respect thereto.
(k) The Corporation shall not amend its Certificate of
Incorporation or participate in any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, for the purpose of avoiding or seeking to avoid, or which
would have the effect of avoiding, the observance or performance of any of the
terms to be observed or performed hereunder by the Corporation, but shall at all
times in good faith assist in carrying out all such action as may be reasonably
necessary or appropriate in order to protect the conversion rights of the
holders of the Series A Preferred against impairment.
(1) Notwithstanding the foregoing, the Series A Preferred
Stock shall not be convertible unless and until any required regulatory
approvals to such conversion are obtained. The Corporation shall use its best
efforts to cooperate with the holders of the Series A Preferred Stock to obtain
any required approvals.
5. DEFINITIONS. As used herein, the following terms shall have the
following meanings:
(a) The term "COMMON STOCK" shall mean the Corporation's
common stock, $0.01 par value per share.
(b) The term "CURRENT MARKET PRICE" shall mean, as of the day
in question, the fair market value of a share of Common Stock on such date, as
determined in good faith by the Board of Directors of the Corporation.
(c) The term "JUNIOR STOCK" shall mean the Common Stock and
any class or series of capital stock of the Corporation ranking, as to payment
of dividends or distribution of assets, junior to the Series A Preferred Stock.
(d) The term "LIQUIDATION PARITY STOCK" shall mean any class
or series of
7
<PAGE>
capital stock of the Corporation ranking, as to distribution of assets, PARI
PASSU to the Series A Preferred Stock.
(e) The term "Person" shall mean any corporation, individual,
partnership, limited liability company, association, trust, joint venture,
unincorporated organization or other entity, and any government, governmental
department or agency or political subdivision thereof.
(f) The term "Series A Preferred Conversion Price" shall mean
$3.51 as adjusted from time to time pursuant to the provisions of Section 4(e)
hereof.
(g) The term "Series A Preferred Original Issue Date" shall
mean the date on which the first share of Series A Preferred Stock has been
issued.
(h) The term "Series A Preferred Original Issuance Price"
shall mean $500 per share of Series A Preferred Stock.
IN WITNESS WHEREOF, said JENNIFER CONVERTIBLES, INC. has caused this
Certificate of Designations, Preferences and Rights of Series A Preferred Stock
to be duly executed by its President and attested to by its Secretary and has
caused its corporate seal to be affixed hereto, this tenth day of December,
1997.
JENNIFER CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
-------------------------------
President
(Corporate Seal)
ATTEST:
/s/ George J. Nadel
- -------------------
Secretary
8
JENNIFER CONVERTIBLES, INC.
1997 STOCK OPTION PLAN
SECTION 1. PURPOSE. The purpose of the Jennifer Convertibles, Inc. 1997
Stock Option Plan (this "Plan") is to provide a means whereby selected
employees, officers, directors, agents, consultants and independent contractors
of Jennifer Convertibles, Inc., a Delaware corporation (the "Company"), or of
any parent or subsidiary (as defined in subsection 5.7 and referred to
hereinafter as "related corporations") thereof, may be granted incentive stock
options and/or non-qualified stock options to purchase the Common Stock (as
defined in Section 3) of the Company, in order to attract and retain the
services or advice of such employees, officers, directors, agents, consultants
and independent contractors and to provide added incentive to them by
encouraging stock ownership in the Company.
SECTION 2. ADMINISTRATION.
(a) This Plan shall be administered by the Board of Directors of the
Company (the "Board"), except to the extent the Board delegates its authority to
a committee of the Board to administer this Plan. The administrator of this Plan
shall hereinafter be referred to as the "Plan Administrator."
(b) For so long as the Company's Common Stock is registered under
Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), no Option shall be granted to a director or officer (subject to Section
16 of the Exchange Act) of the Company by the Board unless (i) approved in
advance by the Board or the Plan Administrator in accordance with the provisions
of Rule 16b-3(d)(1) under the Exchange Act (where the Plan Administrator, if not
the entire Board, is a committee of the Board composed solely of two or more
non-employee directors who satisfy the requirements of Rule 16b-3(b)(3) under
the Exchange Act), or (ii) approved in advance, or subsequently ratified by, the
stockholders in accordance with the provisions of Rule 16b-3(d)(2) under the
Exchange Act, except that an option may be granted absent such approval if the
option provides that no officer or director of the Company may sell shares
received upon the exercise of such option during the six-month period
immediately following the grant of such option.
2.1 PROCEDURES. The Board shall designate one of the members
of the Plan Administrator as chairman. The Plan Administrator may hold meetings
at such times and places as it shall determine. The acts of a majority of the
members of the Plan Administrator present at meetings at which a quorum exists,
or acts reduced to or approved in writing by all Plan Administrator members,
shall be valid acts of the Plan Administrator.
2.2 RESPONSIBILITIES. Except for the terms and conditions
explicitly set forth in this Plan, the Plan Administrator shall have the
authority, in its discretion, to determine all matters relating to the options
to be granted under this Plan, including selection of the individuals to be
granted options, the number of shares to be subject to each option, the exercise
price, and all other terms and conditions of the options, including the
designation of such options as an incentive stock
<PAGE>
option or non-qualified stock option. Grants under this Plan need not be
identical in any respect, even when made simultaneously. The interpretation and
construction by the Plan Administrator of any terms or provisions of this Plan
or any option issued hereunder, or of any rule or regulation promulgated in
connection herewith, shall be conclusive and binding on all interested parties,
so long as such interpretation and construction with respect to incentive stock
options corresponds to the requirements of Internal Revenue Code (the "Code")
Section 422, the regulations thereunder, and any amendments thereto.
2.3 SECTION 16(B) COMPLIANCE AND BIFURCATION OF PLAN. It is
the intention of the Company that this Plan comply in all respects with Section
16(b) and Rule 16b-3 under the Exchange Act, to the extent applicable, and, if
any Plan provision is later found not to be in compliance with such Section or
Rule, as the case may be, the provision shall be deemed null and void, and in
all events the Plan shall be construed in favor of its meeting the requirements
of Section 16(b) and Rule 16b-3 under the Exchange Act. Notwithstanding anything
in the Plan to the contrary, the Board, in its absolute discretion, may
bifurcate the Plan so as to restrict, limit or condition the use of any
provision of the Plan to participants who are officers and directors or other
persons subject to Section 16(b) of the Exchange Act without so restricting,
limiting or conditioning the Plan with respect to other participants.
SECTION 3. STOCK SUBJECT TO THIS PLAN. The stock subject to this Plan
shall be the Company's Common Stock, par value $.01 per share (the "Common
Stock"), presently authorized but unissued or subsequently acquired by the
Company. Subject to adjustment as provided in Section 7 hereof, the aggregate
amount of Common Stock to be delivered upon the exercise of all options granted
under this Plan shall not exceed 500,000 shares as such Common Stock was
constituted on the effective date of this Plan. If any option granted under this
Plan shall expire, be surrendered, exchanged for another option, canceled or
terminated for any reason without having been exercised in full, the unpurchased
shares subject thereto shall thereupon again be available for purposes of this
Plan, including for replacement options which may be granted in exchange for
such surrendered, canceled or terminated options.
SECTION 4. ELIGIBILITY. An incentive stock option may be granted only
to any individual who, at the time the option is granted, is an employee of the
Company or any related corporation. A nonqualified stock option may be granted
to any director, employee, officer, agent, consultant or independent contractor
of the Company or any related corporation, whether an individual or an entity.
Any party to whom an option is granted under this Plan shall be referred to
hereinafter as an "Optionee".
SECTION 5. TERMS AND CONDITIONS OF OPTIONS. Options granted under this
Plan shall be evidenced by written agreements which shall contain such terms,
conditions, limitations and restrictions as the Plan Administrator shall deem
advisable and which are not inconsistent with this Plan (the "Option
Agreement"). Notwithstanding the foregoing, options shall include or incorporate
by reference the following terms and conditions:
<PAGE>
5.1 NUMBER OF SHARES AND PRICE. The maximum number of shares
that may be purchased pursuant to the exercise of each option and the price per
share at which such option is exercisable (the "exercise price") shall be as
established by the Plan Administrator, provided that the Plan Administrator
shall act in good faith to establish the exercise price which shall be not less
than the fair market value per share of the Common Stock at the time the option
is granted with respect to incentive stock options and not less than the par
value per share of the Common Stock at the time the option is granted with
respect to nonqualified stock options and also provided that, with respect to
incentive stock options granted to greater than 10% stockholders, the exercise
price shall be as required by Section 6.
5.2 TERM AND MATURITY. Subject to the restrictions contained
in Section 6 with respect to granting incentive stock options to greater than
10% stockholders, the term of each incentive stock option shall be as
established by the Plan Administrator and, if not so established, shall be 10
years from the date it is granted but in no event shall the term of any
incentive stock option exceed 10 years. The term of each nonqualified stock
option shall be as established by the Plan Administrator and, if not so
established, shall be 10 years from the date it is granted. To ensure that the
Company or related corporation will achieve the purpose and receive the benefits
contemplated in this Plan, any option granted to any Optionee hereunder shall,
unless the condition of this sentence is waived or modified in the agreement
evidencing the option or by resolution adopted by the Plan Administrator, be
exercisable, subject to acceleration upon a "Change of Control" as set forth
below, according to the following schedule:
Period of Optionee's
Continuous Relationship
With the Company or Related
Corporation From the Date Portion of Total Option
the Option is Granted Which is Exercisable
--------------------- -----------------------
after 1 year 25%
after 2 years 50%
after 3 years 75%
after 4 years 100%
Notwithstanding the foregoing, all option shares shall become
immediately exercisable in the event there is a "Change of Control of the
Company." A "Change of Control" of the Company shall be deemed to have occurred
if (1) any change occurs which would be required to be reported under item 1 on
Form 8-K, promulgated under the Securities Exchange Act of 1934, (2) the Company
is merged with or consolidated into any other entity, other than one controlled
by the Optionee, or (3) all or substantially all of the assets of the Company
are sold, leased, exchanged or otherwise transferred to another entity, other
than one controlled by the Optionee.
5.3 EXERCISE. Subject to any vesting schedule described in
subsection 5.2 above, each option may be exercised in whole or in part;
provided, however, that no fewer than 100 shares (or the remaining shares then
purchasable under the option, if less than 100 shares) may be purchased upon any
exercise of an option hereunder and that only whole shares will be issued
pursuant to the
<PAGE>
exercise of any option. Options shall be exercised by delivery to the Company of
notice of the number of shares with respect to which the option is exercised,
together with payment of the exercise price.
5.4 PAYMENT OF EXERCISE PRICE. Payment of the option exercise
price shall be made in full at the time the notice of exercise of the option is
delivered to the Company and shall be in cash, bank certified or cashier's check
or personal check (unless at the time of exercise the Plan Administrator in a
particular case determines not to accept a personal check) for the Common Stock
being purchased.
The Plan Administrator can determine at the time the option is
granted for incentive stock options, or at any time before exercise for
nonqualified stock options, that additional forms of payment will be permitted.
To the extent permitted by the Plan Administrator and applicable laws and
regulations (including, but not limited to, federal tax and securities laws and
regulations and state corporate law), an option may be exercised by:
(a) delivery of shares of stock of the Company held by an
Optionee having a fair market value equal to the exercise price, such fair
market value to be determined in good faith by the Plan Administrator;
(b) delivery of a properly executed exercise notice, together
with irrevocable instructions to a broker, all in accordance with the
regulations of the Federal Reserve Board, to promptly deliver to the Company the
amount of sale or loan proceeds necessary to pay the exercise price and any
federal, state or local withholding tax obligations that may arise in connection
with the exercise; or
(c) delivery of a properly executed exercise notice together
with instructions to the Company to withhold from the shares that would
otherwise be issued upon exercise that number of shares having a fair market
value equal to the option exercise price.
5.5 WITHHOLDING TAX REQUIREMENT. The Company or any related
corporation shall have the right to retain and withhold from any payment of cash
or Common Stock under the Plan the amount of taxes required by any government to
be withheld or otherwise deducted and paid with respect to such payment. At its
discretion, the Company may require an Optionee receiving shares of Common Stock
to reimburse the Company for any such taxes required to be withheld by the
Company and withhold such shares in whole or in part until the Company is so
reimbursed. In lieu thereof, the Company, at its option in its sole discretion,
shall (a) have the right to withhold from any other cash amounts due or to
become due from the Company to the Optionee an amount equal to such taxes or (b)
retain and withhold a number of shares having a market value not less than the
amount of such taxes required to be withheld by the Company to reimburse the
Company for any such taxes and cancel (in whole or in part) any such shares so
withheld. If required by Section 16(b) of the Exchange Act, the election to pay
withholding taxes by delivery of shares held by any person who at the time of
exercise is subject to Section 16(b) of the Exchange Act, shall be made either
six
<PAGE>
months prior to the date the option exercise becomes taxable or at such other
times as the Company may determine as necessary to comply with Section 16(b) of
the Exchange Act.
5.6 ASSIGNABILITY AND TRANSFERABILITY OF OPTION. Options
granted under this Plan and the rights and privileges conferred hereby may not
be transferred, assigned, pledged or hypothecated in any manner (whether by
operation of law or otherwise) other than (i) by will or by the applicable laws
of descent and distribution, (ii) pursuant to a qualified domestic relations
order as defined in Section 414(p) of the Code, or Title I of the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder or
(iii) as otherwise determined by the Plan Administrator and set forth in the
applicable Option Agreement. Any attempt to transfer, assign, pledge,
hypothecate or otherwise dispose of any option under this Plan or of any right
or privilege conferred hereby, contrary to the Code or to the provisions of this
Plan, or the sale or levy or any attachment or similar process upon the rights
and privileges conferred hereby shall be null and void. The designation by an
Optionee of a beneficiary does not, in and of itself, constitute an
impermissible transfer under this Section.
5.7 TERMINATION OF RELATIONSHIP. If the Optionee's
relationship with the Company or any related corporation ceases for any reason
other than death or total disability, and unless by its terms the option sooner
terminates or expires, then the Optionee may exercise, for a three-month period,
that portion of the Optionee's option which is exercisable at the time of such
cessation, but the Optionee's option shall terminate at the end of the
three-month period following such cessation as to all shares for which it has
not theretofore been exercised, unless, in the case of a nonqualified stock
option, such provision is waived in the agreement evidencing the option or by
resolution adopted by the Plan Administrator within 90 days of such cessation.
If, in the case of an incentive stock option, an Optionee's relationship with
the Company or related corporation changes (i.e., from employee to non-employee,
such as a consultant), such change shall constitute a termination of an
Optionee's employment with the Company or related corporation and the Optionee's
incentive stock option shall become a non-qualified stock option.
If an Optionee's relationship with the Company or any related
corporation ceases because of a total disability, the Optionee's option shall
not terminate or, in the case of an incentive stock option, cease to be treated
as an incentive stock option until the end of the 12-month period following such
cessation (unless by its terms it sooner terminates and expires). As used in
this Plan, the term "total disability" refers to a mental or physical impairment
of the Optionee which is expected to result in death or which has lasted or is
expected to last for a continuous period of 12 months or more and which causes
the Optionee to be unable, in the opinion of the Company and two (if more than
one is required by the Company in its sole discretion) independent physicians,
to perform his or her duties for the Company and to be engaged in any
substantial gainful activity. Total disability shall be deemed to have occurred
on the first day after the Company and the two (if more than one is required by
the Company in its sole discretion) independent physicians have furnished their
opinion of total disability to the Plan Administrator.
For purposes of this subsection 5.7, a transfer of
relationship between or among the Company and/or any related corporation shall
not be deemed to constitute a cessation of relationship
<PAGE>
with the Company or any of its related corporations. For purposes of this
subsection 5.7, with respect to incentive stock options, employment shall be
deemed to continue while the Optionee is on military leave, sick leave or other
bona fide leave of absence (as determined by the Plan Administrator). The
foregoing notwithstanding, employment shall not be deemed to continue beyond the
first 90 days of such leave, unless the Optionee's reemployment rights are
guaranteed by statute or by contract.
As used herein, the term "related corporation", when referring
to a subsidiary corporation, shall mean any corporation (other than the Company)
or other entity in, at the time of the granting of the option, an unbroken chain
of corporations ending with the Company, if stock or other interests possessing
50% or more of the total combined voting power of all classes of stock or other
interests of each of the corporations or other entities other than the Company
is owned by one of the other corporations or other entities in such chain. When
referring to a parent corporation or other entity, the term "related
corporation" shall mean any corporation or other entity in an unbroken chain of
corporations or other entities ending with the Company if, at the time of the
granting of the option, each of the corporations or other entities other than
the Company owns stock or other interests possessing 50% or more of the total
combined voting power of all classes of stock or other interests in one of the
other corporations or other entities in such chain.
5.8 DEATH OF OPTIONEE. If an Optionee dies while he or she has
a relationship with the Company or any related corporation or within the
three-month period (or 12-month period in the case of totally disabled
Optionees) following cessation of such relationship, any option held by such
Optionee to the extent that the Optionee would have been entitled to exercise
such option, may be exercised within one year after his or her death by the
personal representative of his or her estate or by the person or persons to whom
the Optionee's rights under the option shall pass by will or by the applicable
laws of descent and distribution.
5.9 STATUS OF STOCKHOLDER. Neither the Optionee nor any party
to which the Optionee's rights and privileges under the option may pass shall
be, or have any of the rights or privileges of, a stockholder of the Company
with respect to any of the shares issuable upon the exercise of any option
granted under this Plan unless and until such option has been exercised.
5.10 CONTINUATION OF EMPLOYMENT. Nothing in this Plan or in
any option granted pursuant to this Plan shall confer upon any Optionee any
right to continue in the employ of the Company or of a related corporation, or
to interfere in any way with the right of the Company or of any such related
corporation to terminate his or her employment or other relationship with the
Company at any time.
5.11 MODIFICATION AND AMENDMENT OF OPTION. Subject to the
requirements of Code Section 422 with respect to incentive stock options and to
the terms and conditions and within the limitations of this Plan, the Plan
Administrator may modify or amend outstanding options granted under this Plan.
The modification or amendment of an outstanding option shall not, without the
consent of the Optionee, impair or diminish any of his or her rights or any of
the obligations of the Company under such option. Except as otherwise provided
in this Plan, no outstanding option shall
<PAGE>
be terminated without the consent of the Optionee. Unless the Optionee agrees
otherwise, any changes or adjustments made to outstanding incentive stock
options granted under this Plan shall be made in such a manner so as not to
constitute a "modification" as defined in Code Section 424(h) and so as not to
cause any incentive stock option issued hereunder to fail to continue to qualify
as an incentive stock option as defined in Code Section 422(b).
5.12 LIMITATION ON VALUE FOR INCENTIVE STOCK OPTIONS. As to
all incentive stock options granted under the terms of this Plan, to the extent
that the aggregate fair market value (determined at the time the incentive stock
option is granted) of the stock with respect to which incentive stock options
are exercisable for the first time by the Optionee during any calendar year
(under this Plan and all other incentive stock option plans of the Company, a
related corporation or a predecessor corporation) exceeds $100,000, such options
shall be treated as nonqualified stock options. The previous sentence shall not
apply if the Code is amended or if the Internal Revenue Service publicly rules,
issues a private ruling to the Company, any Optionee, or any legatee, personal
representative or distributee of an Optionee or issues regulations, changing or
eliminating such annual limit, in which case the limitation shall be that
provided by the Code or the Internal Revenue Service, as the case may be.
5.13 VALUATION OF COMMON STOCK RECEIVED UPON EXERCISE
5.13.1 EXERCISE OF OPTIONS UNDER SECTIONS 5.4(A) AND
(C). The value of Common Stock received by the Optionee from an exercise under
Sections 5.4(a) and 5.4(c) hereof shall be the fair market value, which shall
mean the last reported sales price, regular way, of the Common Stock on the date
of receipt by the Company of the Optionee's delivery of shares under Section
5.4(a) hereof or delivery of the exercise notice under Section 5.4(c) hereof
(or, if no sale takes place on any such day, the closing bid price of the Common
Stock on such day), on the principal securities exchange (including the National
Association of Securities Dealers, Inc. (the "NASD'S") National Market System)
on which the Common Stock is admitted or listed for trading, or, if the Common
Stock is not listed on any such exchange on any such day, the highest reported
bid price for the Common Stock as furnished by the NASD through NASDAQ, or a
similar organization if NASDAQ is no longer reporting such information, or, if
the Common Stock is not listed for trading on an exchange and is not quoted on
NASDAQ or any similar organization on any such day, the fair value of a share of
Common Stock on such day as determined by the Plan Administrator of the Company
in good faith.
5.13.2 EXERCISE OF OPTION UNDER SECTION 5.4(B). The
value of Common Stock received by the Optionee from an exercise under Section
5.4(b) hereof (a) in the case of the sale of the Common Stock received as a
result of the exercise by a broker on the date of receipt by the Company of the
Optionee's exercise notice, shall equal the sales price received for such
shares; and (b) in all other cases, shall be determined as provided in Section
5.13.1 hereof.
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SECTION 6. GREATER THAN 10% STOCKHOLDERS.
6.1 EXERCISE PRICE AND TERM OF INCENTIVE STOCK OPTIONS. If
incentive stock options are granted under this Plan to employees who own more
than 10% of the total combined voting power of all classes of stock of the
Company or any related corporation, the term of such incentive stock options
shall not exceed five years and the exercise price shall be not less than 110%
of the fair market value of the Common Stock at the time the incentive stock
option is granted. This provision shall control notwithstanding any contrary
terms contained in an option agreement or any other document. The term and
exercise price limitations of this provision shall be amended to conform to any
change required (or, in the sole discretion of the Plan Administrator,
permitted) by a change in the Code or by a ruling or pronouncement of the
Internal Revenue Service.
6.2 ATTRIBUTION RULE. For purposes of subsection 6.1, in
determining stock ownership, an employee shall be deemed to own the stock owned,
directly or indirectly, by or for his or her brothers, sisters, spouse,
ancestors and lineal descendants. Stock owned, directly or indirectly, by or for
a corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its stockholders, partners or beneficiaries. If an
employee or a person related to the employee owns an unexercised option or
warrant to purchase stock of the Company, the stock subject to that portion of
the option or warrant which is unexercised shall not be counted in determining
stock ownership. For purposes of this Section 6, stock owned by an employee
shall include all stock owned by him which is actually issued and outstanding
immediately before the grant of the incentive stock option to the employee.
SECTION 7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. The aggregate
number and class of shares for which options may be granted under this Plan, the
number and class of shares covered by each outstanding option, and the exercise
price per share thereof (but not the total price), shall all be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock of the Company resulting from a split-up or consolidation of shares or any
like capital adjustment, or the payment of any stock dividend.
7.1. EFFECT OF LIQUIDATION, REORGANIZATION OR CHANGE IN
CONTROL.
7.1.1 CASH, STOCK OR OTHER PROPERTY FOR STOCK. Except
as provided in subsection 7.1.2, upon a merger (other than a merger of the
Company in which the holders of Common Stock immediately prior to the merger
have the same proportionate ownership of common stock in the surviving
corporation immediately after the merger), consolidation, acquisition of
property or stock, separation, reorganization (other than a mere reincorporation
or the creation of a holding company) or liquidation of the Company, as a result
of which the stockholders of the Company receive cash or property other than
capital stock in exchange for or in connection with their shares of Common
Stock, any option granted hereunder shall terminate, but the Optionee shall have
the right immediately prior to any such merger, consolidation, acquisition of
property or stock, separation, reorganization or liquidation to exercise such
Optionee's option in whole or in part whether or not the vesting requirements
set forth in the option agreement have been satisfied.
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7.1.2 CONVERSION OF OPTIONS ON STOCK FOR STOCK
EXCHANGE. If the stockholders of the Company receive capital stock of another
corporation ("Exchange Stock") in exchange for their shares of Common Stock in
any transaction involving a merger (other than a merger of the Company in which
the holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock in the surviving corporation immediately
after the merger), consolidation, acquisition of property or stock, separation
or reorganization (other than a mere reincorporation or the creation of a
holding company), all options granted hereunder shall be converted into options
to purchase shares of Exchange Stock unless the Company and corporation issuing
the Exchange Stock, in their sole discretion, determine that any or all such
options granted hereunder shall not be converted into options to purchase shares
of Exchange Stock but instead shall terminate in accordance with the provisions
of subsection 7.1.1. The amount and price of converted options shall be
determined by adjusting the amount and price of the options granted hereunder in
the same proportion as used for determining the number of shares of Exchange
Stock the holders of the Common Stock receive in such merger, consolidation,
acquisition of property or stock, separation or reorganization. Unless the Board
determines otherwise, the converted options shall be fully vested whether or not
the vesting requirements set forth in the option agreement have been satisfied.
7.2 FRACTIONAL SHARES. In the event of any adjustment in the
number of shares covered by an option, any fractional shares resulting from such
adjustment shall be disregarded and each such option shall cover only the number
of full shares resulting from such adjustment.
7.3 DETERMINATION OF BOARD TO BE FINAL. All Section 7
adjustments shall be made by the Board, and its determination as to what
adjustments shall be made, and the extent thereof, shall be final, binding and
conclusive. Unless an Optionee agrees otherwise, any change or adjustment to an
incentive stock option shall be made in such a manner so as not to constitute a
"modification" as defined in Code Section 425(h) and so as not to cause his or
her incentive stock option issued hereunder to fail to continue to qualify as an
incentive stock option as defined in Code Section 422(b).
SECTION 8. SECURITIES REGULATION. Shares shall not be issued with
respect to an option granted under this Plan unless the exercise of such option
and the issuance and delivery of such shares pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, any applicable
state securities laws, the Securities Act of 1933, as amended, the Exchange Act,
the rules and regulations promulgated thereunder, and the requirements of any
stock exchange or inter-dealer quotation system upon which the shares may then
be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance, including the availability of an
exemption from registration for the issuance and sale of any shares hereunder.
Inability of the Company to obtain from any regulatory body having jurisdiction
the authority deemed by the Company's counsel to be necessary for the lawful
issuance and sale of any shares hereunder or the unavailability of an exemption
from registration for the issuance and sale of any shares hereunder shall
relieve the Company of any liability in respect of the nonissuance or sale of
such shares as to which such requisite authority shall not have been obtained.
<PAGE>
As a condition to the exercise of an option, the Company may require
the Optionee to represent and warrant at the time of any such exercise that the
shares are being purchased only for investment and without any present intention
to sell or distribute such shares if, in the opinion of counsel for the Company,
such representation is required by any relevant provision of the aforementioned
laws. At the option of the Company, a stop-transfer order against any shares of
stock may be placed on the official stock books and records of the Company, and
a legend indicating that the stock may not be pledged, sold or otherwise
transferred unless an opinion of counsel is provided (concurred in by counsel
for the Company) stating that such transfer is not in violation of any
applicable law or regulation, may be stamped on stock certificates in order to
assure exemption from registration. The Company may also require such other
action or agreement by the Optionees as it may from time to time deem to be
necessary or advisable. THE COMPANY SHALL NOT BE OBLIGATED, BY REASON OF THIS
PROVISION OR OTHERWISE, TO UNDERTAKE REGISTRATION OF THE OPTIONS OR STOCK
HEREUNDER.
Should any of the Company's capital stock of the same class as the
stock subject to options granted hereunder be listed on a national securities
exchange or inter-dealer quotation system, all stock issued hereunder if not
previously listed on such exchange or inter-dealer quotation system shall be
authorized by that exchange or system for listing thereon prior to the issuance
thereof.
SECTION 9. AMENDMENT AND TERMINATION.
9.1 BOARD ACTION. The Board may at any time suspend, amend or
terminate this Plan, provided that except as set forth in Section 7, the
approval of the holders of a majority of the Company's outstanding shares of
voting capital stock present and entitled to vote at any meeting is necessary
for the adoption by the Board of any amendment which will:
(a) increase the number of shares which are to
be reserved for the issuance of options under this Plan;
(b) permit the granting of stock options to a
class of persons other than those presently permitted to receive stock options
under this Plan; or
(c) require stockholder approval under
applicable law, including Section 16(b) of the Exchange Act.
9.2 AUTOMATIC TERMINATION. Unless sooner terminated by the
Board, this Plan shall terminate ten years from the earlier of (a) the date on
which this Plan is adopted by the Board or (b) the date on which this Plan is
approved by the stockholders of the Company. No option may be granted after such
termination or during any suspension of this Plan. The amendment or termination
of this Plan shall not, without the consent of the option holder, alter or
impair any rights or obligations under any option theretofore granted under this
Plan.
SECTION 10. EFFECTIVENESS OF THIS PLAN. This Plan shall become
effective upon adoption by the Board so long as it is approved by the holders of
a majority of the Company's outstanding
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shares of voting capital stock present and entitled to vote at any meeting at
any time within 12 months before or after the adoption of this Plan.
Adopted by the Board of Directors on May 6, 1997 and approved by the
stockholders on ___________, 1998.
STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made as of December 11, 1997, among JENNIFER
CONVERTIBLES, INC., a Delaware corporation (the "Company"), and KLAUSSNER
FURNITURE INDUSTRIES, INC. (the "Purchaser"). Except as otherwise indicated
herein, capitalized terms used herein are defined in Section 7 hereof.
The parties hereto agree as follows:
SECTION 1. - CLOSING.
1A. PURCHASE AND SALE OF THE SERIES A PREFERRED. At the Closing, the
Company shall sell to the Purchaser and, subject to the terms and conditions set
forth herein, the Purchaser shall purchase from the Company, for a purchase
price of $5,000,000, 10,000 shares of convertible preferred stock (the
"Preferred Stock") convertible into an aggregate of 1,424,500 shares, par value
$0.01 per share (the "Common Stock") (approximately $3.51) per share, subject to
adjustment as set forth in the Certificate of Designations (the "Certificate")
of the Preferred Stock in the form attached hereto as Exhibit A.
1B. THE CLOSING. The closing of the purchase and sales of the Preferred
Stock pursuant to paragraph 1A (the "Closing") shall take place at the offices
of Squadron, Ellenoff, Plesent & Sheinfeld, LLP, in New York, New York at 10:00
a.m. on the date hereof, or at such other place or on such other date as may be
mutually agreeable to the Company and the Purchaser. At the Closing, the Company
shall deliver to the Purchaser stock certificates evidencing the Preferred Stock
to be purchased by such Purchaser, registered in such Purchaser's or its
nominee's name, upon payment of the purchase price thereof by a cashier's or
certified check, or by wire transfer of the purchase price (net of amounts to be
used pursuant to Section 2F) immediately available funds to the Company's
account as directed by the Company.
SECTION 2. - CONDITIONS OF THE PURCHASER'S OBLIGATION AT THE CLOSING. The
obligation of the Purchaser to purchase and pay for the Preferred Stock at the
Closing is subject to the satisfaction as of the Closing of the following
conditions:
2A. REPRESENTATIONS AND WARRANTIES; COVENANTS. The representations and
warranties contained in Section 5 hereof shall be true and correct at and as of
the Closing, except to the extent of changes caused by the transactions
expressly contemplated herein, and the Company shall have performed in all
material respects all of the covenants required to be performed by it hereunder
prior to the Closing.
2B. CLOSING DOCUMENTS. The Company shall have delivered to the
Purchaser all of the following documents:
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(i) a duly executed Registration Rights Agreement (the
"Registration Rights Agreement") in the form of Exhibit B hereto;
(ii) certified copies of the resolutions duly adopted by the
Board authorizing the execution, delivery and performance of this Agreement, and
the consummation of all other transactions contemplated by this Agreement.
(iii) certified copies of the Certificate and the Company's
Certificate of Incorporation and bylaws, each as in effect at the
Closing; and
(iv) such other documents relating to the transactions
contemplated by this Agreement as any Purchaser or its special counsel
may reasonably request.
2D. PROCEEDINGS. All corporate and other proceedings taken or required
to be taken by the Company in connection with the transactions contemplated
hereby to be consummated at or prior to the Closing and all documents incident
thereto shall be reasonably satisfactory in form and substance to the Purchaser
and its special counsel.
2E. AUDITORS OPINION. The opinion of Richard A. Eisner & Company as to
the Company's financial statements for the fiscal year ended August 30, 1997
shall be no more qualified than the opinion given for the prior fiscal year and
shall not contain a "going concern" qualification.
2F. USE OF PROCEEDS. At the Closing, the Company shall use a portion of
the proceeds to pay all obligations to the Purchaser and its affiliates and
subsidiaries that, as of the Closing have been billed and outstanding for more
than 60 days (as reflected on their books and records, but without waiving any
dispute the Company may have as to the amounts so reflected).
SECTION 3. - RIGHT OF FIRST REFUSAL
3A. So long as the Purchaser owns at least 10% of the outstanding
Common Stock of the Company or Preferred Stock convertible into at least 10% of
such outstanding Common Stock, the Purchaser shall have the right (the "Right")
of first refusal to purchase any shares of Common Stock (or debt or equity
securities convertible into or exercisable for Common Stock, hereinafter called
"Equivalents") if the sale price of such Common Stock or effective sale price of
the Common Stock underlying such Equivalents (after giving effect to the price
paid for such Equivalents together with any additional consideration to be paid
to the Company on exercise or conversion) is less than $3.51 per share (as
appropriately adjusted to reflect stock splits, stock dividends and similar
events). If the Company proposes to make any such sale, it shall first give the
Purchaser written notice (the "Offer Notice") of the terms of such proposed sale
by the Company, including the type of security to be sold, the sale price or
effective sale price and the amount to be sold. The Purchaser may elect to
exercise the Right to purchase all or a portion of the securities described in
the Offer Notice on the terms described in the Offer Notice by providing written
notice (the "Exercise Notice") to the Company within 15 days after its has
received the Offer Notice, specifying the amount of the securities it intends to
purchase. If the Purchaser does not exercise the Right or exercises it in part,
the Company shall be entitled to sell up to the number of securities set forth
in the Offer Notice (or
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the remaining balance after giving effect to the exercise of the Right) at a
price no less favorable to the Company than the price set forth in the Offer
Notice. If the Purchaser exercises the Right in whole or in part, the closing of
the sale of securities contemplated thereby shall take place on the 15th day
after the Exercise Notice is received the Company at the offices of the Company
or at such other time and place as the parties mutually agree, provided that if
the Exercise Notice is for the purchase of less than all of the securities set
forth in the Offer Notice the Company may, by written notice to the Purchaser,
decline to sell such portion, but in such event shall have no right to sell any
such securities to any third party. Notwithstanding the foregoing, the Purchaser
shall not have the Right with respect to options and warrants outstanding on the
date hereof and the grant of additional options (the "Exempt Options") to
employees or consultants to purchase up to 50,000 shares of Common Stock,
provided that if the Company grants any Exempt Options it will simultaneously
grant the Purchaser options, on the same terms, to purchase such number of
shares of Common Stock as would be necessary to preserve the Purchaser's
percentage beneficial ownership of the outstanding Common Stock assuming the
exercise of the Exempt Options so granted. The reduction of the exercise price
of any outstanding option shall be treated as a new grant of such option.
SECTION 4. - TRANSFER OF RESTRICTED SECURITIES; REGISTRATION RIGHTS.
4A. GENERAL PROVISIONS. The Purchaser agrees that the Preferred Stock
and the underlying Common Stock (collectively, the "Securities") constitute
restricted securities transferable only pursuant to (i) registration under the
Securities Act, (ii) Rule 144 or Rule 144A of the Securities and Exchange
Commission (or any similar rule or rules then in force) if such rule is
available and (iii) subject to the conditions specified in paragraph 4B below,
any other legally available means of transfer.
4B. OPINION DELIVERY. In connection with the transfer of any Securities
(other than a transfer described in Section 4A(i) or (ii) above), the holder
thereof shall deliver written notice to the Company describing in reasonable
detail the transfer or proposed transfer, together with an opinion of Squadron,
Ellenoff, Plesent & Sheinfeld, LLP or other counsel which (to the Company's
reasonable satisfaction) is knowledgeable in securities law matters to the
effect that such transfer of Securities may be effected without registration of
such Securities under the Securities Act. In addition, if the holder of the
Securities delivers to the Company an opinion of Squadron, Ellenoff, Plesent &
Sheinfeld, LLP or such other counsel that no subsequent transfer of such
Securities shall require registration under the Securities Act and has delivered
the original certificate or certificates representing such Securities to the
Company, the Company shall promptly upon such contemplated transfer deliver new
certificates for such Securities which do not bear the Securities Act legend set
forth in Section 6. If the Company is not required to deliver new certificates
for such Securities not bearing such legend, the holder thereof shall not
transfer the same until the prospective transferee has confirmed to the Company
in writing its agreement to be bound by the conditions contained in this Section
paragraph and Section 6.
4C. RULE 144A. Upon the request of the Purchaser, the Company shall
promptly supply to such Purchaser or its prospective transferees, at such
Purchaser's cost, all information regarding the Company required to be delivered
in connection with a transfer pursuant to Rule 144A of the Securities and
Exchange Commission.
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4D. LEGEND REMOVAL. If any Securities become eligible for sale pursuant
to Rule 144(k), the Company shall, upon the request of the holder of such
Securities and receipt of evidence sufficient in the reasonable judgment of the
Company's counsel that the Securities are so eligible, remove the legend set
forth in Section 6 from the certificates for such Securities.
4E. REGISTRATION RIGHTS. At the Closing, the Company shall enter into
the Registration Rights Agreement providing certain demand registration rights
as to the Securities.
4F. AGREEMENT NOT TO DISPOSE. The Purchaser hereby agrees not to sell,
transfer or otherwise dispose of any of Preferred Stock until September 1, 1999,
provided, however, that the Purchaser may transfer Securities to an affiliate of
the Purchaser which agrees, in writing, to be bound by the provisions of this
Section 4F and, provided, further that nothing herein shall be deemed to prevent
Purchaser from converting the Preferred Stock to Common Stock earlier than
September 1, 1999 pursuant to Section 4 of the Certificate or from selling,
transferring or disposing of any Common Stock received upon such conversion.
SECTION 5. - REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company hereby represents and warrants to the Purchaser that:
5A. ORGANIZATION, CORPORATE POWER AND LICENSES. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and is qualified to do business in
every jurisdiction in which the failure to so qualify has had or would
reasonably be expected to have a material adverse effect on the financial
condition, operating results, assets, operations or business prospects of the
Company and its Subsidiaries taken as a whole. The Company possesses all
requisite corporate power and authority and all material licenses, permits and
authorizations necessary to own and operate its properties, to carry on its
businesses as now conducted and presently proposed to be conducted and to carry
out the transactions contemplated by this Agreement.
5B. CAPITAL STOCK AND RELATED MATTERS.
(i) Immediately prior to the Closing, the authorized capital
stock of the Company shall consist of (a) 1,000,000 shares of preferred
stock, of which no shares shall be outstanding (but certain of which
are contemplated to be issued and outstanding pursuant to the class and
derivative action settlement agreement) and (b) 10,000,000 shares of
Common Stock, of which 5,700,725 shares shall be issued and
outstanding. As of the Closing, the Company shall not have outstanding
any stock or securities convertible or exchangeable for any shares of
its capital stock or containing any profit participation features, nor
shall it have outstanding any rights or options to subscribe for or to
purchase its capital stock or any stock or securities convertible into
or exchangeable for its capital stock or any stock appreciation rights
or phantom stock plans, except as set forth on the attached
"Capitalization Schedule." As of the Closing, all of the outstanding
shares of the Company's capital stock, including the Preferred Stock,
shall be validly issued, fully paid and nonassessable.
(ii) There are no statutory or contractual stockholders
preemptive rights or rights
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<PAGE>
of refusal with respect to the issuance of the Securities hereunder.
Assuming the representations of the Purchaser in Section 6 are
accurate, the offer, sale and issuance of the shares of Preferred Stock
hereunder do not require registration under the Securities Act or any
applicable state securities laws.
5C. AUTHORIZATION: NO BREACH. The execution, delivery and performance
of this Agreement and all other agreements contemplated hereby to which the
Company is a party, have been duly authorized by the Company. Assuming the due
and valid execution by the other parties thereto, this Agreement and all other
agreements contemplated hereby to which the Company is a party each constitutes
a valid and binding obligation of the Company enforceable in accordance with its
terms, subject to the effect of bankruptcy, insolvency, reorganization,
fraudulent conveyance or other similar laws, and to general principles of equity
(whether considered in proceedings at law or in equity). The execution and
delivery by the Company of this Agreement and all other agreements contemplated
hereby to which the Company is a party, the offering, sale and issuance of the
Preferred Stock and the fulfillment of and compliance with the respective terms
hereof and thereof by the Company, do not and shall not (i) conflict with or
result in a breach of the terms, conditions or provisions of, (ii) constitute a
default under, (iii) result in the creation of any lien, security interest,
charge or encumbrance upon the Company's or any Subsidiary's capital stock or
assets pursuant to, (iv) give any third party the right to modify, terminate or
accelerate any obligation under, (v) result in a violation of, or (vi), except
as required in connection with a registration under the Securities Act as
contemplated by the Registration Rights Agreement, require any authorization,
consent, approval, exemption or other action by or notice or declaration to, or
filing with, any court or administrative or governmental body or agency pursuant
to, the charter or bylaws of the Company or any Subsidiary or any law, statute,
rule or regulation to which the Company or any Subsidiary is subject, or any
agreement, instrument, order, judgment or decree to which the Company or any
Subsidiary is subject.
5D. BROKERAGE. Assuming the Purchaser's representations in Section 6
are accurate, there are no claims for brokerage commissions, finders' fees or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement binding upon the Company. The
Company shall pay, and hold the Purchaser harmless against, any liability, loss
or expense (including, without limitation, reasonable attorneys' fees and
out-of-pocket expenses) arising in connection with any such claim.
5E. GOVERNMENTAL CONSENT, ETC. No permit, consent, approval or
authorization of, or declaration to or filing with, any governmental authority
is required in connection with the execution, delivery and performance by the
Company of this Agreement or the other agreements contemplated hereby, or the
consummation by the Company of any other transactions contemplated hereby or
thereby, except as expressly contemplated herein or therein.
5F. PUBLIC FILINGS. To the best of the Company's knowledge, neither the
1996 10-K nor any filing made by the Company with the Securities and Exchange
Commission ("SEC") thereafter contained, as of the date filed, any untrue
statement of a material fact or omitted, as of the date filed, any material fact
necessary to make any statements contained therein not misleading under the
circumstances given and the Company has not received any request from the SEC to
amend or
5
<PAGE>
modify any such filing.
5G. LITIGATION. Attached as Schedule 5G is a description of all
litigation, investigations and claims pending against the Company, other than
routine matters in the ordinary course of business.
SECTION 6. - REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The
Purchaser represents and warrants to the Company the following:
(i) The Purchaser hereby represents that it is acquiring the
Preferred Stock purchased hereunder or acquired pursuant hereto for its
own account with the present intention of holding such securities for
purposes of investment, and that it has no intention of selling such
securities in a public distribution in violation of the federal
securities laws or any applicable state securities laws; provided that
nothing contained herein shall prevent the Purchaser and subsequent
holders of Preferred Stock from transferring such securities in
compliance with the provisions of Section 4 hereof. Each certificate or
instrument representing Preferred Stock shall be imprinted with a
legend in substantially the following form:
"The securities represented by this certificate were
originally issued on December __, 1997, and have not
been registered under the Securities Act. The
transfer of the securities represented by this
certificate is subject to the conditions specified
in the Purchase Agreement, dated as of December __,
1997 and as amended and modified from time to time,
between the issuer (the "Company") and the
Purchaser, and the Company reserves the right to
refuse the transfer of such securities until such
conditions have been fulfilled with respect to such
transfer. A copy of such conditions shall be
furnished by the Company to the holder hereof upon
written request and without charge."
Certificates representing the Common Stock underlying the Preferred Stock shall
be imprinted with a substantially similar legend.
(ii) The Purchaser represents and warrants that it is
an "accredited investor" as that term is defined in Regulation
D promulgated under the Securities Act. The Purchaser
acknowledges that it has been given the opportunity to ask
questions and receive satisfactory answers concerning the
terms and conditions of the Preferred Stock and obtain
additional information in order to evaluate the merits and
risks of an investment in the Preferred Stock and to verify
the accuracy of the information contained in this Agreement.
The Purchaser represents and warrants that it is a
sophisticated investor with such knowledge and experience in
business and financial matters as will enable the Purchaser to
evaluate the merits and risks of investment in the Preferred
Stock and is able to bear the economic risks and lack of
liquidity of an investment in the Preferred Stock.
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SECTION 7. - DEFINITIONS.
7A. DEFINITIONS. For the purposes of this Agreement, the following
terms have the meanings set forth below:
"Affiliate" of any particular Person means any other Person
controlling, controlled by or under common control with such particular Person,
where "control" means the possession, directly or indirectly, of the power to
direct the management and policies of a Person whether through the ownership of
voting securities, contract or otherwise.
"Officer's Certificate" means a certificate signed by the Company's
president or its chief financial officer, stating that (i) the officer signing
such certificate has made or has caused to be made such investigations as are
reasonably necessary in order to permit him to verify the accuracy of the
information set forth in such certificate and (ii) to the best of such officer's
knowledge, such certificate does not misstate any material fact and does not
omit to state any fact necessary to make the certificate not misleading.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"Securities and Exchange Commission" includes any governmental body or
agency succeeding to the functions thereof.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar federal law then in force.
"Subsidiary" means, with respect to any Person, any corporation,
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by any Person or one or more
Subsidiaries of that Person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if
such Person or Persons shall be allocated a majority of limited liability
company, partnership, association or other business entity gains or losses or
shall be or control any managing director or general partner of such limited
liability company, partnership, association or other business entity.
SECTION 8. - MISCELLANEOUS.
8A. CONSENT TO AMENDMENTS. Except as otherwise expressly provided
herein, the provisions of this Agreement may be amended, only if the Company and
the Purchaser have amended this Agreement in writing. No other course of dealing
between the Company and the Purchaser or any delay in exercising any rights
hereunder shall operate as a waiver of any rights of the Purchaser.
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8B. SUCCESSORS AND ASSIGNS. This Agreement may not be assigned by
either party without the other's written consent except as otherwise expressly
provided herein, all covenants and agreements contained in this Agreement by or
on behalf of any of the parties hereto shall bind and inure to the benefit of
the respective successors and assigns of the parties hereto whether so expressed
or not.
8C. SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
8D. COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts, any one of which need not contain the signatures of more
than one party, but all such counterparts taken together shall constitute one
and the same Agreement.
8E. DESCRIPTIVE HEADINGS: INTERPRETATION. The descriptive headings of
this Agreement are inserted for convenience only and do not constitute a
substantive part of this Agreement. The use of the word "including" in this
Agreement shall be by way of example rather than by limitation.
8F. GOVERNING LAW. The corporate law of the State of Delaware shall
govern all issues and questions concerning the relative rights and obligations
of the Company and its stockholders. All other issues and questions concerning
the construction, validity, enforcement and interpretation of this Agreement and
the exhibits and schedules hereto shall be governed by, and construed in
accordance with, the laws of the State of New York, without giving effect to any
choice of law or conflict of law rules or provisions (whether of the State of
New York or any other jurisdiction) that would cause the application of the laws
of any jurisdiction other than the State of New York. In furtherance of the
foregoing, the internal law of the State of New York shall control the
interpretation and construction of this Agreement (and all schedules and
exhibits hereto), even though under that jurisdiction's choice of law or
conflict of law analysis, the substantive law of some other jurisdiction would
ordinarily apply.
8G. NOTICES. All notices, demands or other communications to be given
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable overnight courier service (charges
prepaid), mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid or sent to the recipient by facsimile.
Such notices, demands and other communications shall be sent to the offices of
the Company at 419 Crossways Park Drive, Woodbury, New York 11797, Attention:
Chief Executive Officer, with a copy to Squadron, Ellenoff, Plesent & Sheinfeld,
LLP, Attention: Kenneth R. Koch, Esq., at 551 Fifth Avenue, New York, New York
10176 and to the Purchaser at the address indicated below:
405 Lewallen Street
Asheboro, North Carolina 27203
Attention: Robert Shaffner
8
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with a copy to:
Michael Abel, Esq.
Schell Bray Aycock Abel & Livingston L.L.P.
1500 Renaissance Plaza
230 North Elm Street
Greensboro, North Carolina 27401
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
8H. NO THIRD PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any Person other than the parties hereto and their
respective successors and permitted assigns.
8I. NO WAIVER OR MODIFICATION OF EXISTING AGREEMENTS. Nothing contained
herein shall be deemed in any respect to modify or waive any provision of the
other agreements between the parties hereto, including without limitation, the
Credit and Security Agreement, dated as of March 1, 1996, as amended.
8J. EXPENSES. The parties shall bear their respective expenses in
connection with this transaction except that the Company will bear up to $25,000
of the legal fees incurred by the Purchaser in connection herewith.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Common Stock
Purchase Agreement on the date first written above.
JENNIFER CONVERTIBLES, INC.
/s/ Harley J. Greenfield
----------------------------------------------
By: Harley J. Greenfield, Chief Executive Officer
KLAUSSNER FURNITURE INDUSTRIES, INC.
/s/ Robert C. Shaffner
----------------------------------------------
By: Robert C. Shaffner, Senior Vice President
10
JENNIFER CONVERTIBLES, INC.
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made by and
between Jennifer Convertibles, Inc., a Delaware corporation (the "Company"), and
Klaussner Furniture Industries, Inc. (the "Investor").
RECITALS
A. The Investor desires to purchase from the Company, and the
Company desires to issue and sell to the Investor 10,000
shares of Series A Preferred Stock, par value $0.01 per share,
of the Company (the "Shares").
B. As further inducement for the Investor to purchase the Shares
from the Company, the Company desires to undertake to register
under the Securities Act, the shares of common stock, par
value $0.01 per share, of the Company (the "Common Stock"),
underlying the Shares, in accordance with the terms hereof.
AGREEMENTS
The Company and the Investor covenant and agree as follows:
1. DEFINITIONS. For the purposes of this Agreement:
(a) The term "Investor" includes (i) the Investor (as defined
above) and (ii) each person who is a permitted transferee or assignee of the
Registrable Securities pursuant to Section 8 of this Agreement.
(b) The term "Prospectus" means the prospectus included in any
Registration Statement (including, without limitation, a prospectus that
discloses information previously omitted form a prospectus filed as part of an
effective Registration Statement in reliance upon Rule 430A promulgated under
the Securities Act of 1933, as amended), as amended or supplemented by any
prospectus supplement, including post-effective amendments, and all material
incorporated by reference deemed to be incorporated by reference in such
prospectus.
(c) The terms "register," "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement or statements or similar documents in compliance with the Securities
Act, and the declaration or ordering of effectiveness of such registration
statement or document by the Securities and Exchange Commission (the "SEC").
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(d) The term "Registrable Securities" means (i) any shares of
Common Stock issued or issuable upon conversion of the Shares or acquired upon
exercise of the Investor's right of first refusal set forth in Section 3 of the
Stock Purchase Agreement, dated as of even date herewith (or underlying
Equivalents, as defined in such Stock Purchase Agreement, acquired upon exercise
of such right) and (ii) shares of Common Stock issued or issuable upon the
conversion or exercise of any convertible security, warrant, right or other
security which is issued as a dividend or other distribution with respect to, or
in exchange for or in replacement of the shares of Common Stock issued, issuable
or held pursuant to clause (i) above, excluding in all cases, however, any
Registrable Securities sold by an Investor in a transaction in which its
registration rights under this Agreement are not assigned pursuant to Section 8
of this Agreement.
(e) The term "Registration Statement" means any registration
statement of the Company which covers any of the Registrable Securities pursuant
to the provisions of this Agreement, including the Prospectus, amendments or
supplements to such registration statement, including post-effective amendments,
all exhibits, and all material incorporated by reference or deemed to be
incorporated by reference in such registration statement.
2. DEMAND REGISTRATION.
(a) REQUEST FOR REGISTRATION. Subject to the terms of this
Agreement, if the Company receives from holders of Registrable Securities, a
written request that the Company effect any registration for an offering of
Registrable Securities, then the Company will promptly give written notice of
the proposed registration to all the holders of Registrable Securities and will,
as soon as practicable, subject to Section 2(c) (ii) use its best efforts to
effect registration of the Registrable Securities specified in such request,
together with all or such portion of the Registrable Securities of any holder
joining in such request as are specified in a written request delivered to the
Company within twenty (20) days after written notice from the Company of the
proposed registration. If such request is made at a time when the Company is
eligible to register securities for a secondary offering by its stockholders on
Form S-3 (or any successor form to Form S-3, regardless of its designation),
then the Company shall use Form S-3 and, if the Company is not so eligible, the
Company shall use any registration form for which it is then eligible.
Notwithstanding the foregoing, in no event shall the Company be required to
effect more than three registrations (the "Initial Demands") at its expense and
two additional registrations (the "Additional Demands"), at the expense of the
Investor, pursuant to this Section 2(a); provided, further, that the Company
shall not be required to effect more than one registration at its expense of an
offering managed by an underwriter (an "Underwritten Registration").
(b) NOTICE OF INTENT TO DISTRIBUTE. Each holder of Registrable
Securities agrees to give written notice to the Company at least three business
days (but no more than 30 business days) prior to any intended distribution of
Registrable Securities pursuant to an effective Registration Statement, which
notice shall specify the date on which such holder intends to begin such
distribution and such information with respect to such holder and the intended
distribution of Registrable Securities by such holder as may be required to
amend the Registration Statement
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or supplement the related Prospectus with respect to such intended distribution
of Registrable Securities.
(c) As soon as practicable after the date notice is provided
to the Company pursuant to Section 2(a) or (b) above, the Company shall either:
(i) (A) If necessary, prepare and file a post-effective
amendment to the Registration Statement or a supplement to the related
Prospectus or a supplement or amendment to any document incorporated therein by
reference or file any other required document so that such Registration
Statement will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; and (B) provide to each holder of Registrable Securities who has
given notice of intention to distribute such holder's Registrable Securities in
accordance with Section 2(b) hereof copies of any documents filed pursuant to
this Section 2(c); or
(ii) Furnish to all the holders of Registrable Securities who
joined in the request for registration pursuant to Section 2(a) above or who
informed the Company of an intent to distribute pursuant to Section 2(b) above,
a certificate signed by an authorized executive officer of the Company stating
that, in the good faith judgment of the Board of Directors of the Company, it
would be seriously detrimental to the Company for any registration to be
effected as requested under Section 2(a) or for any distribution to be made as
described in Section 2(b), in which case the Company shall have the right to
defer such filing of a Registration Statement or such distributions for a period
of not more than ninety (90) days; provided, however, that the Company may not
utilize this right more than once in any twelve-month period.
(d) REGISTRATION OF OTHER SECURITIES IN DEMAND REGISTRATION.
Any registration statement filed under this Section 2 may, include securities of
the Company other than Registrable Securities to the extent required by
agreements in effect as of the date hereof.
(e) NOTICE OF UNDERWRITING. If a holder of Registrable
Securities intends to distribute the Registrable Securities covered by the
holder's request by means of an underwriting, the holder shall so advise the
Company as a part of the request made pursuant to this Section 2, and the
Company shall include such information in the written notice referred to in
Section 2(c).
(f) SELECTION OF UNDERWRITER IN DEMAND REGISTRATION. The
Company shall (together with all holders proposing to distribute their
securities through such underwriting) enter into and perform its obligations
under an underwriting agreement in usual and customary form with the
representative of the underwriter or underwriters (the "Underwriter's
Representative") selected for such underwriting by the Investor and consented to
by the Company (which consent shall not be unreasonably withheld).
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<PAGE>
3. OBLIGATIONS OF THE COMPANY. In connection with the registration of
the Registrable Securities pursuant to this Agreement, the Company shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the SEC a Registration Statement or
Registration Statements on Form S-3 (or such other form as the Company is then
eligible for) with respect to all Registrable Securities included therein, and
use its best efforts to cause the Registration Statement to become effective as
soon as reasonably possible, subject to Section 2(c)(ii), after such filing and,
to keep the Registration Statement effective pursuant to Rule 415 under the
Securities Act for a period of at least 90 days (in the case of a Registration
Statement on a Form other than Form S-3) and 180 days (in the case of a
Registration Statement on Form S-3) (the "Period"), which Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading.
(b) Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and any
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective for the Period.
(c) Furnish promptly to each Investor whose Registrable
Securities are included in the Registration Statement such number of copies of a
Prospectus, including a preliminary prospectus, and all amendments and
supplements thereto, and of such other documents as such Investor may reasonably
request in order to facilitate the disposition of Registrable Securities owned
by such Investor.
(d) Use its reasonable efforts to register and qualify the
Registrable Securities covered by the Registration Statement under such other
securities or Blue Sky laws of such jurisdiction as shall be reasonably
requested by the Investor and prepare and file in those jurisdictions such
amendments (including post-effective amendments) and supplements and to take
such other actions as may be necessary to maintain such registration and
qualification in effect at all times for the Period and to take all other
actions necessary or advisable to enable the disposition of such securities in
such jurisdictions; provided, however, that the Company shall not be required in
connection therewith or as a condition thereto to (i) qualify to do business,
file a general consent to service of process or subject itself to general
taxation in any such states or jurisdictions or (ii) provide any undertaking or
make any change in its Certificate of Incorporation or bylaws.
(e) Notify the Investor who holds Registrable Securities being
sold (or in the event of an underwritten offering, the Underwriter's
Representative), at any time when a Prospectus is required to be delivered under
the Securities Act, of the happening of any event as a result of which the
Prospectus included in the Registration Statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein
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<PAGE>
or necessary to make the statements therein not misleading in light of the
circumstances then existing. Subject to Section 2(c), the Company shall use its
best efforts promptly to amend or supplement the Registration Statement to
correct any such untrue statement or omission.
(f) Notify the Investor who holds Registrable Securities being
sold (or in the event of an underwritten offering, the Underwriter's
Representative) of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any proceedings
for that purpose. The Company will make every reasonable effort to prevent the
issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible time.
(g) Make generally available to its security holders as soon
as practicable, but not later than forty five (45) days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 under the Securities Act) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date of the Registration Statement.
(h) If the Common Stock is then listed on a national
securities exchange, use its best efforts to cause the Registrable Securities to
be listed on such exchange if the listing of such Registrable Securities is then
permitted under the rules of such exchange, or if the Common Stock is not then
listed on a national securities exchange, use its best efforts to facilitate the
quotation of the Common Stock on NASDAQ, and use its best efforts to cause
continued listing of the Common Stock so long as the Registration Statement is
in effect under the Securities Act.
(i) Provide a transfer agent and registrar, which may be a
single entity, for the Registrable Securities not later than the effective date
of the Registration Statement.
(j) Take all actions reasonably necessary to facilitate the
timely preparation and delivery of certificates (not bearing any restrictive
legend) representing the Registrable Securities sold pursuant to the
Registration Statement and to enable such certificates to be in such
denominations and registered in such names as the Investor or any underwriters
may reasonably request.
(k) Notwithstanding anything contained in this Section 3 to
the contrary, the Company shall have no obligation pursuant to Section 2 for the
registration of Registrable Securities held by any Investor where such Investor
would then be entitled to sell under Rule 144 within any three-month period (or
such other unitary period prescribed under Rule 144 as may be provided by
amendment thereof) all of the Registrable Securities then held by such Investor.
(l) If the Registration Statement relates to an underwritten
offering, enter into and perform its obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the Underwriter's
Representative.
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<PAGE>
(m) At the request of the Investor, furnish to the
underwriters, if any, on the date that Registrable Securities are delivered to
the underwriters for sale in connection with a registration pursuant to this
Agreement (i) an opinion, dated such date, of the counsel representing the
Company for the purposes of such registration, in form and substance as is
customarily given to underwriters in an underwritten public offering, addressed
to the underwriters, and (ii) a letter, dated such date, from the independent
certified public accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering, addressed to the underwriters.
(n) Make available for inspection by any underwriters
participating in the offering and the counsel, accountants or other agents
retained by such underwriter, all pertinent financial and other records,
corporate documents and properties of the Company, and cause the Company's
officers, directors and employees to supply all information reasonably requested
by such underwriters in connection with the Registration Statement.
4. OBLIGATIONS OF THE INVESTOR. In connection with the registration of
the Registrable Securities pursuant to this Agreement, the Investor shall have
the following obligations:
(a) It shall be a condition precedent to the obligations of
the Company to take any action pursuant to this Agreement with respect to the
Investor that such Investor shall furnish to the Company such information
regarding itself, the Registrable Securities held by it, and the intended
methods of disposition of such securities as shall be reasonably required to
effect the registration of the Registrable Securities and shall execute such
documents in connection with such registration as the Company may reasonably
request. At least thirty (30) days prior to the first anticipated filing date of
the Registration Statement, the Company shall notify the Investor of the
information the Company requires from the Investor (the "Requested Information")
if it elects to have any of its Registrable Securities included in the
Registration Statement. If within seven (7) business days of the filing date the
Company has not received the Requested Information from the Investor (a
"Non-Responsive Investor"), then the Company may file the Registration Statement
without including Registrable Securities of such Non-Responsive Investor.
(b) The Investor by its acceptance of the Registrable
Securities agrees to cooperate with the Company in connection with the
preparation and filing of any Registration Statement hereunder, unless the
Investor has notified the Company in writing of the Investor's election to
exclude all of its Registrable Securities from the Registration Statement.
(c) The Investor agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Section 3(e),
the Investor will immediately discontinue disposition of Registrable Securities
pursuant to the Registration Statement until the Investor's receipt of the
copies of the supplemented or amended Prospectus contemplated by Section 3(e)
and, if so desired by the Company, the Investor shall deliver to the Company (at
the expense of the Company) or destroy (and deliver to the Company a certificate
of such destruction) all copies, other than the permanent file copies then in
such Investor's possession, of the Prospectus current at the time of receipt of
such notice.
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<PAGE>
(d) In the event the Investor selects an underwriter for the
offering, the Investor agrees to enter into and perform its obligations under an
underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations and market
stand-off obligations, with the managing underwriter of such offering and to
take such other actions as are reasonably required in order to expedite or
facilitate the disposition of the Registrable Securities.
5. EXPENSES OF REGISTRATION. All expenses other than underwriting
discounts and commissions incurred in connection with registration, filings or
qualifications pursuant to Section 2, including, without limitation, all
registration, listing, filing and qualification fees, printers and accounting
fees, the fees and disbursements of counsel for the Company shall be borne by
the Company as to the Initial Demands (provided that the Company shall not be
required to bear the expenses of more than one Underwritten Registration) and
all expenses relating to any registration thereafter pursuant to Additional
Demands (or to more than one Underwritten Registration) shall be borne by the
Investor.
6. INDEMNIFICATION. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless the Investor, the directors, if any, of the Investor, the
officers, if any, of the Investor who sign the Registration Statement, each
person, if any, who controls the Investor, any underwriter (as defined in the
Securities Act) for the Investor and each person, if any, who controls any such
underwriter within the meaning of the Securities Act or the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), against any losses, claims,
damages, expenses or liabilities, joint or several) to which any of them may
become subject under the Securities Act, the Exchange Act, other federal or
state law or otherwise, insofar as such losses, claims, damages, expenses or
liabilities (or actions or proceedings, whether commenced or threatened, in
respect thereof, arise out of or are based upon any of the following statements,
omissions or violations (collectively, a "Violation"): (i) any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement, including any Prospectus, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading, or (iii) any violation or alleged violation by the Company of
the Securities Act, the Exchange Act, any state securities law or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any state
securities law. Subject to the restrictions set forth in Section 6(c) with
respect to the number of legal counsel, the Company will reimburse the Investor
and each such underwriter or controlling person, promptly as such expenses are
incurred, for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability, action or proceeding. Notwithstanding anything contained in this
Agreement to the contrary, the indemnity agreement contained above in this
Section 6(a): (I) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the prior written consent of the Company, which consent shall not be
unreasonably withheld, (II) shall not apply
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<PAGE>
to any such case for any such loss, claim, damage, liability or action arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with written information furnished expressly for use in connection with such
registration by the Investor or any such underwriter or controlling person, as
the case may be, and (III) with respect to any preliminary prospectus, shall not
inure to the benefit of any person from whom the person asserting any such claim
purchased the Registrable Securities that are the subject thereof (or to the
benefit of any person controlling such person) if the untrue statement or
omission of material fact contained the preliminary prospectus was corrected in
the Prospectus, as then amended or supplemented. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
the Investor or any such underwriter or controlling person and shall survive the
transfer of the Registrable Securities by an Investor pursuant to Section 8.
(b) To the extent permitted by law, each Investor, severally
and not jointly, will indemnify and hold harmless, to the same extent and in the
same manner set forth in Section 6(a), the Company, each of its directors, each
of its officers who have signed the Registration Statement, each person, if any,
who controls the Company within the meaning of the Securities Act or the
Exchange Act, any underwriter and any other stockholder selling securities
pursuant to the Registration Statement or any of its directors or officers or
any person who controls such holder or underwriter, against any losses, claims,
damages or liabilities, joint or several) to which any of them may become
subject, under the Securities Act, the Exchange Act, other federal or state law
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any Violation, in each case
to the extent (and only to the extent) that such Violation occurs in reliance
upon and in conformity with written information furnished by such Investor
expressly for use in connection with such registration; and such Investor will
reimburse any legal or other expenses reasonably incurred by any of them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Investor shall be liable under
this Section 6(b) for only that amount of losses, claims, damages and
liabilities as does not exceed the proceeds to such Investor as a result of the
sale of Registrable Securities pursuant to such registration. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such indemnified party and shall survive the transfer of the
Registrable Securities by the Investor pursuant to Section 8. The Company shall
be entitled to receive indemnities from underwriters, selling brokers, dealer
managers and similar securities industry professionals participating in the
distribution, to the same extent as provided above, with respect to information
about such persons so furnished in writing by such persons expressly for
inclusion in the Registration Statement
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 6, deliver to
the indemnifying party a written notice of the commencement thereof, and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume control of the defense thereof with counsel
satisfactory to the indemnifying party; provided, however, that an indemnified
party shall have the right to retain its own counsel, with the fees and expenses
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<PAGE>
to be paid by the indemnifying party, if, in the reasonable opinion of counsel
for the indemnifying party, representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The Company shall pay for
only one legal counsel for the Investor. Such legal counsel shall be selected by
the Investor. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action shall relieve
such indemnifying party of any liability to the indemnified party under this
Section 6 only to the extent prejudicial to its ability to defend such action,
but the omission so to deliver written notice to the indemnifying party will not
relieve it of any liability that it may have to any indemnified party otherwise
than under section 6. The indemnification required by this Section 6 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, promptly as such expense, loss, damage or liability is
incurred and is due and payable.
(d) To the extent any indemnification by an indemnifying party
is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under this Section 6 to the extent permitted by law; provided, however,
that (i) no contribution shall be made under circumstances where the maker would
not have been liable for indemnification under the fault standards set forth in
this Section 6, (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11 of the Securities Act) shall
be entitled to contribution from any seller of Registrable Securities who was
not guilty of such fraudulent misrepresentation, and (iii) contribution by any
seller of Registrable Securities shall be limited in amount to the net amount of
proceeds received by such seller from the sale of such Registrable Securities.
7. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making
available to the Investor the benefits of Rule 144 and any other rule or
regulation of the SEC that may at any time permit the Investor to sell
securities of the Company to the public without registration, the Company agrees
to:
(a) Make and keep public information available, as those terms
are understood and defined in Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public.
(b) File with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act.
(c) Furnish to each Investor, so long as such Investor owns
any Registrable Securities, forthwith upon request (i) a written statement by
the Company that it has complied with the reporting requirements of Rule 144 (at
any time after 90 days after the effective date of the first registration
statement filed by the Company), the Securities Act and the Exchange Act (at any
time after it has become subject to such reporting requirements), (ii) a copy of
the most recent annual or quarterly report of the Company and such other reports
and documents so filed by the Company, and (iii) such other information as may
be reasonably requested in availing the
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<PAGE>
Investor of any rule or regulation of the SEC which permits the selling of any
such securities without registration.
8. ASSIGNMENTS OF REGISTRATION RIGHTS. The rights to have the Company
register securities pursuant to this Agreement may be assigned by the Investor
to transferees or assignees of such securities provided that (i) the Company is,
within a reasonable time after such transfer, furnished with written notice of
the name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned, (ii) such
assignment is in accordance with and permitted by all other agreements between
the Company and the transferor or assignor, and (iii) such assignments shall be
effective only if immediately following such transfer the further disposition of
such securities by the transferee or assignee is restricted under the Securities
Act. The term "Investor" as used in this Agreement shall include permitted
assignees.
9. MISCELLANEOUS.
(a) Notices required or permitted to be given hereunder shall
be in writing and shall be deemed to be sufficiently given when personally
delivered or sent by registered mail, return receipt requested, addressed (i) if
to the Company, 419 Crossways Park Drive, Woodbury, New York 11797, Attention:
President, and (ii) if to an Investor, at the address set forth under its
signature herein, or at such other address as each such party furnishes by
notice given in accordance with this Section 9(a).
(b) Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, will not operate as a waiver thereof. No waiver will be effective unless
and until it is in writing and signed by the party giving the waiver.
(c) This Agreement shall be enforced, governed and construed
in all respects in accordance with the laws of the State of New York (without
regard to conflicts of law principles) as such laws are applied by New York
courts to agreements entered into and to be performed in New York by and between
residents of New York. This Agreement shall be binding upon each Investor and
its heirs, estate, legal representatives, successors and permitted assignees and
shall inure to the benefit of the Company and its successors and assigns. In the
event that any provision of this Agreement is invalid or unenforceable under any
applicable statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law. Any provision hereof which
may prove invalid or unenforceable under any law shall not affect the validity
or enforceability of any other provision hereof.
(d) This Agreement constitutes the entire agreement between
the parties hereto with respect to the subject matter hereof. Any provision of
this Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only by a writing executed by the Company and the Investor.
- 10 -
<PAGE>
Any amendment or waiver effected in accordance with this Section 9(d) shall be
binding upon the Investor and the Company.
(e) Any such person is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, then the Company shall be entitled to act upon the basis
of the instructions, notice or election received from the registered owner of
such Registrable Securities.
(f) Subject to execution and delivery of an appropriate
confidentiality agreement, Investor shall be entitled to participate, at its own
expense, in the preparation of any Registration Statement filed hereunder and to
receive information from the Company relevant in connection therewith.
Dated this 11th day of December, 1997.
JENNIFER CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
-------------------------------
Name: Harley J. Greenfield
Title: Chief Executive Officer
KLAUSSNER FURNITURE INDUSTRIES, INC.
By:/s/ Robert C. Shaffner
----------------------------------------
Robert Shaffner, Senior Vice President
405 Lewallen Street
Drawer 2201
Asherboro, North Carolina 27204
- 11 -
KLAUSSNER FURNITURE INDUSTRIES, INC.
405 LEWALLEN ROAD
ASHEBORO, NORTH CAROLINA 27203
December 11, 1997
WAIVER AND MODIFICATION AGREEMENT
---------------------------------
To the Below-Named Parties:
Gentlemen:
Reference is made to that certain Credit and Security Agreement dated
as of the 1st day of March, 1996 by and among the undersigned and each of you
(the "Credit and Security Agreement"), together with all Guaranties, Security
Agreements, Assignments, Powers of Attorney, and all other agreements,
instruments and documents executed in connection therewith, as amended by letter
agreement dated February 26, 1997 (hereinafter collectively referred to as the
"Credit Agreements"). All capitalized terms not otherwise defined herein shall
have the meaning given such terms in the Credit Agreements.
This will confirm our agreement with respect to (1) waiver by the
Suppliers and the Secured Party of certain Events of Default described in
Section 8(a) of the Credit and Security Agreement and (2) modification of the
Credit and Security Agreement.
WAIVER
- ------
At August 30, 1997, the amount of Secured Obligations outstanding for
more than 21 days of the due date was approximately $1,990,000 and, since that
date, Secured Obligations in varying amounts have been outstanding for more than
21 days of the due date. The Suppliers and the Secured Party hereby waive any
Events of Default occurring on or before the date hereof based on Debtors'
failure to pay any Secured Obligations within 21 days of the due date. This
Waiver does not apply to any Event of Default occurring after the date hereof
based on Debtors' failure to pay any Secured Obligations within 21 days of the
due date (regardless of whether such Secured Obligations are outstanding on the
date hereof or arise hereafter).
The Suppliers and the Secured Party shall have all of the rights and
remedies provided for in the Credit Agreements upon the occurrence and
continuance of any Event of Default not waived herein.
<PAGE>
MODIFICATION
- ------------
The Credit and Security Agreement is hereby amended by adding thereto a
new Section 3A to read as follows:
"3A LATE PAYMENT FEE. The Suppliers and Purchasing
have agreed that, in lieu of interest and for the convenience
of the parties, Purchasing shall pay to the Suppliers, on or
before the 10th day of each month (beginning January 10, 1998
with respect to the month of December 1997 and continuing on
the 10th day of each month thereafter during the term of this
Agreement), an amount equal to the product of .67% times the
sum of all Secured Obligations outstanding for more than 60
days as of the last day of the immediately preceding month
(based on the Suppliers' invoice date, as reflected on their
books and records)."
Purchasing, Convertibles, and each of the other Debtors hereby acknowledge and
agree that, from and after the date hereof, the terms "Obligations" and "Secured
Obligations", as used in the Credit Agreements, include the obligations of
Purchasing under Section 3A of the Credit and Security Agreement, as hereinabove
amended.
Convertibles shall reimburse the Suppliers and the Secured Party for
all costs and expenses (including reasonable attorneys' fees) incurred by them
in connection with the preparation and negotiation of this Waiver and
Modification Agreement.
Except as herein specifically provided, no other changes, amendments or
modifications to the Credit Agreements are intended or implied and the same are
hereby ratified and confirmed.
2
<PAGE>
Please confirm that this letter accurately sets forth our understanding
and agreement by signing and returning the enclosed copy.
Very truly yours,
KLAUSSNER FURNITURE INDUSTRIES, INC. (for
(itself individually, as successor by merger to
Realistic Furniture Industries, Inc. and as
Secured Party)
RFI ENTERPRISES, INC.
KLAUSSNER INTERNATIONAL, L.L.C.
KLAUSSNER FURNITURE OF CALIFORNIA, INC.
KLAUSSNER CORPORATE SERVICES, INC.
(d/b/a Stylecraft)
By: /s/ Robert C. Shaffner
---------------------------------------------
Robert C. Shaffner
READ AND AGREED TO:
JENNIFER PURCHASING CORP.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
JENNIFER CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
JENNIFER CONVERTIBLES LICENSING CORP.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
JENNIFER L.P. III
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
3
<PAGE>
JENNIFER L.P. IV
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
JENNIFER MANAGEMENT II CORP.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
ELEGANT LIVING MANAGEMENT, LTD.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
JENNIFER L.P. V
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
JENNIFER L.P. VI
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
BURLINGTON CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
FRAMINGHAM CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
4
<PAGE>
BOSTON POST ROAD CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
SAUGUS CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
WEST ROXBURY CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
CAMBRIDGE CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
DANBURY SQUARE CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
EAST BRUNSWICK CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
WISCONSIN CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
5
<PAGE>
HARTSDALE CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
HIGH RIDGE CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
CONTOUR ROAD CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
CIPRIANO SQUARE CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
NICOLE CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
PORTSMOUTH CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
DANIEL WEBSTER CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
6
<PAGE>
JENNIFER LONG BRANCH, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
ROUTE 17 CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
ROUTE 440 CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
ROUTE 46 CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
ROUTE 7 CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
ROUTE 10 CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
STATEN ISLAND CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
7
<PAGE>
LEESBURG CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
VIENNA CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
VALLEY STREAM CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
CONVERTIBLES OF GRAND CONCOURSE, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
CONVERTIBLES OF WOODBRIDGE, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
CONVERTIBLES OF UNION, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
SOUTHEASTERN FLORIDA HOLDING COMPANY, INC.
By:
--------------------------------------
Title:
--------------------------------------
8
<PAGE>
JENNIFER BOCA, INC.
By:
--------------------------------------
Title:
--------------------------------------
JENNIFER LAUDERHILL, INC.
By:
--------------------------------------
Title:
--------------------------------------
JENNIFER NORTH MIAMI, INC.
By:
--------------------------------------
Title:
--------------------------------------
JENNIFER FLAGLER INC.
By:
--------------------------------------
Title:
--------------------------------------
JENNIFER FORT LAUDERDALE, INC.
By:
--------------------------------------
Title:
--------------------------------------
NATICK CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
JENNIFER CONVERTIBLES
BOYLSTON MA., INC.
By: /s/ Harley J. Greenfield
--------------------------------------
Title: Chief Executive Officer
--------------------------------------
9
<TABLE>
<CAPTION>
EXHIBIT 11.1
JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF NET (LOSS) PER SHARE
YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996, AND AUGUST 26, 1995
(in thousands, except per share data)
1997 1996 1995
Fully Fully Fully
Primary Diluted Primary Diluted Primary Diluted
------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net (loss) ($3,061) ($3,061) ($6,023) ($6,023) ($12,068) ($12,068)
======= ======= ======= ======= ======== ========
Common shares outstanding 5,701 5,701 5,701 5,701 5,701 5,701
======= ======= ======= ======= ======== ========
Net (loss) per common share ($ 0.54) ($ 0.54) ($ 1.06) ($ 1.06) ($ 2.12) ($ 2.12)
======= ======= ======= ======= ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000806817
<NAME> JENNIFER CONVERTIBLES, INC.
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-30-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-30-1997
<EXCHANGE-RATE> 1
<CASH> 3,405,000
<SECURITIES> 0
<RECEIVABLES> 1,149,000
<ALLOWANCES> 0
<INVENTORY> 7,943,000
<CURRENT-ASSETS> 12,974,000
<PP&E> 14,109,000
<DEPRECIATION> 6,440,000
<TOTAL-ASSETS> 22,998,000
<CURRENT-LIABILITIES> 30,232,000
<BONDS> 0
0
0
<COMMON> 57,000
<OTHER-SE> (13,424,000)
<TOTAL-LIABILITY-AND-EQUITY> 22,998,000
<SALES> 97,789,000
<TOTAL-REVENUES> 97,789,000
<CGS> 67,114,000
<TOTAL-COSTS> 101,487,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,000
<INCOME-PRETAX> (2,966,000)
<INCOME-TAX> 95,000
<INCOME-CONTINUING> (3,061,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,061,000)
<EPS-PRIMARY> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
