Document/Exhibit Description Pages Size
1: 10-K Annual Report 81 401K
2: EX-3.2 Certificate of Designations 8 31K
3: EX-10.29 Stock Option Plan 11 49K
4: EX-10.30 Stock Purchase Agreement 10 45K
5: EX-10.31 Registration Rights Agreement 11 51K
6: EX-10.32 Waiver & Modification Agreement 9 33K
7: EX-11.1 Statement re: Computation of Earnings Per Share 1 8K
8: EX-27 Financial Data Schedule 1 7K
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission File number 1-9681
August 30, 1997
JENNIFER CONVERTIBLES, INC.
---------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-2824646
---------------------------- ---------------------------------
(State or other jurisdiction (I.R.S. Employer of incorporation
or organization) Identification No.)
419 Crossways Park Drive
Woodbury, New York 11797 5712
--------------------------------------- ---------------------------
(Address of principal executive office) (Primary Standard
Industrial Classification
Code Number)
Registrant's telephone number, including area code (516) 496-1900
--------------
Securities registered pursuant to Section 12(b) of the Act: NONE Securities
registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01
(Title of class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of registrant as
of November 14, 1997: $12,826,631
Shares of Common Stock outstanding as of November 14, 1997: 5,700,725
DOCUMENTS INCORPORATED BY REFERENCE
NONE
PART I
Item 1. BUSINESS
UNLESS OTHERWISE SET FORTH HEREIN, THE TERM THE "COMPANY" INCLUDES
JENNIFER CONVERTIBLES, INC., A DELAWARE CORPORATION, AND ITS DIRECT OR INDIRECT
SUBSIDIARIES.
BUSINESS OVERVIEW
The Company is the owner and licensor of the largest group of sofabed
specialty retail stores in the United States, with 122 Jennifer Convertibles(R)
stores located on the Eastern seaboard, in the Midwest, on the West Coast and in
the Southwest as of August 30, 1997. As of August 30, 1997, the Company also
operated 36 "Jennifer Leather" ("Jennifer Leather") stores. Of the Jennifer
Convertibles(R) stores, as of August 30, 1997, 48 were owned by the Company and
74 were licensed by the Company.
2
[Enlarge/Download Table]
NUMBER OF STORES IN OPERATION AS OF AUGUST 30, 1997
======================================================================================
TOTAL LPS AND OTHER PRIVATE TOTAL
CONVERTIBLES LEATHER COMPANY LICENSEES(1) COMPANY(2) STORES
--------------------------------------------------------------------------------------
REGION
TRI-STATE AREA
NEW YORK 6 11 17 3 22 42
NEW JERSEY 9 8 17 4 21
CONNECTICUT 4 1 5 2 7
--------------------------------------------------------------------------------------
SUBTOTAL 19 20 39 9 22 70
ARIZONA 3 3
CALIFORNIA 4 4 22 26
FLORIDA 4 4 9 13
GEORGIA 4 4
ILLINOIS 14 14
INDIANA 3 3 3
KANSAS 1 1 1
MARYLAND 3 1 4 3 7
MASSACHUSETTS 7 5 12 12
MICHIGAN 6 6 6
MISSOURI 4 4 4
NEVADA 2 2
NEW HAMPSHIRE 2 2 2
OHIO 4 4
PENNSYLVANIA 4 4
VIRGINIA 2 1 3 3
WASHINGTON, D.C. 1 1 2 2
--------------------------------------------------------------------------------------
TOTAL 48 36 84 74 22 180
======================================================================================
(1) These include certain limited partnership licensees ("LPS"), which are
licensees whose accounts are included in the consolidated financial
statements of the Company, and licensees (the "Unconsolidated
Licensees") whose accounts are not so included.
(2) These 22 stores are not owned and do not pay royalties to the Company.
They operate in New York (the "Private Stores") and 20 of such stores
are owned by a company (the "Private Company") that, is owned by an
individual who was a principal stockholder of the Company and the
brother-in-law of Harley J. Greenfield, the Company's Chairman of the
Board, Chief Executive Officer and a director and principal
stockholder. Also, in December 1996, the Private Company purchased the
limited partnership interests in LPS owning 49 of the licensed stores.
In addition, Mr. Greenfield and Edward Seidner (also an officer,
director and principal stockholder of the Company) retain a substantial
economic interest in the Private Company through ownership of
$10,273,204 in the aggregate principal amount of secured Private
Company promissory notes issued in connection with the redemption of
their stock ownership in the Private Company. Accordingly, the Private
Company may be deemed an affiliate of the Company. The remaining two
stores
3
are sublicensees of the Private Company and one of such stores is owned
by the father of an executive officer of the Company. The Private
Stores are operated in substantially the same way as the Company-owned
stores. See "Notes to Consolidated Financial Statements - Footnote -
Related Party Transactions."
Jennifer Convertibles(R) stores specialize in the retail sale of a
complete line of sofabeds and companion pieces, such as loveseats, chairs and
recliners, designed and priced to appeal to a broad range of consumers. The
sofabeds and companion pieces are made by several manufacturers and range from
high-end merchandise to relatively inexpensive models. Each store has a kiosk
devoted to mattress sales. The Jennifer Leather stores specialize in the retail
sale of leather livingroom furniture. In fiscal 1997, the Company also opened
two test Jennifer Living Room stores which sell a broad range of livingroom
furniture, including furniture of the type sold in Jennifer Convertibles and
Jennifer Leather stores. The Company is the largest dealer of Sealy(R) sofabeds
in the United States. Merchandise is displayed in attractively decorated model
room settings in the store designed to show the merchandise as it would appear
in the customer's home. In order to generate sales, the Company and its
licensees rely on the attractive image of the stores, competitive pricing,
prompt delivery and extensive advertising.
The table below sets forth information with respect to the number of stores
(Company-owned and licensed) opened since fiscal 1986:
[Enlarge/Download Table]
FISCAL YEARS
-------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Company-owned stores
open at end of
period (1)(2)(3)(4)(5) 84 86 90 55 34 33 33 39 42 31 13
Licensed stores open at
end of period 74 75 79 113 87 42 15 0 0 0 0
--- --- --- --- --- --- --- --- --- --- ---
Total stores open at
end of period 158 161 169 168 121 75 48 39 42 31 13
=== === === === === === === === === === ===
----------
(1) Stores acquired from affiliated companies are reflected as opened in
the year they were opened by the affiliate, not in the year they were
acquired by the Company.
(2) For fiscal 1994, includes the 19 Jennifer Leather and two Elegant
Living stores open at the end of such fiscal year.
(3) For fiscal 1995, includes the 38 Jennifer Leather stores and one
Elegant Living store open at the end of such fiscal year.
(4) For fiscal 1996, includes 36 Jennifer Leather stores.
(5) For fiscal 1997, includes 36 Jennifer Leather stores and two Jennifer
Living Room stores.
4
Store Image and Merchandise
The Company believes that the image presented by its stores is an important
factor in its overall marketing strategy. Accordingly, stores are designed to
display the Company's merchandise in attractive model room settings. All the
Company's stores are of a similar clearly defined style, are designed as
showrooms for the merchandise and are carpeted, well-lighted and
well-maintained. Inventories for delivery are maintained in separate warehouses.
The Company displays a variety of sofabeds and companion pieces (including
cocktail tables) at each Jennifer Convertibles retail location with carpeting
and accessories. In contrast to certain of its competitors that primarily target
particular segments of the market, the Company attempts to attract customers
covering a broad socio-economic range of the market and, accordingly, offers a
complete line of sofabeds made by a number of manufacturers in a variety of
styles at prices currently ranging from approximately $299 to $2,200. The
Jennifer Leather stores similarly offer a complete line of leather living room
furniture in a variety of styles and colors at prices currently ranging from
approximately $599 to $5,000. The Company generally features attractive price
incentives to promote the purchase of merchandise. In addition to offering
merchandise by brand name manufacturers, the Company offers merchandise at its
Jennifer Convertibles and Jennifer Leather stores under the "Jennifer" brand
name for sofabeds and under the "Bellissimo Collection" brand name for leather
merchandise.
Although each style of sofabed, loveseat, chair and recliner is generally
displayed at Jennifer Convertibles stores in one color and fabric, samples of
the other available colors and fabrics are available. On selected merchandise,
up to 2,000 different colors and fabrics are available on selected items for an
additional charge. To maximize the use of the Company's real estate and to offer
its customers greater selection and value, the Company, as is common in the
mattress industry, sells various sizes of sofabeds with various sizes of
mattresses but displays only one size of sofabed at its stores. Leather
furniture is offered in a number of different grades of leather and colors. The
Company currently emphasizes contemporary and traditional sofabeds and companion
pieces in the Jennifer Convertibles stores and in the Jennifer Leather stores.
The Company generates additional revenue by selling tables and offering related
services, such as fabric protection and a lifetime warranty. Fabric protection
services are obtained from, and the warranty is given by, the Private Company,
which retains approximately 1/3 of the revenues generated from such services.
See "Certain Relationships and Related Transactions."
Merchandise ordered from inventory (approximately 55% of sales in the
Jennifer Convertibles stores and 35% of sales in the Jennifer Leather stores) is
generally available to be delivered within two weeks. Customers who place orders
for items, colors or fabrics not in inventory ("special orders") must generally
wait four to six weeks for delivery, except for Italian leather merchandise
which may take up to 20 weeks. The Company believes that its delivery times on
stocked items and special orders are significantly faster than the usual
delivery times for furniture and that its ability to offer quick delivery of
merchandise represents a significant competitive advantage.
5
Operations
Generally, the Company's stores are open seven days per week. Stores are
typically staffed by a manager, one full-time salesperson and in some cases, one
or more part-time salespersons, as dictated by the sales volume and customer
traffic of each particular store. In some cases, where sales volume and customer
traffic so warrant, stores may be staffed with one to three additional full-time
salespersons. The Company's licensed stores are substantially the same in
appearance and operation as the Company-owned stores.
The Company and its licensees have district managers throughout the United
States. The district managers supervise store management and monitor stores
within their assigned district to ensure compliance with operating procedures.
District managers report to and coordinate operations in their district with the
Company's executive management.
An inventory of approximately 70% of the items displayed in the stores, in
the colors and fabrics displayed, is usually stocked at the Private Company's
warehouse facilities (described below.) The Company and its licensees typically
(except in the case of certain financed sales) require a minimum cash, check or
credit card deposit of 50% of the purchase price when a sales order is given,
with the balance, if any, payable in cash or certified or official bank check
upon delivery of the merchandise. The balance of the purchase price is collected
by the independent trucker making the delivery.
Marketing
The Company and its licensees advertise in newspapers, transit, radio and
on television in an attempt to saturate its marketplaces. The Company's approach
to advertising requires the Company to establish a number of stores in each area
it enters. This concentration of stores enables area advertising expenses to be
spread over a larger revenue base and to increase the prominence of the local
advertising program. The Company's and the LPS' expenditures for advertising
were approximately $10,893,000, or 11.1% of sales, in the fiscal year ended
August 30, 1997 as compared to approximately $12,265,000, or 11.6% of sales, in
the prior year.
The Company creates advertising campaigns for use by the Company's stores
which also may be used by the Private Stores. The Private Company bears a share
of advertisement costs in New York. See "Certain Relationships and Related
Transactions." However, the Company also advertises independently of the Private
Company outside of the New York metropolitan area. The Company is entitled to
reimbursement from most of its licensees, which are responsible for their
respective costs of advertising; however, the approach and format of such
advertising is usually substantially the same for the Company and its licensees.
The Company has the right to approve the content of all licensee advertising.
In order to further understand its markets, the Company carefully monitors
its sales, interviews customers and obtains other information reflecting trends
in the furniture industry and changes in customer preferences. The Company also
reviews industry publications, attends trade shows and maintains close contact
with its suppliers to aid in identifying trends and changes in the industry.
6
Leasing Strategy and Current Locations
The Company considers the ability to obtain attractive, high-traffic store
locations to be critical to the success of its stores. The Company, together
with outside real estate consultants, selects sites and negotiates leases on
behalf of its licensees. The site selection process involves numerous steps,
beginning with the identification of territories capable of sustaining a number
of stores sufficient to enable such stores to enjoy significant economies of
scale, particularly in advertising, management and distribution. Significant
factors in choosing a territory include market demographics and the availability
of newspapers and other advertising media to efficiently provide an advertising
umbrella in the new territory.
Once a territory is selected, the Company picks the specific locations
within such territory. Although a real estate consultant typically screens sites
within a territory and engages in preliminary lease negotiations, each site is
inspected by an officer of the Company and the Company is responsible for
approval of each location. The leased locations are generally in close proximity
to heavily populated areas, shopping malls, and other competing retail
operations which are on or near major highways or major thoroughfares, are
easily accessible by auto or other forms of transportation and provide
convenient parking.
The locations currently leased by the Company and its licensees range in
size from 1,900 square feet to a little over 8,000 square feet. The Company
anticipates that stores opened in the future will range from approximately 2,000
square feet to 4,000 square feet. Stores may be freestanding or part of a strip
shopping center.
In fiscal 1997, the Company and the LPS closed an aggregate of three
stores. The Company will continue to selectively close stores where the
economics so dictate and it may selectively open additional stores if attractive
opportunities present themselves.
Sources of Supply
The Company currently purchases merchandise, for its stores and the stores
of its licensees and the Private Company, from a variety of domestic
manufacturers generally on 40 to 90 day terms. The Company also purchases from
overseas manufacturers on varying terms. The combined purchasing power of the
Company, its licensees and the Private Company enables them to receive the
right, in some instances, to market exclusively certain products, fabrics and
styles. See "Certain Relationships and Related Transactions."
The Company's principal suppliers of sofabeds are Klaussner Furniture
Industries, Inc. ("Klaussner"), which was recently granted a license to
manufacture furniture under the Sealy(R) brand name, and Ellis Home Furnishings,
Inc. ("Ellis"). Sealy(R) brand name sofabeds are the Company's largest selling
brand name item and the Company believes that Sealy(R) brand name mattresses are
the largest selling mattresses in the world and have the highest consumer brand
awareness. The Company is the largest sofabed specialty retailer and the largest
Sealy(R) sofabed dealer in the United States. During the fiscal year ended
August 30, 1997, the
7
Company purchased approximately 81% of its merchandise from Klaussner and
approximately 11% of its merchandise from Ellis. Leather furniture is purchased
primarily from Klaussner and Industries Natuzzi S.p.A. The loss of Klaussner as
a supplier could have a material adverse effect on the Company. In March 1996,
as part of a series of transactions (the "Klaussner Transaction") the Company,
among other things, granted Klaussner a security interest in substantially all
of its assets in exchange for improved credit terms. In addition, in December
1997, Klaussner purchased $5,000,000 of the Company's convertible preferred
stock ("the Klaussner Investment"). In fiscal 1997, Klaussner also gave the
Company certain vendor credits for advertising and repairs. See "Certain
Relationships and Related Transactions" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a fuller
description of the Klaussner Transaction, the Klaussner Investment and other
transactions with Klaussner.
Licensing Arrangements
The Company's arrangements with its licensees typically involve providing
the licensee with a license, bearing a royalty of 5% of sales, to use the name
Jennifer Convertibles(R). The Company's existing licensing arrangements are not
uniform and vary from licensee to licensee. Generally, however, the Company
either manages the licensed stores or, if the licensee is a partnership, has a
subsidiary act as general partner of such partnership, in each case, for 1% of
the licensees' profits. The arrangements generally have a term ranging between
10 and 20 years (and may include options on the licensee's part to extend the
license for additional periods) and involve the grant of exclusivity as to
defined territories. In some cases, the Company also has an option to purchase
the licensee or the licensed stores for a price based on an established formula
or valuation method. Investors in certain licensees have, in certain
circumstances (including a change of control of the Company), the right to put
their investments to the Company for a price based upon an established formula
or valuation method. The Private Company currently provides warehousing, fabric
protection and other services to licensees on substantially the same basis as
such services are provided to the Company and the Company purchases merchandise
for the licensees. The Company also provides certain accounting services to
certain licensees for which it generally charges $6,000 per store, per annum. As
of August 30, 1997, the Company was owed an aggregate of $16,200,000 for
royalties, advances and merchandise by its licensees, a substantial portion of
which was overdue. Of such amount, $9,487,000 due from the LPS is eliminated in
the Company's financial statements as a result of the consolidation of the LPS
and $6,713,000 due from Unconsolidated Licensees was reserved against in such
financial statements due to doubts as to collectibility. Most of the investors
in the licensees have other relationships with the Company or its current or
former management and, in December 1996, the Private Company acquired the
limited partnership interests in LPS owning an aggregate of 49 licensed stores.
See "Certain Relationships and Related Transactions."
As set forth under "Legal Proceedings," the Memoranda of Understanding
("MOUS") and related documents as to the settlement of certain class and
derivative litigation contemplate that, subject to court approval of such
Settlement Agreement, the Company will receive the limited partnership interests
or stock in licensees which now own 55 licensed stores, representing all but 19
of the royalty bearing licensed stores, in connection with the settlement of
certain litigation.
8
Although the Company does not believe that certain transactions in which
licenses were granted to operate stores were subject to state and Federal laws
regulating the offer and sale of franchises, the applicability of such laws is
uncertain as applied to the Company's licensing program, and there can be no
assurance that a court would not take the position that the Company should have
complied with such laws in connection with those transactions. In order to
reduce or eliminate this uncertainty, in 1993 the Company offered certain
licensees the opportunity to rescind their license agreements. All such
licensees declined such offers of rescission.
Warehousing and Related Services
Effective January 1, 1994, the Company and the Private Company entered into
a new warehousing agreement (the "New Warehousing Agreement") which terminated
the original Warehousing and Purchasing Agreement (the "Original Warehousing
Agreement") entered into in 1986. Pursuant to the New Warehousing Agreement
(which expires in 2001), the Company currently utilizes the warehousing and
distribution facilities leased and operated by the Private Company consisting of
a 236,000 square foot warehouse facility in North Carolina, and satellite
warehouse facilities in New Jersey and California (collectively, the "Warehouse
Facilities"). The Warehouse Facilities service Company-owned stores, licensed
stores and the Private Stores.
The Company presently uses the Warehouse Facilities to service all of the
Company-owned and licensed stores. Although the Company is not obligated to use
the Warehouse Facilities of the Private Company, it has done so to avoid the
administrative and other costs associated with developing and maintaining the
infrastructure required to manage warehousing and handling independently. The
New Warehousing Agreement provides that the Private Company is not obligated to
provide services for more than 300 Company-owned stores. The Company pays the
Private Company a monthly warehouse fee (the "Warehouse Fee") equal to 5% of the
retail selling price of all merchandise (including the retail selling price of
any related services, such as fabric protection) delivered from the Warehouse
Facilities to customers of the Company-owned stores plus 5% of the retail
selling price of all merchandise delivered from the Warehouse Facilities to
Company-owned stores for display purposes. In addition, the Private Company has
separately contracted with the Company's licensees to provide warehousing and
handling services for licensed stores for a fee equal to 5% of the retail price
of merchandise delivered to the licensees' customers and on other terms
substantially similar to those under the New Warehousing Agreement.
The Private Company also provides a number of other services, including
fabric protection and warranty services. In addition to the Warehouse Fee, the
Company pays the Private Company a portion (approximately one-third) of fabric
protection revenues from its customers. The Company also pays the Private
Company for freight charges based on quoted freight rates. See "Certain
Relationships and Related Transactions."
As described in "Legal Proceedings," the MOUS contemplate that the Company
and the Private Company will enter into a new warehousing agreement pursuant to
which the arrangements described above will be substantially revised and the
Company will take over the warehousing and related functions on
9
January 1, 1999. In contemplation of the settlement, in August 1996, the Company
began to take over certain functions, including customer service, cash
processing, order processing and store support.
Trademarks
The trademarks Jennifer Convertibles(R), Jennifer Leather(R), Jennifer
House(R) and With a Jennifer Sofabed, There's Always a Place to Stay(R) are
registered with the U.S. Patent and Trademark Office and now owned by the
Company. An application has been filed for a trademark for "Jennifer Living
Rooms" and "Bellissimo Collection." The Private Company, as licensee, was
granted a perpetual royalty-free license to use and sublicense the proprietary
marks in the State of New York, subject to certain exceptions.
See "Certain Relationships and Related Transactions."
Employees
As of August 30, 1997, the Company had 452 employees, including seven
executive officers. The Company trains personnel to meet its expansion needs by
having its most effective managers and salespersons train others and evaluate
their progress and potential for the Company. The Company believes that its
employee relations are satisfactory. None of the Company's employees are
represented by a collective bargaining unit. The Company has never experienced a
strike or other material labor dispute.
Competition
The Company competes with other furniture specialty stores, major
department stores, individual furniture stores, discount stores and chain
stores, some of which have been established for a long time in the same
geographic areas as the Company's stores (or areas where the Company or its
licensees may open stores). The Company believes that the principal areas of
competition with respect to its business are store image, price, delivery time,
selection and service. The Company believes that it competes effectively with
such retailers because its stores offer a broader assortment of convertible
sofabeds than most of its competitors and, as a result of volume purchasing, it
is able to offer its merchandise at attractive prices. The Company also
advertises more extensively than many of its competitors and offers
substantially faster delivery on most of its items.
Item 2. PROPERTIES
The Company maintains its executive offices in Woodbury, New York
pursuant to a lease which expires in the year 2005.
As of August 30, 1997, the Company and the LPS lease all of their store
locations pursuant to leases which expire between 1998 and 2009. During fiscal
1998, eight leases will expire, although the lessee has an option to renew each
such lease. The leases are usually for a base term of at least five years. For
additional information concerning the leases, see Note 9 of "Notes to
Consolidated Financial Statements."
10
Item 3. Legal Proceedings.
------------------
The Company is involved in a number of proceedings described below.
A. The Class Action Litigation
---------------------------
Beginning in December 1994, a series of 11 class actions were
brought against the Company, various of its present and former officers and
directors, and certain third parties, in the United States District Court for
the Eastern District of New York. The complaints in all of these actions alleged
that the Company and the other defendants violated Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder in
connection with the press release (the "Press Release") issued by the Company on
or about December 2, 1994. All of these class actions have been consolidated
under the caption IN RE JENNIFER CONVERTIBLES, Case No. 94 Civ. 5570, pending in
the Eastern District of New York (the "Class Action Litigation").
In March 1996, the parties in the Class Action Litigation
signed a Memorandum of Understanding for the purpose of settling the Class
Action Litigation (the "Class Action MOU"). The terms of the Class Action MOU
(which are described below) are subject to a stipulation of settlement and other
documentation to be submitted to the United States District Court for the
Eastern District of New York, as well as the approval of the terms of the
settlement by that Court.
The Class Action MOU also provides that the settlement of the
Class Action Litigation is contingent upon final Court approval of the proposed
settlement set forth in another Memorandum of Understanding dated March 18, 1996
with respect to certain derivative actions pending in: (a) the United States
District Court for the Eastern District of New York; (b) the Supreme Court of
the State of New York; and (c) the Court of Chancery in the State of Delaware
(the "Derivative Action MOU"). These derivative actions and the terms of the
Derivative Action MOU, are also described below.
The Class Action MOU provides for the payment to certain
members of the class and their attorneys of an aggregate maximum amount of $7
million in cash and preferred stock having a present value of $370,000. The cash
portion of the settlement is to be funded entirely by insurance company
proceeds. The stock portion of the settlement is to be provided by the Company
based on a new issue of preferred stock of the Company having an aggregate
present value of $370,000, which will bear an annual dividend of 7% and which
will be convertible into the Company's Common Stock (at such time as the
Company's Common Stock trades at $7.00 per share or higher) at $7.00 per share.
The settlement of the Class Action Litigation is a claims made
settlement, meaning that the actual amount of cash and stock to be paid out will
depend on the number of persons entitled to participate in the settlement who
actually file valid proofs of claim. All those who purchased Common Stock during
the period from December 9, 1992 through December 2, 1994 and who held their
stock through December 2, 1994, will be entitled to participate in the
settlement.
11
The Class Action MOU also provides that the defendants will
not object to an application by plaintiffs' attorneys for fees and expenses of
up to 1/3 of the total of the maximum amount of the cash and stock proceeds of
the settlement, without regard to the number of class members who filed valid
proofs of claim.
In January 1997, documents reflecting the settlement terms set
forth in the Class Action MOU were filed in the United States District Court in
the Eastern District of New York. At that time, Judge Hurley of that court
signed an order providing, INTER ALIA, for notice of the terms of the settlement
to the class, a deadline for the filing of objections by class members, and a
date for the hearing on the fairness of the settlement. No objections to the
settlement were filed by any member of the class. However, the hearing as to the
fairness of the settlement has not yet been held, and the settlement has not yet
been approved, as a result of the pendency of the unresolved objections to the
proposed settlement of the derivative litigation, as is more fully set forth
below.
B. The Derivative Litigation
-------------------------
Beginning in December 1994, a series of six actions were
commenced as derivative actions on behalf of the Company, against Harley J.
Greenfield, Fred J. Love, Edward B. Seidner, Bernard Wincig, Michael J. Colnes,
Michael Rosen, Al Ferarra, William M. Apfelbaum, Glenn S. Meyers, Lawrence R.
Haut, Jara Enterprises, Inc., Jerome I. Silverman, Jerome I. Silverman Company,
Selig Zises and BDO Seidman & Co.1 in: (a) the United States District Court for
the Eastern District of New York, entitled PHILIP E. ORBANES V. HARLEY J.
GREENFIELD, ET AL., Case No. CV 94-5694 (DRH) and MEYER OKUN AND DAVID SEMEL V.
AL FERRARA, ET AL., Case No. CV 95-0080 (DRH); MEYER OKUN DEFINED BENEFIT
PENSION PLAN, ET AL. V. BDO SEIDMAN & CO., Case No. CV 95-1407 (DRH); and MEYER
OKUN DEFINED BENEFIT PENSION PLAN V. JEROME I. SILVERMAN COMPANY, ET. AL., Case
No. CV 95-3162 (DRH); (b) the Court of Chancery for the County of New Castle in
the State of Delaware, entitled MASSINI V. HARLEY GREENFIELD, ET. AL., Civil
Action No. 13936 (WBC); and (c) the Supreme Court of the State of New York,
County of New York, entitled MEYER OKUN DEFINED BENEFIT PENSION PLAN V. HARLEY
J. GREENFIELD, ET. AL., Index No. 95-110290 (collectively, the "Derivative
Litigation").
The complaints in each of these actions assert various acts of
wrongdoing by the defendants, as well as claims of breach of fiduciary duty by
the present and former officers and directors of the Company, including but not
limited to claims relating to the matters described in the Press Release.
In March 1996, all of the parties to the derivative action
(including the Company), except for Selig Zises ("Zises") and BDO Seidman & Co.
("Seidman") signed a Memorandum of Understanding for the purpose of settling all
of the claims involving those parties in the Derivative Litigation (the
"Derivative Litigation MOU"). The terms of the Derivative Litigation MOU (which
are discussed below)
--------
1 Each of these individuals and entities is named as a defendant in at
least one action.
12
are subject to a stipulation of settlement and other documentation to be
submitted to the appropriate Court(s), as well as Court approval of the terms of
the settlement.
The Derivative Litigation MOU also provides that the
settlement of the Derivative Litigation is contingent upon final Court approval
of the proposed settlement set forth in the Class Action MOU, by the United
States District Court for the Eastern District of New York. The terms of the
Class Action MOU have already been described above.
The Derivative Litigation MOU annexes as Exhibit A thereto a
signed agreement (the "Settlement Agreement") dated March 5, 1996 between the
Private Company and the Company. In February 1997, definitive agreements
reflecting the terms of the Derivative Litigation MOU were submitted to the
United States District Court for the Eastern District of New York. The
Settlement Agreement and the related agreements, although signed, provide that
they too are subject to and dependent upon Court approval of the settlement of
the Derivative Litigation.
The Settlement Agreement and the related agreements are
designed to restructure the relationship between the Private Company and the
Company, in order to reduce and eliminate any alleged actual or potential
conflicts of interest, and to provide tangible benefits to the Company. The
Settlement Agreement and the related agreements contemplate, INTER ALIA, as
follows:
1. From the effective date of the Settlement Agreement until
December 31, 1997, the Private Company will bill the Company for services under
a new warehousing agreement, a warehousing fee of 8.3% of the retail selling
price of merchandise leaving the Warehouse Facilities for Company stores and
their customers and a redelivery fee equal to 3% of the retail selling price of
merchandise which is required to be redelivered to customers, under certain
circumstances. The Company will be entitled to a reduction in the warehousing
fee to the extent, and as of the date, that the Company assumes the costs of
providing certain non-warehousing services presently provided by the Private
Company to the Company. The Settlement Agreement contemplates that once the
Company has assumed all of these services, the warehousing fee shall be reduced
to 7.2%, which will then be the warehousing fee until December 31, 1997, and
that under all circumstances, from January 1, 1998 through December 31, 1998,
the warehousing fee shall be 7.2%. Upon the effective date of the Settlement
Agreement, the Company will no longer pay the Private Company separately for
"fabric protection" services.
2. In the event that the volume of merchandise shipped from
all of the Private Company's warehouses to Company stores during calendar year
1996 fails to equal a retail selling price of $135,000,000, the Company shall
pay the Private Company an additional fee of $65,000 for each million dollars of
the shortfall (the "Shortfall Payments"), but in no event more than $650,000.
The Private Company will repay the Company for the Shortfall Payments in the
following manner: (i) 50% in 1997 if $140,000,000 or more in shipments is
achieved; (ii) 50% in 1998 if $140,000,000 or more in shipments is achieved; and
(iii) the balance of any Shortfall Payments not repaid by the Private Company to
the Company under (i) and (ii) above will be repaid over seven years in equal
monthly installments, without interest, beginning on January 1, 1999. The
Company did not achieve sales of $135,000,000 in calendar
13
1996 and, accordingly, it will be liable for the Shortfall Payments if the
settlement is approved as contemplated. Provisions of $520,000 and $130,000 have
been made in the financial statements in the fiscal years ended August 31, 1996
and August 30, 1997, respectively. The Shortfall Payments described above are
being credited to the Private Company under the Offset Agreement currently in
anticipation of Court approval of the settlement. The Company also agreed to
give the Private Company a credit under the Offset Agreement (as defined below)
equal to the amount obtained by multiplying the warehouse fee then in effect by
the amount, if any, by which the Company's sales for each of the 12 months
ending December 31, 1997 and 1998 are less than $106,500,000. Such credit is to
be estimated and paid monthly based on target sales for each month and will be
reconciled and adjusted quarterly. Sales in excess of $106,500,000 in 1997 will
be carried over to 1998 and sales in 1998 in excess of $106,500,000 will be
carried back to 1997, if necessary. No provision is currently being made with
respect to such credit.
3. On January 1, 1999, the Private Company will assign to the
Company all of its real property interests in or to the various warehouse
facilities then being operated by the Private Company (including all related
computer hardware), including any fee simple and/or leasehold interest, subject
only to any mortgages, purchase money security agreements, leasehold
obligations, racking and forklifting expenses, and other operation expenses
relating to such property interest and the mortgage on the Inwood, New York
warehouse (the "Inwood Warehouse"). The Inwood Warehouse was sold in 1996. The
Settlement Agreement also provided that, as of December 31, 1998, the aggregate
of all mortgages on the Inwood Warehouse facility would not exceed $2,850,000
and that, to the extent that the aggregate of all such mortgages was less than
$2,850,000 as of that date, the Company would pay the Private Company the
difference between $2,850,000 and the actual amount of such mortgages by way of
set-off against the Private Company's obligation to the Company for warehousing
services.
4. The Settlement Agreement provided that if the Private
Company sold the Inwood Warehouse before December 31, 1998 (as it has already
done), then the Private Company would pay the Company $25,000 per month starting
January 1, 1999 for a period of 84 months. The Settlement Agreement also
provided that if the Inwood Warehouse was sold for more than $4,500,000 (net of
all reasonable and customary expenses and brokerage commissions), the Company
would be entitled to any such excess. However, the Inwood Warehouse was sold in
June 1996 for less than $4,500,000.
5. Commencing January 1, 1999, and continuing for seven years,
the Company will provide the Private Company all warehousing services formerly
provided by the Private Company to the Company for a fee equal to 2% of the
Private Company's deemed retail selling price, plus an additional fee for any
fabric protection services sold by the Private Company to customers, payable at
the then current invoice rate.
6. The Private Company acquired the interest of the limited
partners in the LPS known as Jennifer, LP III, Jennifer, LP IV, Jennifer, LP V
(the "Partnerships") on December 31, 1996. The Private Company will also
purchase the stock of the shareholders of Southeastern Florida Holding Co., Inc.
("S.F.H.C.") upon approval of the settlement. The Private Company will assign
its Partnership interests and stock to the Company at no cost (except as
described below). As of March 5, 1996, S.F.H.C. and the Partnerships owned an
aggregate of 55 licensed Jennifer Convertibles stores which, after such
assignment, will be wholly-owned by the
14
Company. Upon approval of the settlement, the current shareholders of S.F.H.C.
will receive 10-year warrants to purchase an aggregate of 180,000 shares of
Common Stock at $7.00 per share. In addition, the maturity date of three-year
notes (with an aggregate remaining balance of $300,000) originally entered into
by them in connection with their purchase of warrants (the "Original Warrants"),
expiring June 1998, to purchase an aggregate of 180,000 shares of Common Stock
at $15.625 per share, was extended for 10 years. The extended notes bear
interest at a rate of 7.12% per annum, and 10% of the principal amount of such
notes is due each year. Such notes are secured by the Original Warrants to
purchase an aggregate of 105,636 shares of Common Stock (representing the unpaid
for Original Warrants) and the Company's sole remedy, until the notes mature,
upon any default in the payment of principal of such notes, is to cancel a
proportionate number of Original Warrants.
7. Commencing January 1, 1999, the Private Company agrees to
pay the Company, under the offset agreement described in Paragraph 11 below,
$1,400,000 in resolution of certain intercompany accounts as of August 26, 1995
to be paid, $17,000 per month to be applied toward principal and interest, with
interest computed at 6% annually.
8. Commencing January 1, 1999, the Private Company will
provide a license to the Company permitting the Company to use and change the
Private Company's computer program without fee. As of January 1, 1999, the
Company will also assume the obligations and personnel of the computer
department presently maintained by the Private Company.
9. On or after the effective date of the Settlement Agreement,
and through December 31, 1998, although the Private Company will continue to be
responsible to apply fabric protection (at no additional charge to the Company),
the Company will be responsible for any claims on breach of warranty relating to
fabric protection (irrespective of the date of the sale or whether the sale was
made by the Private Company or the Company), provided, that, as to such claims
made as to merchandise sold by the Private Company, the Company may bill the
Private Company for outside parts and labor directly expended in connection
therewith.
10. The Private Company will assume and pay the $1,200,000
debt of certain stockholders of S.F.H.C. to S.F.H.C. in 84 equal monthly
installments without interest, beginning January 1, 1999.
11. As of the effective date of the Settlement Agreement, the
Private Company and the Company will enter into an offset agreement similar to
the one described under "Certain Relationships and Related Transactions" dealing
with the offset of obligations for the period not covered by the initial offset
agreement and providing for cash payments to the extent that any amounts due
under such agreement exceeds $1,000,000. In contemplation of the settlement, the
Company and the Private Company are
15
currently operating under the terms of this offset agreement with respect to
cash payments of current amounts due in excess of $1,000,000.
12. Royalties aggregating $100,147 from certain licensees
managed by the Private Company will be paid in 84 equal monthly installments,
commencing January 1, 1999, without interest.
The Derivative Litigation MOU also provides, INTER ALIA, as
follows:
1. All of the plaintiffs in the derivative actions and the
Company will release all of current and former officers and directors, including
Isabelle Silverman, and the defendants in the derivative actions (except for
Zises, KPMG Peat Marwick ("Peat") and Seidman), from all claims which were or
could have been asserted against them in the Derivative Litigation or in any
other Court including, but not limited to: (a) the matters discussed or referred
to in the Final Report of Counsel to the Independent Committee of the Board of
Directors of Jennifer Convertibles, Inc., dated January 26, 1995 (as previously
described in the Company's Annual Reports on Form 10-K for the fiscal years
ended August 27, 1994, August 26, 1995 and August 31, 1996 and as discussed in
Note 9 to the Financial Statements included herein); (b) the draft complaint in
a proposed action entitled ZISES, ET. ANO. V. GREENFIELD, ET AL., (S.D.N.Y.)
dated March 30, 1994; (c) all transactions publicly disclosed by Jennifer
through the date of filing with the SEC of its Annual Report on Form 10-K for
the year ended August 26, 1995; and (d) the negotiation and approval of the
settlement of the Class Action Litigation.
2. Although one or more of the derivative actions may continue
against Peat, Zises and/or Seidman, the Derivative Litigation MOU contains
provisions designed to relieve those receiving releases from any claims by Peat,
Seidman and/or Zises for contribution or indemnification.
3. The defendants in the derivative actions will not object to
an application by counsel for the plaintiffs in the derivative actions for an
award of attorneys' fees and expenses up to an aggregate of $795,000. Of this
amount, the first $500,000 will be funded by an insurance carrier for one of the
defendants other than the Company; $165,000 will be paid in cash by the Private
Company, and the remaining portion of fees and expenses will be paid by the
Company in preferred stock having a present value of up to $130,000. The
preferred stock to be issued by the Company will be of the same type and will be
subject to the same terms and conditions as the preferred stock to be issued in
connection with the Class Action Litigation described above.
In February 1997, documents reflecting the terms of the Derivative MOU
were submitted to the United States District Court in the Eastern District of
New York. At that time, Judge Hurley signed an order which, INTER ALIA, provided
for notice to the shareholders of the Company of the settlement, a deadline for
shareholders of the Company to object to the terms of the settlement and a
proposed hearing date as to the fairness of the proposed settlement of the
derivative litigation.
A group of shareholders claiming to own approximately 8.5% of the
outstanding shares of the Company have filed (as a group) objections to the
fairness of the settlement. This group has requested deposition and document
discovery in advance of any hearing on the fairness of the settlement, and the
16
Company has provided some document and deposition discovery voluntarily.
However, the group of objectors has made a motion for additional discovery which
the Company has opposed. The motion is still pending.
The Company anticipates that once the Court decides on what additional
discovery, if any, to give the objectors, it will also schedule a hearing date
to determine the fairness of the derivative and class action settlements.
C. SEC Investigation
-----------------
On May 3, 1995, the Securities and Exchange Commission commenced a
formal investigation as to the Company. In connection therewith, subpoenas were
issued to the Company and certain of its current and former management and the
Company and such persons have furnished various contracts, records and
information.
D. Other Litigation
----------------
The Company is also subject, in the ordinary course of business, to a
number of litigations in relation to leases for those of its stores which it has
closed or relocated. Management does not believe the outcome of such litigations
will be material to the Company's financial position.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable
17
PART II
Item 5: Market For Registrant's Common Equity and Related
Stockholder Matters.
-------------------------------------------------
The principal market for the Common Stock during the two fiscal years ended
August 30, 1997 and August 31,1996 was the NASDAQ Bulletin Board. The following
table sets forth, for the fiscal periods indicated, the high and low bid prices
of the Common Stock on the Bulletin Board. Such quotations since April 17, 1995
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
High Low
---- ---
Fiscal Year 1996:
1st Quarter..................... $ 3 3/4 $ 1 13/16
2nd Quarter..................... 3 3/8 2
3rd Quarter..................... 3 1/4 2 1/16
4th Quarter..................... 3 1/4 2
High Low
---- ---
Fiscal Year 1997:
1st Quarter..................... $ 2 5/8 $ 1 7/8
2nd Quarter..................... 2 9/16 1 3/4
3rd Quarter..................... 2 1/2 1 3/4
4th Quarter..................... 2 15/16 2 3/16
As of November 14, 1997, there were approximately 244 holders of record and
approximately 4,600 beneficial owners for the Common Stock. On November 14,
1997, the closing bid and asked prices of the Common Stock as reported on the
NASDAQ Bulletin Board were $2 5/16 and $2 1/8, respectively.
Dividend Policy
The Company has never paid a dividend on its Common Stock and does not
anticipate paying dividends on the Common Stock at the present time. The Company
currently intends to retain earnings, if any, for use in its business. There can
be no assurance that the Company will ever pay dividends on its Common Stock.
The Company's dividend policy with respect to the Common Stock is within the
discretion of the Board of Directors and its policy with respect to dividends in
the future will depend on numerous factors, including the Company's earnings,
financial requirements and general business conditions.
18
Item 6. SELECTED FINANCIAL DATA
The following table presents certain selected financial data for Jennifer
Convertibles, Inc. and subsidiaries:
[Enlarge/Download Table]
(in thousands, except share data)
-----------------------------------------
OPERATIONS DATA: Year Ended Year Ended Year Ended Year Ended Year Ended
8/30/97 8/31/96 8/26/95 8/27/94 8/31/93
----------- ----------- ----------- ----------- -----------
Net sales $ 97,789 $ 106,041 $ 126,074 $ 97,420 $ 64,348
----------- ----------- ----------- ----------- -----------
Cost of sales, including store occupancy,
warehousing, delivery and fabric protection 67,114 72,708 86,964 67,974 43,898
Selling, general and administrative expenses 32,904 37,618 45,955 34,139 22,652
Depreciation and amortization 1,840 1,852 2,261 2,091 1,583
Termination of consulting agreement,
legal and other costs -- -- 500 6,604 --
Write off of purchased limited partners' interests -- -- -- 3,482 --
(Recovery) provision for losses on amounts due from
Private Company and Unconsolidated Licensees (426) 952 3,088 3,284 --
Loss from store closings 55 191 1,670 -- --
----------- ----------- ----------- ----------- -----------
101,487 113,321 140,438 117,574 68,133
----------- ----------- ----------- ----------- -----------
Operating (loss) (3,698) (7,280) (14,364) (20,154) (3,785)
----------- ----------- ----------- ----------- -----------
Other income (expense)
Royalty income 374 375 523 644 711
Interest income 67 195 311 473 674
Interest expense (28) (47) (48) (61) (640)
Gain on sale of securities -- -- -- 336 61
Other income, net 319 880 1,670 1,374 696
----------- ----------- ----------- ----------- -----------
732 1,403 2,456 2,766 1,502
----------- ----------- ----------- ----------- -----------
(Loss) before income taxes (benefit) and
minority interest (2,966) (5,877) (11,908) (17,388) (2,283)
Income taxes (benefit) 95 146 160 (322) 113
----------- ----------- ----------- ----------- -----------
(Loss) before minority interest (3,061) (6,023) (12,068) (17,066) (2,396)
Minority interest share of losses -- -- -- 2,449 2,902
----------- ----------- ----------- ----------- -----------
Net (loss) earnings ($3,061) ($6,023) ($12,068) ($14,617) $ 506
=========== =========== =========== =========== ===========
Net (loss) earnings per share ($0.54) ($1.06) ($2.12) ($2.56) $ 0.09
=========== =========== =========== =========== ===========
Weighted average number of common shares 5,700,725 5,700,725 5,700,725 5,700,725 6,013,000
=========== =========== =========== =========== ===========
Cash Dividends -- -- -- -- --
=========== =========== =========== =========== ===========
Store data: 8/30/97 8/31/96 8/26/95 8/27/94 8/31/93
----------- ----------- ----------- ----------- ----------- -----------
Company-owned stores open
at end of period 84 86 90 55 34
Consolidated licensed stores open
at end of period 63 64 68 99 73
Licensed stores not consolidated
open at end of period 11 11 11 14 14
----------- ----------- ----------- ----------- -----------
Total stores open at end of period 158 161 169 168 121
=========== =========== =========== =========== ===========
BALANCE SHEET DATA: 8/30/97 8/31/96 8/26/95 8/27/94 8/31/93
------------------- ----------- ----------- ----------- ----------- -----------
Working capital (deficiency) ($17,258) ($15,757) ($10,988) $ 1,240 $ 11,573
Total assets 22,998 25,435 33,871 44,922 37,488
Long-term obligations 421 230 337 477 118
Total liabilities 36,365 35,741 38,154 37,137 15,305
(Capital deficiency) stockholders' equity (13,367) (10,306) (4,283) 7,785 22,183
(Capital deficiency) stockholders' equity per share ($2.34) ($1.81) ($0.75) $1.37 $3.69
19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE U.S. PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, AS AMENDED. THESE STATEMENTS INVOLVE
KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL
RESULTS OR OUTCOMES TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO RISK FACTORS SUCH AS UNCERTAINTY AS TO THE OUTCOME OF THE LITIGATION
CONCERNING THE COMPANY, FACTORS AFFECTING THE FURNITURE INDUSTRY GENERALLY, SUCH
AS THE COMPETITIVE AND MARKET ENVIRONMENT, AND MATTERS WHICH MAY AFFECT THE
COMPANY'S SUPPLIERS OR THE PRIVATE COMPANY. IN ADDITION TO STATEMENTS WHICH
EXPLICITLY DESCRIBE SUCH RISKS AND UNCERTAINTIES, INVESTORS ARE URGED TO
CONSIDER STATEMENTS LABELED WITH THE TERMS "BELIEVES," "BELIEF," "EXPECTS,"
"INTENDS," "PLANS" OR "ANTICIPATES" TO BE UNCERTAIN AND FORWARD-LOOKING.
OVERVIEW
The Company is the owner and licensor of sofabed specialty retail
stores that specialize in the sale of a complete line of sofabeds and companion
pieces such as loveseats, chairs and recliners and specialty retail stores that
specialize in the sale of leather furniture.
For the fiscal years ended August 31, 1992 and August 31, 1993, the
Company did not consolidate the operations of the LP's of which subsidiaries of
the Company served as general partners. In November 1994, during the course of
its audit, KPMG Peat Marwick, the Company's independent auditor at the time,
advised the Company that its method of accounting for the LP's should be changed
and would likely require a restatement of previously announced financial
results. In addition, on December 2, 1994, a special committee of the Company's
Board of Directors delivered a summary report which concluded that the Company
had meritorious claims against three members of its management, the Private
Company and others. The Company announced these matters publicly in a press
release on December 2, 1994. As more fully discussed under "Legal Proceedings,"
the Company and certain of its management became involved in class action and
derivative litigations relating to such matters and, on May 3, 1995, the
Securities and Exchange Commission commenced an investigation relating to such
matters. In November 1994, the Company determined that it should consolidate the
operating losses of such LP's, to the extent they exceeded the capital
contributions of the limited partners, in its financial statements for the
fiscal year ended August 27, 1994 and the Company subsequently determined that
such accounting treatment would have been the appropriate treatment for the 1993
and 1992 fiscal years as well. Accordingly, the 1994, 1995, 1996 and 1997
consolidated financial statements include the operations of such LP's in excess
of capital contributed by the limited partners as well as those of the Company
and its subsidiaries.
20
The operating losses in excess of capital contributions of the LP's
that are included in the consolidated financial statements are as follows:
[Download Table]
Years Ended
------------------------------------
(In Thousands)
8/26/95 8/31/96 8/30/97
------- ------- --------
Total operating losses before
capital contributions of LP's $(7,288) $(4,206) $(4,234)
------- ------- -------
Total capital contributions -- -- --
------- ------- -------
Net operating losses $(7,288) $(4,206) $(4,234)
======= ======= =======
Prior to fiscal 1996, the Company relied upon the Private Company to
provide and maintain all data entry processing and other related services that
support its business. Employees of the Private Company provided these services
as well as other related services such as all accounts payable
(non-merchandise), all payroll preparation services, inventory control
reporting, certain store cash recording and initial review of cash activity and
store customer service. Starting in fiscal 1996, the Company has been assuming
these responsibilities.
The Company has for all fiscal years prior to September 1, 1994 engaged
the accounting firm of Jerome I. Silverman Company ("JISCO") to provide general
accounting and tax services. Effective September 1, 1994, the Company terminated
the accounting and tax services of JISCO and hired 19 employees who had
previously worked directly for JISCO. This group, under the direction of a new
Executive Vice President and Chief Financial Officer hired on August 1, 1994,
established the Company's general accounting offices.
RESULTS OF OPERATIONS:
FISCAL YEAR ENDED AUGUST 30, 1997 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1996:
Net sales decreased by 7.8% to $97,789,000 for the fiscal year ended
August 30, 1997 as compared to $106,041,000 for the fiscal year ended August 31,
1996. This decrease is mainly attributable to the closing of three stores since
the prior year period and a decline in net sales of the Jennifer Leather
division of $6,366,000. This decline is partly attributable to an inability to
obtain inventory due to an overseas supplier's production problems.
Additionally, the current fiscal year included 52 weeks as compared to 53 weeks
in the prior year. Comparable store sales (those open for a full year in each
period) decreased by 5.7%.
21
Cost of sales decreased 7.7% to $67,114,000 for the fiscal year ended
August 30, 1997 from $72,708,000 for the fiscal year ended August 31, 1996. The
dollar decrease of $5,594,000 is primarily attributable to:
1) lower net sales which resulted in lower purchases for the year of
approximately $3,900,000;
2) lower occupancy costs due to closed stores of $508,000;
3) higher net home delivery income of $511,000; and
4) higher costs for customer repairs were offset by vendor allowances
from the Company's principal supplier of $1,166,000 which resulted
in a net decline of $506,000 for total repairs.
Cost of sales as a percentage of sales was 68.6% in fiscal 1997,
unchanged from the prior year because the higher costs of merchandise due to a
change in the product mix offset the items described above. Additionally,
warehouse expenses of $5,021,000 and fabric protection services of $2,543,000
provided by the Private Company in fiscal 1997 decreased from $5,822,000 and
$2,972,000, respectively, from the previous year due to the lower sales volume
in the 1997 fiscal year and reduced warehouse fee "shortfall" payments.
Selling, general and administrative expenses were $32,904,000 (33.6% as
a percentage of sales) for the fiscal year ended August 30, 1997 as compared to
$37,618,000 (35.5% as a percentage of sales) for the fiscal year ended August
31, 1996, a decrease of $4,714,000 or 12.6% from the prior year. This decrease
was due principally to reductions in salaries and related benefits of $1,287,000
(principally because of the lower sales volume which generated lower
commissions, as well as fewer stores in operation during the current fiscal
year) and lower legal fees of $610,000. Legal fees were $1,275,000 in the prior
year (see "Liquidity and Capital Resources" below). Accounting fees declined by
$72,000 to $241,000 for the year in part as the result of improved controls
installed during the current fiscal year. Additionally, during the fiscal year
ended August 30, 1997, selling, general and administrative expenses were reduced
for adjustments related to cancelled customer orders of $817,000, which
adjustments ($344,000) in the prior year were classified in other income.
Additionally, advertising expenses declined by $1,372,000 to $10,893,000 (11.1%
as a percentage of sales) as compared to $12,265,000 (11.6% as a percentage of
sales) in the prior year. Although the Company spent approximately the same
amount on advertising in both fiscal years, the fiscal 1997 amount is net of an
advertising allowance of $1,075,000 the Company received from its principal
supplier.
The Company's receivables from the Private Company ($2,335,000), the
Unconsolidated Licensees (other than S.F.H.C.) ($2,355,000) and S.F.H.C.
($2,208,000) decreased in the aggregate by $426,000 in the fiscal year ended
August 30, 1997 to $6,898,000 which resulted in income of $426,000 from cash
collections. These entities have losses and/or capital deficiencies and,
accordingly, the Company had fully reserved for all amounts due from the Private
Company, the Private Licensees and S.F.H.C. in prior years which totalled
$7,324,000 at August 31, 1996. In connection with the uncertainty of
collectibility and the relationship between the Company, the Private Company,
the Private Licensees and S.F.H.C., the Company accounts for transactions with
these entities on an offset basis. If the result of the offset is a receivable
due from them, then such net amount will be generally recognized only at the
time when cash is received from these entities.
22
Interest income decreased by $128,000 to $67,000 for the fiscal year
ended August 30, 1997 as compared to the prior year. The decrease reflects the
generally lower level of investments throughout the fiscal year.
Other income decreased to $319,000 in the fiscal year ended August 30,
1997 from $880,000 in the prior year. This decrease is primarily attributable to
adjustments related to cancelled customer orders which have been offset against
selling, general and administrative expenses starting in the current fiscal year
(as described above).
Net (loss) in the fiscal year ended August 30, 1997 was $(3,061,000) as
compared to a net (loss) of $(6,023,000) in the prior year, a decrease of loss
of $2,962,000. The primary reason for the decreased loss was due to expense
reductions, credits received from vendors, as discussed above, together with
lower store closing costs and a recovery of amounts due from the Private Company
and Unconsolidated Licensees which had previously been recorded as losses.
FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED TO FISCAL YEAR ENDED AUGUST 26, 1995:
Net sales decreased by 15.9% to $106,041,000 for the fiscal year ended
August 31, 1996 as compared to $126,074,000 for the year ended August 26, 1995.
This decrease is mainly attributable to the closing of eight stores since the
prior year period, a physical split of 14 Jennifer Convertibles stores into both
a Jennifer Convertibles store and a Jennifer Leather store (thereby
cannibalizing sales), a reduction in the number of credit promotions that the
Company has been able to offer customers to stimulate business and an
industry-wide softness. Comparable store sales (those open for a full year in
each period) decreased by 16.3% partially as a result of the physical split
described above.
Cost of sales decreased 16.4% to $72,708,000 for the year ended August
31, 1996 from $86,964,000 for the fiscal year ended August 26, 1995. The dollar
decrease of $14,256,000 is attributable to the lower sales and lower occupancy
costs due to the closed stores, while the decrease in the cost of sales as a
percentage of sales to 68.6% from 69.0% is essentially due to lower costs of
merchandise. Warehouse expenses of $5,822,000 and fabric protection services of
$2,972,000 provided by the Private Company decreased from $6,304,000 and
$3,804,000, respectively, from the previous year due to the lower sales volume
in the current fiscal year.
Selling, general and administrative expenses were $37,618,000 (35.5% as
a percentage of sales) for the fiscal year ended August 31, 1996 as compared to
$45,955,000 (36.5% as a percentage of sales) for the fiscal year ended August
26, 1995, a decrease of $8,337,000 or 18.1% over the prior year. This decrease
was due principally to reductions in salaries and related benefits of $3,586,000
(principally because of the lower sales volume which generated lower commissions
as well as fewer stores in operation during the current fiscal year) and lower
advertising expenses of $3,464,000. Legal fees increased in the current fiscal
year by $403,000 to $1,275,000 primarily because of the new Credit and Security
Agreement signed with Klaussner (see "Liquidity and Capital Resources" below).
Accounting fees declined by $421,000 to $313,000 for the year in part as the
result of improved controls installed during the current fiscal year. Various
other store expense categories were reduced due to the implementation of the
Company's cost reduction programs.
23
The Company's receivables from the Private Company, the Private
Licensees and S.F.H.C. increased by $952,000 in the fiscal year ended August 31,
1996 to $7,324,000. These entities have losses and/or capital deficiencies and,
accordingly, the Company has fully reserved for all amounts due from the Private
Company and the Unconsolidated Licensees. This resulted in a provision for loss
of $952,000. In prior years, the Company had reserved the full amounts due which
totalled $6,372,000 at August 26, 1995.
In connection with the uncertainty of collectibility and the
relationship between the Company, the Private Company and the Unconsolidated
Licensees, the Company will account for subsequent transactions with these
entities on an offset basis. However, if the result of the offset is a
receivable due from them, then such net amount will be generally recognized only
at the time when cash is received from these entities.
Interest income decreased by $116,000 to $195,000 for the fiscal year
ended August 31, 1996 as compared to the prior year. The decrease reflects the
generally lower level of investments throughout the fiscal year.
Other income decreased to $880,000 in the fiscal year ended August 31,
1996 from $1,670,000 in the prior year. This decrease is primarily attributable
to adjustments related to cancelled customer orders.
Net (loss) in the fiscal year ended August 31, 1996 was $(6,023,000)
compared to a net (loss) of $(12,068,000) in the prior year, a decrease of loss
of $6,045,000. The primary reason for the decreased loss was due to expense
reductions and operating efficiencies the Company was able to achieve as
discussed above together with lower store closing costs and a substantially
lower provision for losses from the Private Company and Unconsolidated Licensees
reflecting the reduced increase in such amount over the prior year.
LIQUIDITY AND CAPITAL RESOURCES:
As of August 30, 1997, the Company and LP's had an aggregate working
capital deficiency of $17,258,000 compared to a deficiency of $15,757,000 at
August 31, 1996 and had available cash and cash equivalents of $3,405,000
compared to $3,600,000 at August 31, 1996.
The Company is continuing to fund the operations of the LP's which, as
described above, continue to generate operating losses. All such losses have
been consolidated in the Company's consolidated financial statements. The
Company's receivables from the Private Company, the Unconsolidated Licensees,
and S.F.H.C., which had been fully reserved for in prior years, decreased by
$426,000 which has been reflected in income. These entities have operating
losses and capital deficiencies and there can be no assurance that the total
receivables of $6,898,000 at August 30, 1997 will be collected. It is the
Company's intention to continue to fund these operations in the future. The
Company and the Private Company have entered into offset agreements that permit
the two companies to offset their current obligations to each other. As part of
such agreements, the Private Company agreed to assume certain liabilities owed
to the Company by the Unconsolidated Licensees, other than S.F.H.C..
24
In March 1996, the Company executed a Credit and Security Agreement
("Agreement") with its principal supplier, Klaussner which effectively extended
the payment terms for merchandise shipped from 60 days to 81 days. At various
times during the current fiscal year, the Company exceeded terms by no more than
21 days with such extended amounts owing totalling no more than $2,650,000. As
of August 30, 1997, the amount owed that exceeded terms was $1,990,000 for 14
days. Klaussner has waived the default provisions in the Agreement as to such
violations. As part of the Agreement, the Company granted a security interest in
all of its assets as well as assigning leasehold interests, trademarks and a
licensee agreement to operate the Company's business in the event of default.
Klaussner also lent $1,440,000 to the Private Company (all of which has been
paid at August 30, 1997) to be used to pay down the mortgage balance on the
warehouse property. This paydown also reduced the Company's guarantee to the
mortgagee.
On December 11, 1997, the Company sold to Klaussner 10,000 shares of
Series A Convertible Preferred Stock ("Preferred Stock"), convertible into
1,424,500 shares of the Company's Common Stock for $5,000,000. These shares are
non-voting, have a liquidation preference of $5,000,000 and do not pay dividends
(except if declared on the Common Stock). The Preferred Stock is not convertible
until September 1, 1999, or earlier under certain circumstances (e.g. if another
person or group acquires 12.5% or more of the Common Stock or there are certain
changes in management or the Board of Directors), and has other rights
associated with it. In addition, the Credit and Security Agreement with
Klaussner was modified to include a late fee of .67% per month for invoices the
Company pays beyond the normal 60 day terms. See "Certain Relationships and
Related Transactions."
In June 1996, the Private Company sold its principal New York warehouse
and repaid the mortgage thereon. As a result, the Company's guaranty of a
portion of such mortgage obligation was extinguished without any liability to
the Company.
The Company does not currently have any traditional bank financing and
there can be no assurance such financing will be available in the future.
The proposed settlement of the derivative and class action litigations
(as described elsewhere) will come from insurance company payments and the
issuance of new Preferred Stock by the Company. If approved, there will be no
cash outlays by the Company other than legal costs. Additionally, a new proposed
agreement with the Private Company (as described in the Notes to the
Consolidated Financial Statements) contemplates significant changes to the
operating relationship between the companies.
In fiscal 1996 and 1995, the Company and the LP's closed an aggregate
of 40 stores. In fiscal 1997, three additional stores were closed. Several were
closed for non-performance, but a number of such closings were due to the
Company's decision to combine separate Jennifer Convertibles and Jennifer
Leather stores located in the same demographic areas into one store. The primary
benefit of combining both operations into one store was an elimination of the
real estate expenses and other expenses associated with the closed showroom.
Additional benefits realized included reductions of personnel and, in a number
of cases, elimination of duplicate office equipment and telephone lines.
Although combining two stores into one store generally reduces sales, management
believes that sales at the combined store will generate more profit due to the
elimination or reduction of expenses described above.
25
The Company anticipates losses for fiscal 1998. However, as a result of
the Credit and Security Agreement with Klaussner and the $5,000,000 sale of
Preferred Stock to Klaussner on December 11, 1997, the Company, in the opinion
of management, will have adequate cash flow to fund its operations for the next
fiscal year.
For the year ended August 30, 1997 and fiscal year ended August 31,
1996, the Company and the LP's spent $206,000 and $989,000, respectively, for
capital expenditures. The Company currently anticipates capital expenditures
totalling no more than $500,000 during fiscal 1998.
INFLATION:
There was no significant impact on the Company's operations as a result
of inflation during the fiscal year ended August 30, 1997.
26
Item 8. Financial Statements and Supplementary Data.
--------------------------------------------
See Index immediately following the signature page
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
-----------------------------------------------------------------------
None
Item 10. Directors and Executive Officers of the Company.
------------------------------------------------
The names and ages of the Company's directors and the Company's
executive officers as of December 2, 1997 are as follows:
Position(s) with the
Name Age Company
---- --- -----------------------------
Harley J. Greenfield 53 Chairman of the Board and
Chief Executive Officer
Edward G. Bohn 52 Director
Kevin J. Coyle 53 Director
Edward B. Seidner 45 Director and Executive Vice President
Bernard Wincig 66 Director
George J. Nadel 55 Executive Vice President, Chief
Financial Officer and Treasurer
Rami Abada 38 President, Chief Operating Officer and
Director
Ronald E. Rudzin 35 Senior Vice President - Retail Stores
Leslie Falchook 37 Vice President - Administration
Kevin Mattler 40 Vice President - Store Operations
The Company's directors are elected at the Annual Meeting of
stockholders and hold office until their successors are elected and qualified.
The Company's officers are appointed by the Board of Directors and serve at the
pleasure of the Board of Directors. The Company currently has no compensation or
nominating committees.
The Board of Directors held six meetings during the 1997 fiscal year.
None of the directors attended fewer than 75% of the number of meetings of the
Board of Directors or any committee of which he is a member, held during the
period in which he was a director or a committee member, as applicable.
The Board of Directors has a Stock Option Committee, which as of August
30, 1997, consisted of Messrs. Greenfield and Seidner. The Stock Option
Committee had one meeting during the 1997 fiscal year. The Stock Option
Committee is authorized to administer the Company's stock option plans.
27
The Board of Directors has an Audit Committee, which during the fiscal
year ended August 30, 1997, consisted of Harley Greenfield, Bernard Wincig,
Edward Bohn and Kevin Coyle. During such fiscal year, the Audit Committee held
three meetings. The Audit Committee is responsible for reviewing the adequacy of
the structure of the Company's financial organization and the implementation of
its financial and accounting policies. In addition, the Audit Committee reviews
the results of the audit performed by the Company's outside auditors before the
Annual Report to Stockholders is published.
The Company also has a Monitoring Committee consisting of Edward Bohn,
Kevin Coyle and Bernard Wincig to monitor transactions between the Company and
the Private Company.
Set forth below is a biographical description of each director and
executive officer of the Company as of December 2, 1997.
HARLEY J. GREENFIELD
Mr. Greenfield has been the Chairman of the Board and Chief Executive
Officer of the Company since August 1986 and was the Company's President from
August 1986 until December 1997. Mr. Greenfield has been engaged for more than
25 years in the furniture wholesale and retail business and was one of the
co-founders of the Private Company which established the Jennifer Convertibles
concept in 1975. Mr. Greenfield is a member of the Home Furnishings Association.
EDWARD G. BOHN
Mr. Bohn has been a director of the Company since February 1995. From
March 1995 to May 1997, he was a Consultant for Borlas Sales in Avenel, New
Jersey, an importer/exporter of consumer electronics. Borlas also handles the
sale and installation of software. Since June 1995, he has been a Director of
Nuwave Technologies, Inc. He has also operated as an Independent Consultant in
financial and operational matters since September 1994 through the present. Mr.
Bohn was employed by Emerson Radio Corporation, which designs and sells consumer
electronics, in various capacities from January 1983 through March 1994. From
March 1993 to March 1994, he was the Senior Vice President-Special Projects; he
was Chief Financial Officer from March 1991 through March 1993 and
Treasurer/Vice President of Finance prior to that. Emerson Radio filed in the
United States Bankruptcy Court, District of New Jersey, for protection under
Chapter 11 of the Federal Bankruptcy Act on September 29, 1993 and was
discharged on March 31, 1994.
KEVIN J. COYLE
Mr. Coyle was appointed as a director of the Company in February 1995.
Mr. Coyle is a certified public accountant specializing in litigation support.
Until 1993, Mr. Coyle was President of Olde Kraft Company Ltd. ("Olde Kraft"), a
retail furniture business operating seven stores in the New York Metropolitan
Area. Olde Kraft filed a Chapter XI petition in bankruptcy in October 1993 and
converted to a Chapter VII in October 1994. Mr. Coyle graduated from Queens
College with a BS in accounting and
28
is a member of the American Institute of Certified Public Accountants and the
New York State Society of Certified Public Accountants.
EDWARD B. SEIDNER
Mr. Seidner became a director of the Company in August 1986 and an
Executive Vice President of the Company in September 1994. From 1977 until
November 1994, Mr. Seidner was an officer and a director of the Private Company.
Mr. Seidner has been engaged for more than 25 years in the furniture wholesale
and retail business. Mr. Seidner is a member of the Home Furnishings
Association.
BERNARD WINCIG
Mr. Wincig became a director of the Company in September 1986. Mr.
Wincig has been an attorney in private practice since 1962. Mr. Wincig received
his Juris Doctor degree from Brooklyn Law School.
GEORGE J. NADEL
Mr. Nadel joined the Company and became Executive Vice President, Chief
Financial Officer and Treasurer on August 1, 1994. Prior to joining the Company,
from October 1989 to July 1994, Mr. Nadel was the Senior Vice President and
Chief Financial Officer of Loehmann's Inc., a retail chain specializing in
ladies clothing and accessories. Mr. Nadel has over thirty years experience in
various senior financial officer positions with companies in the retail industry
and is a Certified Public Accountant.
RAMI ABADA
Mr. Abada became the President and a director of the Company on
December 2, 1997 and has been the Chief Operating Officer since April 12, 1994.
Mr. Abada was the Executive Vice President of the Company from April 12, 1994 to
December 2, 1997. Prior to joining the Company, Mr. Abada had been employed by
the Private Company since 1982. Mr. Abada is also a director of CCA Industries,
Inc., a public company engaged in the manufacture and distribution of health and
beauty aid products.
29
RONALD E. RUDZIN
Mr. Rudzin became Senior Vice President - Retail Stores on April 12,
1994. Prior to joining the Company, Mr. Rudzin had been employed by the Private
Company since 1979. Mr. Rudzin was, and is, in charge of directing the sales
force of the Company, including the Private Stores and licensed stores.
LESLIE FALCHOOK
Mr. Falchook has been a Vice President of the Company since September
1986. Mr. Falchook is primarily involved with the internal operations of the
Company. Prior to joining the Company, Mr. Falchook had been employed by the
Private Company since 1982.
KEVIN MATTLER
Mr. Mattler became Vice President - Store Operations on April 12, 1994
and has been with the Company since 1988. Mr. Mattler is involved with, and
supervises, the operation of the Company's stores and during his tenure with the
Company Mr. Mattler has been involved in all facets of its operations. Prior to
joining the Company, Mr. Mattler had been employed by the Private Company since
1982.
Certain of the directors and former officers of the Company are
defendants in the litigation described under "Legal Proceedings" above. See also
"Certain Relationship and Related Transactions."
30
Item 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth compensation paid for the fiscal years ended
August 30, 1997, August 31, 1996 and August 26, 1995 (or such shorter period as
such employees were employed by the Company) of those persons who were (i) the
chief executive officer at August 30, 1997 and (ii) the four other most highly
compensated executive officers of the Company at August 30, 1997 whose total
annual salary and other compensation exceeded $100,000 (collectively, the "Named
Executive Officers").
[Enlarge/Download Table]
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------ -------------
SECURITIES
NAME AND UNDERLYING ALL OTHER
PRINCIPAL POSITION FISCAL YEAR SALARY ($) OPTIONS (#) COMPENSATION
------------------ ----------- ---------- ----------- ------------
Harley J. Greenfield, 1997 $320,000 0 0
Chairman of the Board, Chief 1996 352,307 0 0
Executive Officer and President 1995 400,000 0 0
Edward B. Seidner, 1997 $240,000 0 0
Executive Vice President 1996 264,231 0 0
1995 300,000 0 0
George J. Nadel 1997 $225,000 50,000(1) 0
Executive Vice President and 1996 250,000 0 0
Chief Financial Officer 1995 202,083 50,000(2) 0
Leslie Falchook, 1997 $116,000 50,000(3) 0
Vice President - Administration 1996 127,712 0 0
1995 144,670 0 0
Rami Abada 1997 $120,000 100,000(4) 0
Executive Vice President and 1996 132,115 0 0
Chief Operating Officer 1995 150,000 0
Ronald E. Rudzin 1997 $120,000 100,000(5) 0
Senior Vice President Retail 1996 132,115 0 0
Stores 1995 150,000 0 0
31
---------------------
(1) On May 6, 1997, Mr. Nadel was granted options to purchase 50,000 shares
of Common Stock at $2.00 per share, the market value on the date of
grant, in exchange for the cancellation of the options referred to in
Note (2) below.
(2) On August 1, 1995, Mr. Nadel was granted options to purchase 25,000
shares of Common Stock at $2.50 per share and, on February 1, 1995, Mr.
Nadel was granted options to purchase 25,000 shares of Common Stock at
$3.53 per share, in each case the market value on the date of grant.
(3) On May 6, 1997, Mr. Falchook was granted options to purchase 50,000
shares of Common Stock at $2.00 per share, the market value on the date
of grant, in exchange for the cancellation of options to purchase
20,000 shares of Common Stock at $13.125 per share which were granted
in 1993.
(4) On May 6, 1997, Mr. Abada was granted options to purchase 100,000
shares of Common Stock at $2.00 per share, the market value on the date
of grant.
(5) On May 6, 1997, Mr. Rudzin was granted options to purchase 100,000
shares of Common Stock at $2.00 per share, the market value on the date
of grant.
Non-employee directors currently receive a fee of $10,000 per year,
plus $500 per meeting attended (an aggregate of $78,000 in fiscal 1997).
Directors are reimbursed for out-of-pocket expenses incurred in connection with
their services as such.
Effective February 1, 1996, the salaries of each of the Company's
officers was reduced (other than George J. Nadel), in connection with the
Company's cost-cutting program. The annual salaries of the Company's executive
officers, effective February 1, 1996 are as follows: Harley Greenfield-$320,000;
Edward Seidner - $240,000, George J. Nadel - $225,000, Rami Abada - $120,000,
Ronald E. Rudzin - $120,000, Leslie Falchook - $116,000 and Kevin Mattler -
$96,000.
32
STOCK OPTION PLANS
The Company has Incentive and Non-Qualified Stock Option Plans (the
"Plans"), pursuant to which, as of August 30, 1997, options to purchase an
aggregate of 837,047 shares of Common Stock were outstanding and under which
options to purchase an aggregate of 9,953 shares of Common Stock were available
for grant. In addition, options granted outside of the Plans to purchase an
additional 392,000 shares of Common Stock (not including options to purchase
1,200,000 shares of Common Stock owned by JCI Consultants, L.P.) were
outstanding as of August 30, 1997 and options to purchase an additional 100,000
shares of Common Stock outside of the Plans were granted in December 1997. The
Plans are administered by a Stock Option Committee (the "Committee") consisting
of two persons appointed by the Board of Directors. As of August 30, 1997, the
Committee consisted of Harley Greenfield and Edward B. Seidner. The Committee
has full and final authority (a) to determine the persons to be granted options,
(b) to determine the number of shares subject to each option and whether or not
options shall be incentive stock options or non-qualified stock options, (c) to
determine the exercise price per share of the options (which, in the case of
incentive stock options, may not be less per share than 100% of the fair market
value per share of the Common Stock on the date the option is granted or, in the
case of a stockholder owning more than 10% of the stock of the Company, not less
per share than 110% of the fair market value per share of the Common Stock on
the date the option is granted), (d) to determine the time or times when each
option shall be granted and become exercisable and (e) to make all other
determinations deemed necessary or advisable in the administration of the Plans.
In determining persons who are to receive options and the number of shares to be
covered by each option, the Committee considers the person's position,
responsibilities, service, accomplishments, present and future value to the
Company, the anticipated length of his future service and other relevant
factors. Members of the Committee are not eligible to receive options under the
Plans or otherwise during the period of time they serve on the Committee and for
one year prior thereto, but may receive options after their term on the
Committee is over. Officers and directors, other than members of the Committee,
may receive options under the Plans. The exercise price of all options granted
under or outside of the Plans equaled or exceeded the market value of the
underlying shares on the date of grant.
1997 STOCK OPTION PLAN
On May 6, 1997 the Board of Directors adopted the 1997 Stock Option
Plan (the "1997 Plan"). The Stockholders will be asked to approve the 1997 Plan
at the 1997 Annual Meeting of Stockholders.
The purpose of the 1997 Plan is to attract and retain the services or
advice of selected employees, directors, agents, consultants and independent
contractors of the Company or any parent or subsidiary. The 1997 Plan provides
for the grant of options to acquire a maximum of 500,000 shares of the Common
Stock, and permits the granting of qualified incentive stock options ("ISOs") or
nonqualified stock options ("NSOs"), at the discretion of the administrator of
the 1997 Plan (the "Plan Administrator"). The Board of Directors has appointed
the Committee as the Plan Administrator. Subject to the terms of the 1997 Plan,
the Plan Administrator determines the terms and conditions of options granted
under the 1997 Plan. Options granted under the 1997 Plan are evidenced by
written agreements which contain such terms, conditions, limitations and
restrictions as the Plan Administrator deems advisable and which are not
inconsistent with the 1997 Plan.
33
ISOs may be granted to individuals who, at the time of grant, are
employees of the Company or its affiliates. NSOs may be granted to directors,
employees, consultants, agents or other independent contractors of the Company
or its affiliates.
The 1997 Plan provides that the Plan Administrator must establish an
exercise price for ISOs that is not less than the fair market value per share of
the Common Stock at the date of grant and an exercise price for NSOs of not less
than the par value per share of the Common Stock at the date of grant. Each ISO
must expire within ten years of the date of grant. However, if ISOs are granted
to persons owning more than 10% of the voting stock of the Company, the 1997
Plan provides that the exercise price may not be less than 110% of the fair
market value per share at the date of grant and that the term of such ISOs may
not exceed five years. Unless otherwise provided by the Plan Administrator,
options granted under the 1997 Plan vest at a rate of 25% per year over a
four-year period, but vesting is accelerated in the event of a change of
control.
An optionee whose relationship with the Company or any related corporation
ceases for any reason (other than termination for cause, death or total
disability, as such terms are defined in the 1997 Plan) may exercise options in
the three-month period following such cessation (unless such options terminate
or expire sooner by their terms), or in such longer period determined by the
Plan Administrator in the case of NSOs. Unexercised options granted under the
1997 Plan terminate upon a merger (other than a stock merger), reorganization or
liquidation of the Company; however, immediately prior to such a transaction,
optionees may exercise such options without regard to whether the vesting
requirements have been satisfied.
The option exercise price must be paid in full at the time the notice of
exercise of the option is delivered to the Company and must be tendered in cash,
by bank certified or cashier's check or by personal check. Options may also be
exercised in "cashless exercises" (delivery of such shares of stock of the
Company having a fair market value equal to the exercise price). Unless
otherwise provided by the Plan Administrator, options are nontransferable. The
Board of Directors has certain rights to suspend, amend or terminate the 1997
Plan provided shareholder approval is obtained.
34
OPTION GRANTS IN LAST FISCAL YEAR
Pursuant to the 1991 Amended and Restated Incentive and Non-Qualified
Stock Option Plan, in May 1997, options for an aggregate of 425,000 shares of
Common Stock were granted at an exercise price of $2.00 per share, the market
value on the date of grant, to certain employees of the Company, including Mr.
Falchook (50,000 shares), Mr. Nadel (50,000 shares), Mr. Abada (100,000 shares)
and Mr. Rudzin (100,000 shares). Also in May 1997, options for an aggregate
307,000 shares of Common Stock were granted not pursuant to any plan at an
exercise price of $2.00 per share, the market value on the date of grant, to
certain employees of the Company, certain employees of the Private Company
(subject to their joining the Company if offered comparable positions) and
certain consultants of the Company. In exchange for certain of such grants,
options for an aggregate of 264,500 shares of Common Stock, which had exercise
prices ranging from $2.50 to $13.125, were canceled, including options which had
been granted to Mr. Falchook (20,000 shares) and Mr. Nadel (50,000 shares). In
December 1997, in connection with his appointment as President and a director of
the Company, Mr. Abada received options to purchase 100,000 shares of Common
Stock at $2.44 per share, the market value of the Common Stock on the date of
grant.
[Enlarge/Download Table]
Potential Realizable
Value at Assumed
Annual Rate of Stock
Price Appreciation
for
Individual Grants Option Term
-------------------------------------------------------------- -----------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(1) FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ---------- ------------ --------- ---------- -- ---
George J. Nadel 50,000 11.76% $2.00 5/6/07 $62,889 $159,374
Leslie Falchook 50,000 11.76% $2.00 5/6/07 $62,889 $159,374
Rami Abada 100,000 23.53% $2.00 5/6/07 $125,779 $318,748
Ronald E. Rudzin 100,000 23.53% $2.00 5/6/07 $125,779 $318,748
----------
(1) ALL OPTIONS WERE GRANTED AT AN EXERCISE PRICE EQUAL TO THE FAIR MARKET
VALUE OF THE COMMON STOCK ON THE DATE OF GRANT.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
[Enlarge/Download Table]
Name of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
August 30, 1997 August 30, 1997(1)
Shares
Acquired on Value
Name Exercise (#) Realized Unexercisable Exercisable Unexercisable Exercisable
---------------------- ------------ -------- ------------- ----------- ------------- -----------
Harley J. Greenfield (2)(4) N/A N/A 0 297,047 $0 $0
Edward B. Seidner N/A N/A 0 0 0 0
George J. Nadel(3)(4) N/A N/A 50,000 0 25,000 0
Leslie Falchook(4)(5) N/A N/A 50,000 0 25,000 0
Rami Abada N/A N/A 100,000 0 50,000 0
Ronald E. Rudzin N/A N/A 100,000 0 50,000 0
35
-------------------
(1) Amount reflects the market value of the underlying shares of Common
Stock as reported on the Bulletin Board on August 29, 1997 (a bid price
of $2.50) less the exercise price of each option.
(2) Includes (i) 122,047 options granted on September 17, 1991 at an
exercise price of $4.88 per share, (ii) 150,000 options granted on
April 6, 1992, at an exercise price of $8.375 per share, in connection
with Mr. Greenfield's employment agreement, and (iii) 25,000 options
granted on January 25, 1993 at an exercise price of $13.125 per share.
(3) Includes 50,000 options granted on May 6, 1997 to Mr. Nadel at an
exercise price of $2.00 per share in exchange for cancellation of
25,000 options previously granted on August 1, 1995 at an exercise
price of $2.50 per share and 25,000 options granted on February 1, 1995
at an exercise price of $3.53 per share.
(4) All options were granted at an exercise price equal to the market value
of the underlying Common Stock on the date of grant.
(5) Includes 50,000 options granted on May 6, 1997 to Mr. Falchook at an
exercise price of $2.00 per share in exchange for the cancellation of
20,000 options granted on January 25, 1993 to Mr. Falchook at an
exercise price of $13.125 per share.
(6) Includes 100,000 options granted on May 6, 1997 to Mr. Abada at an
exercise price of $2.00 per share.
(7) Includes 100,000 options granted on May 6, 1997 to Mr. Rudzin at an
exercise price of $2.00 per share.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
The following table sets forth, as of December 12, 1997, information
regarding the beneficial ownership of the Company's Common Stock by (i) each
person who is known to the Company to be the owner of more than five percent of
the Company's Common Stock, (ii) each of the Company's directors, (iii) each of
the Named Executive Officers (as defined in Item 11) and (iv) by all directors
and executive officers of the Company as a group. Information as to David A.
Belford and the Pacchia, Grossman, Shaked, Wexford group is based on Schedules
13D filed by such person and group:
36
Amount and Nature Percent (%) of Class
of Beneficial Outstanding as of
Beneficial Owner Ownership(1) December 12, 1997
---------------- ----------------- --------------------
Harley J. Greenfield 835,336 (2)(3) 13.9%
Fred J. Love 585,662 (2)(5)(6) 10.3
Edward B. Seidner 553,914 (2)(4) 9.7
Jara Enterprises, Inc. ("Jara") 343,579 (6) 6.0
JCI Consultants, L.P 1,200,000 (3)(7) 17.4
David A. Belford 329,000 (8) 5.8
Pacchia, Grossman,
Shaked, Wexford Group 482,100 (9) 8.5
Bernard Wincig 144,573 (10) 2.5
Edward G. Bohn 16,667 (11) 0.3
Kevin J. Coyle 17,917 (11) 0.3
Leslie Falchook 25,000 (12) 0.4
George J. Nadel 0 (13) 0.0
Rami Abada 53,000 (14) 1.0
Ronald E. Rudzin 12,500 (15) 0.2
Hans J. Klaussner
and Klaussner 2,510,123 (17) 35.2
All directors and executive 1,658,907 (2)(3)(4)(5)(6) 27.4
officers as a group (10)(11)(12)(13)
(ten (10) persons) (14)(15)(16)
--------------------
* Less than 0.1%
(1) All of such shares are owned directly with sole voting and investment
power, unless otherwise noted below.
(2) The address of Messrs. Greenfield and Seidner is c/o Jennifer
Convertibles, 419 Crossways Park Drive, Woodbury, New York 11797. The
address of Fred J. Love is One Ames Court, Plainview, New York 11803. Mr.
Greenfield and Mr. Love are brothers-in-law. See "Certain Relationships
and Related Transactions." The shares of Common Stock owned by Messrs.
Greenfield, Seidner and Love and the Private Company were pledged to
Klaussner as part of the Klaussner Transaction. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Includes (a) 292,831 shares underlying options granted to Mr. Greenfield
by Mr. Love (the Greenfield Option"), over which Mr. Greenfield has no
voting power but has shared dispositive power, as such shares may not be
disposed of without the consent of Mr. Greenfield, and (b) 297,047
shares of Common Stock underlying vested options granted to Mr.
Greenfield by the Company, with respect to which shares Mr. Greenfield
would have sole voting and dispositive power
37
upon exercise of such options. See "Executive Compensation." Does not
include 1,200,000 shares of Common Stock underlying options which became
exercisable on April 1, 1996 and which are owned by JCI Consultant, L.P.
("JCI"). Mr. Greenfield does not have the power to cause the exercise of
such options by JCI. However, Mr. Greenfield would be the voting trustee
for the shares of Common Stock upon exercise of such options and would
have, subject to certain exceptions, the right to vote the shares issued
upon such exercise. See "Certain Relationships and Related Transactions."
(4) Includes 292,831 shares underlying the options granted to Mr. Seidner by
Mr. Love and the Private Company (the "Seidner Option"), over which Mr.
Seidner has no voting power but has shared dispositive power, as such
shares may not be disposed of without the consent of Mr. Seidner.
(5) Includes 343,579 shares of Common Stock owned by the Private Company,
over which Mr. Love has sole voting and dispositive power, which are
subject to the Greenfield Option and the Seidner Option (the "Options")
granted to Messrs. Greenfield and Seidner, respectively (the
"Optionees"), and which may not be disposed of without the consent of the
relevant Optionee.
(6) All of such shares are beneficially owned by Mr. Love, the sole
stockholder of Jara. Includes shares of Common Stock owned by three of
Jara's wholly-owned subsidiaries. Jara's address is One Ames Court,
Plainview, New York 11803. Mr. Love has sole voting and shared
dispositive power over such shares, as such shares are subject to the
Options and may not be disposed of without the consent of the relevant
Optionee.
(7) Represents 1,200,000 shares of Common Stock underlying exercisable
options referred to in footnote (3).
(8) The address of David A. Belford is 2097 S. Hamilton Road, Suite 200,
Columbus, Ohio 43232.
(9) Represents the shares of Common Stock owned by a group which was formed
to object to the proposed settlement of the derivative litigation
referred to in "Legal Proceedings." The group consists of the following
persons and entities, each of which has the sole and shared power to vote
and dispose, and total beneficial ownership, of the shares of Common
Stock set forth opposite such persons' or entity's name: (1) Anthony J.
Pacchia ("Pacchia") - sole 11,000, shared 20,700, total 31,700; (2)
F&Co., Inc. as Custodian for Pacchia under IRA Account - sole 16,000,
shared 15,700, total 31,700; (3) Anthony J. Pacchia, P.C., (Money
Purchase) fbo Pacchia - sole 2,500, shared 29,200, total 31,700; (4)
Sandra Pacchia Custodian for Lee Pacchia - sole 1,100, shared 30,600,
total 31,700; (5) Sandra Pacchia Custodian for Tom Pacchia - sole 1,100,
shared 30,600, total 31,700; (6) Anthony T. Pacchia and Gloria Pacchia -
sole 1,000, shared 15,000, total 16,000; (7) Anthony T. Pacchia, IRA
Rollover - sole 15,000, shared 1,000, total 16,000; (8) Kenneth S.
Grossman Trustee, Profit Sharing Plan DLJSC -
38
Custodian fbo Kenneth S. Grossman - sole 96,400, shared 3,500, total
99,900; (9) Kenneth S. Grossman - 3,500, sole 96,400 shared, total
99,900; (10) IRA fbo Patricia Berger, DLJSC as custodian - sole 3,500,
shared 0, total 3,500, (11) Ellen Grossman, Custodian for Andrew Grossman
UGMA/ NY - sole 5,000, shared 0, total 5,000; (12) IRA fbo Howard Berger,
DLJSC as custodian - sole 3,500, shared 0, total 3,500; (13) IRA fbo Jill
Berger, DLJSC as custodian, Rollover Account - sole 3,500, shared 0,
total 3,500; (14) IRA fbo Herbert Berger, DLJSC as custodian - sole
5,000, shared 0, total 5,000; (15) Marilyn Levy - sole 5,000, shared 0,
total 5,000; (16) Ellen Grossman, Custodian for Joshua Grossman UGMA/NY -
sole 5,000, shared 0, total 5,000; (17) Amir Shaked ("Shaked") - sole
37,700, shared 1,300, total 39,000; (18) IRA fbo Shaked - sole 1,300,
shared 37,700, total 39,000; (19) Wexford Special Situations 1996, L.P. -
sole 0, shared 142,783, total 142,783; (20) Wexford Special Situations
1996 Institutional L.P. - sole 0, shared 25,764, total 25,764; (21)
Wexford Special Situations 1996 Limited - sole 0, shared 7,859, total
7,859; (22) Wexford-Euris Special Situations 1996, L.P. - sole 0, shared
36,094, total 36,094; (23) Wexford Management LLC - sole 0, shared
212,500, total 212,500; (24) IRA fbo Zachery Goldwyn - sole 52,500,
shared 0, total 52,500. The address for group members (a) 1-5 is 602
Orchard Street, Cranford, New Jersey 07106, (b) 6 and 7 is 31 Center
Board Drive, Bayville, New Jersey 08721, (c) 8-9, 11, 16, 17 and 18 is
620 Fifth Avenue, 7th Floor, New York, New York 10020, (d) 10 and 14 is
31 Wisconsin Avenue, N. Massapequa, New York 11578, (e) 12 and 13 is 58
Alpine Way, Dix Hills, New York 11746, (f) 15 is 155 East 76th Street,
New York, New York 10022, (g) 19-21 and 23-24 is 411 West Putnam Avenue,
Greenwich, Connecticut 06830, and (h) 22 is c/o Hemisphere Fund Managers
Ltd., Harbour Centre, Georgetown, Grand Cayman Islands, B.W.I.
(10) Includes 8,800 shares of Common Stock owned by Mr. Wincig's wife and
25,000 shares of Common Stock underlying exercisable options. Does not
include 4,000 shares of Common Stock underlying options which have not
yet vested.
(11) Includes, as to each individual, 16,667 shares of Common Stock underlying
exercisable options, but does not include, as to each individual, 8,333
shares of Common Stock underlying options granted, which options have not
yet vested.
(12) Does not include 50,000 shares of Common Stock underlying options which
are not currently exercisable.
(13) Does not include 50,000 shares of Common Stock underlying options which
are not currently exercisable.
(14) Does not include 200,000 shares of Common Stock underlying options which
are not currently exercisable.
39
(15) Does not include 100,000 shares of Common Stock underlying options which
are not currently exercisable.
(16) Does not include 50,000 shares of Common Stock underlying options granted
to an officer of the Company other than a Named Executive Officer, which
options are not yet vested.
(17) Represents shares pledged to Klaussner by Messrs. Greenfield, Seidner and
Love and Jara as part of the Klaussner Transaction and 1,424,500 shares
underlying convertible preferred stock issued to Klaussner in connection
with the Klaussner Investment. The pledged shares secure a guarantee by
the pledgors of approximately $1,000,000 owed to Klaussner by the Private
Company as of August 30, 1997. The preferred stock is not convertible
until September 1, 1999, except that such convertibility will be
accelerated upon the occurrence of certain events, including acquisitions
of 12.5% or more of the Company's voting stock by third parties,
commencement of a proxy solicitation or tender offer, mergers, asset
sales, certain changes in the constitution of the Company's Board of
Directors or if Harley Greenfield is no longer the Company's Chief
Executive Officer and similar events. See "Certain Relationships and
Related Transactions." Based on information contained in the Schedule 13D
filed by Hans J. Klaussner and Klaussner, Hans J. Klaussner is the sole
stockholder of the parent of Klaussner and, accordingly, may be deemed
the beneficial owner of shares owned by Klaussner. The principal address
of Klaussner is 405 Lewallen Street, Asheboro, North Carolina 27203. Hans
J. Klaussner's address is 7614 Gegenbach, Germany.
Based on the Company's review of reports filed by directors, executive
officers and 10% shareholders of the Company on Forms 3, 4 and 5 pursuant to
Section 16 of the Securities and Exchange Act of 1934, all such reports were
filed on a timely basis during fiscal year 1997.
Item 13. Certain Relationships and Related Transactions.
-----------------------------------------------
The Private Company
-------------------
Until November 1994 when Messrs. Greenfield and Seidner sold their
interests in the Private Company for a long-term note (the "Jara Notes") and
options to purchase the Common Stock owned by Mr. Love, Mr. Greenfield's
brother-in-law and the Private Company, Harley J. Greenfield (the Chairman of
the Board, Chief Executive Officer, President and a principal stockholder of the
Company), Fred J. Love (a director of the Company until August 10, 1995 and
principal stockholder of the Company as of August 30, 1997) and Edward B.
Seidner (a director, officer and principal stockholder of the Company) each
owned 33-1/3% of Jara, which, together with its subsidiaries, comprises the
Private Company, which owns or licenses the Private Stores. Following such sale,
Mr. Love beneficially owns 100% of the Private Company. The Private Company is
responsible for the warehousing for the Company-owned stores, the
40
Company's licensed stores and the Private Stores, and leases and operates the
Warehouse Facilities. Until December 31, 1993, the Private Company was also
responsible for the purchasing and for certain advertising and promotional
activities for the Company-owned stores, the Company's licensed stores and the
Private Stores. Effective January 1, 1994, the Company assumed the
responsibility for purchasing and advertising for itself, its licensees, and the
Private Stores. The Private Company is responsible for an amount which
approximates its pro-rata share of all advertising production costs and costs of
publication of promotional material within the New York area. Until October 28,
1993, a corporation of which Messrs. Greenfield, Seidner and Love each owned
33-1/3% (the "Licensor") owned the trademarks "Jennifer Convertibles(R)" and
"With a Jennifer Sofabed, There's Always a Place to Stay(R)" (collectively the
"Marks"). On October 28, 1993, the Marks were assigned to the Company from the
Licensor for nominal consideration, and the Company agreed to license such Marks
to Jara in New York, as described below. Mr. Love is, and until November 1994,
Mr. Seidner was, an executive officer and director of Jara and the Licensor.
During the fiscal year ended August 30, 1997, Mr. Greenfield and Mr. Seidner
each received approximately $310,000 of interest on the Jara Notes from the
Private Company. Beginning in April 1997, each of Mr. Greenfield and Mr. Seidner
agreed to a $10,000 a month deferral of the amounts paid to them under the Jara
Notes. The shares of Common Stock owned by Messrs. Greenfield, Love, and Seidner
and Jara were pledged to Klaussner as part of the Klaussner transaction. In
November 1994, Mr. Greenfield and Mr. Seidner sold their interests in the
Private Company in exchange for the Jara Notes and options (the "Buy-Out
Options") to purchase the Common Stock owned by Mr. Love and the Private
Company. The Jara Notes are $10,273,204 in aggregate principal amount
($5,136,602 owned by Mr. Greenfield and $5,136,602 owned by Mr. Seidner), bear
interest at a rate of 7.5% per annum (although, as described above, a portion of
such interest is being deferred on a month-to-month basis) and are due in
December 2023. Only interest is payable on the Jara Notes until December 1, 2001
and, thereafter principal is payable monthly through the maturity date. The Jara
Notes are secured by (i) a security interest in the Private Company's personal
property, (ii) Mr. Love's personal guarantee of the Private Company's
performance under the Jara Notes, and (iii) a stock pledge by Mr. Love of his
stock in the Private Company to secure his obligations under the guarantees.
Subject to court approval of the Settlement Agreement, Messrs. Greenfield and
Seidner have agreed to subordinate, until January 1, 1999, their right to
receive payments in respect of the Jara Notes, if the Private Company is in
default in the payment of any cash obligation to the Company arising after
August 7, 1996. Such subordination does not apply to any distribution in respect
of a disposition of substantially all of the assets of the Private Company. The
Buy-Out Options are exercisable for an aggregate of 585,662 shares of Common
Stock (292,831 by Mr. Greenfield and 292,831 by Mr. Seidner) at a price of
$15.00 per share until they expire on November 7, 2004.
THE LICENSE
Pursuant to a license agreement between the Company and Jara, Jara has
the perpetual, royalty-free right to use, and to sublicense and franchise the
use of, the Marks in the State of New York. The license is exclusive in such
territory, subject to certain exceptions.
41
THE PURCHASING AND WAREHOUSING AGREEMENT
Prior to January 1, 1994, the Private Company and the Company were
parties to a Warehousing and Purchasing Agreement (the "Original Warehousing
Agreement") pursuant to which the Private Company was obligated to make
merchandise available to the Company on the same basis as such merchandise was
made available to the Private Stores and was obligated to promptly order
merchandise requested by the Company to fill special orders. The Original
Warehousing Agreement provided that the Private Company would sell such
merchandise to the Company at the Private Company's cost. Additionally, the
Private Company was obligated to provide certain warehousing and handling
services to the Company for up to 100 Company-owned stores and 200 Company
licensed stores. In return, the Company paid the Private Company a fee equal to
5% of the retail selling price of all merchandise (including the retail selling
price of any related services, such as fabric protection) delivered to customers
of the Company's stores from the warehouse facilities operated by the Private
Company, plus 5% of the retail selling price of all merchandise delivered from
such warehouse facilities to Company-owned stores for display purposes.
Effective January 1, 1994, the Company assumed the responsibility for purchasing
for itself, its licensees and the Private Company on substantially the same
terms as it was receiving from the Private Company prior to 1994. However, the
Private Company continued to provide warehousing and handling services as
described above. During the fiscal year ended August 30, 1997 the Company and
the LPS paid warehouse fees under the Offset Agreement (as defined below) to the
Private Company aggregating approximately $5,021,000. During the fiscal year
ended August 30, 1997, the Private Company purchased from the Company
approximately $10,081,000 of merchandise (net of discounts and allowances),
which was paid under the Offset Agreement. Under the terms of the Warehousing
Agreement, however, the Company was not obligated to use the Private Company's
warehouse facilities or purchase through the Private Company. As part of the
transfer of the purchasing function, the Private Company, on May 29, 1994,
agreed to pay the Company $1,000,000 representing discounts and allowances
received from suppliers with respect to merchandise previously delivered. Such
payment was in the form of a note, dated May 29, 1994, calling for payments in
36 equal monthly installments and bearing interest at 8% per annum. The Private
Company made the final payments of $305,555 on such note during the fiscal year
ended August 30, 1997.
As set forth in "Business-Warehousing," the Private Company also provides
certain other services at the Warehouse Facilities, including arranging for
goods to be delivered to the Warehouse Facilities and customers and providing
fabric protection and warranty services. The Private Company is reimbursed by
the Company and its licensees for freight charges on deliveries to the Warehouse
Facilities at predetermined freight rates. The Private Company also provides
fabric protection services, including a life-time warranty, to customers of the
Company and its licensees. The Company retains approximately 2/3 of the revenues
from fabric protection and the warranty. During the fiscal year ended August 30,
1997, the Company and the LPS paid under the Offset Agreement $2,827,000 for
freight charges and $2,543,000 for fabric protection to the Private Company. See
"The Committee Report" below.
42
The Company guarantees the lease for the Private Company's satellite
warehouse in California. Such lease expires September 30, 1998 and the annual
base rent is $133,000. Pursuant to an agreement dated September 1, 1993, the
Company is indemnified against any liability arising under such guaranty by the
Private Company.
THE OFFSET AGREEMENT
By agreement dated November 1, 1995, the Private Company and the Company
acknowledged that as of August 26, 1995 the Private Company owed the Company
$9,267,962, certain licensees (consisting of the Unconsolidated Licensees other
than S.F.H.C. and hereinafter referred to as the "Private Licensees") owed the
Company $2,117,616 for merchandise purchased (of which $1,865,813 was past due)
and the Company owed the Private Company $11,459,677. In addition, the Private
Company agreed to assume the obligations of the Private Licensees referred to
above and to offset the amounts owed to the Company by the Private Company
against the amounts owed to the Private Company by the Company. By agreement
dated March 1, 1996 (the "Offset Agreement"), the Private Company and the
Company agreed to continue to offset, on a monthly basis, amounts owed by the
Private Company and the Private Licensees to the Company for purchasing,
advertising, and other services and matters against amounts owed by the Company
to the Private Company for warehousing services, fabric protection, freight and
other services and matters. In contemplation of the settlement, the parties are
currently operating under the terms of the offset agreement to become effective
upon court approval of the settlement which provides for cash payments of
current amounts due in excess of $1,000,000. The Private Company paid for all
current charges under the Offset Agreement during fiscal 1997. Amounts owed by
the Private Company and certain licensees to the Company as of August 30, 1997
(consisting of unpaid amounts from fiscal 1996 and prior years) are reserved
against in the accompanying consolidated financial statements due to uncertain
collectibility. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
THE ADVERTISING AGREEMENT
Under the advertising agreement with the Private Company, the Private
Company bears a share of all advertising production costs and costs of
publication of promotional advertising material within the New York area. During
the fiscal year ended August 30, 1997, the Company charged the Private Company
$1,800,000 in respect of the Private Company and the Private Licensees and
charged S.F.H.C. $418,000 for advertising.
43
JENNIFER LIVING ROOMS
In September 1996, the Company, opened two test "Jennifer Living Rooms"
stores in St. Louis, Missouri. As part of its license with the Private Company,
the Private Company also has the royalty free right to open "Jennifer Living
Rooms" stores in New York. In October 1996, the Private Company began operating
a test store in New York under the name "Jennifer Living Rooms."
OTHER MATTERS
As described under the heading "The Committee" below, a committee of the
Board of Directors consisting of Michael Colnes concluded that the Company had
claims against Messrs. Greenfield, Love, Seidner and the Private Company. During
fiscal 1997, the Company paid legal fees for Harley J.
Greenfield of $24,298 in connection with these matters.
JCI
Related parties of JCI, which is the holder of options to purchase
1,200,000 shares of Common Stock, also own the limited partnership interest in
Jennifer Chicago, L.P. (the "Chicago Partnership"), an LP which operates,
pursuant to a license agreement with the Company, 14 Jennifer Convertibles
stores in the Chicago, Illinois area, and, until the Company purchased it as of
September 1, 1994, Jennifer L.P. II ("L.P. II"), an LP which operated, pursuant
to a license agreement with the Company, 21 Jennifer Convertible stores in the
Detroit, St. Louis, Indianapolis, Milwaukee and Kansas City metropolitan areas.
During the fiscal year ended August 30, 1997, the Company earned $485,000 of
royalties from the Chicago Partnership, which are not separately shown in the
financial statements due to the consolidation of the LPS for financial statement
purposes.
OTHER MATTERS
In January 1994, Rami Abada, the Company's President and Chief Operating
Officer, joined the Company. Mr. Abada owns interests in certain licensed
Jennifer Convertibles stores, which he acquired when he was an employee of the
Private Company. As of October 1996, Mr. Abada owned a 20% interest in S.F.H.C.,
which owns six licensed Jennifer Convertibles stores, and owned a 20% interest
in each of two corporations which each own a licensed Jennifer Convertibles
store. In October 1996, Mr. Abada entered into an agreement pursuant to which he
exchanged his 20% interest in S.F.H.C. for the remaining 80% interest in the two
corporations referred to above. During the year ended August 30, 1997, S.F.H.C.
incurred and paid approximately $166,000 in royalties and $1,565,000 for
merchandise purchases to the Company. Such entity did not make any payments to
the Company in respect of a 9%
44
secured note, due December 31, 2001, in the original principal amount of
$810,000 (which principal amount was $637,743 as of August 30, 1997). In
addition, such corporation owes the Company $500,000 principal amount under a
Revolving Credit Agreement pursuant to which all available revolving credit
loans have been drawn down. Such loans bear interest at prime plus 3% and were
due on June 1, 1995. As of August 30, 1997, S.F.H.C. also owed the Company
$1,069,842 for advertising and merchandise purchases. During the year ended
August 30, 1997, the two corporations wholly-owned by Mr. Abada incurred and
paid under the Offset Agreement an aggregate of approximately $74,000 in
royalties and $678,000 for merchandise purchases owed to the Company. Such
corporations have received financing from the Private Company (with a balance of
$323,174 as of August 30, 1997) and, by a letter agreement dated March 14, 1997
among the Private Company, the Company and the two corporations, all amounts
owed by the two corporations to the Company incurred subsequent to September 1,
1996 were paid through the allocation of amounts to be credited to the Private
Company under the Offset Agreement. During the fiscal year ended August 30,
1997, Mr. Abada received $312,448 of salary, severance pay, distributions and
other payments from such licensees and the Private Company.
In January 1994, Ronald Rudzin, the Company's Senior Vice President -
Retail Stores, joined the Company. Mr. Rudzin also owns interests in stores
acquired while an employee of the Private Company. Mr. Rudzin owns one licensed
Jennifer Convertibles store and his father owns two licensed Jennifer
Convertibles stores which during the fiscal year ended August 30, 1997 incurred
and paid under the Offset Agreement approximately $36,000 (for Mr. Rudzin's
stores) and $95,000 (for Mr. Rudzin's father's stores) of royalties and $336,000
(for Mr. Rudzin's store) and $876,000 (for Mr. Rudzin's father's stores) for
merchandise purchases. Mr. Rudzin received approximately $214,983 of salary,
distributions and other payments from such licensees and the Private Company.
Amounts owed to the Company by the corporate licensees referred to above,
(each of which is a Private Licensee) have been fully reserved against in the
accompanying financial statements for the 1995, 1996 and 1997 fiscal years due
to uncertain collectibility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Subject to court approval of the
Settlement Agreement, Mr. Rudzin has agreed, to personally guarantee the
merchandise purchases and royalty obligations incurred after the date of such
approval of the Private Licensees in which he has an ownership interest. Mr.
Abada has entered into a similar agreement as to the Private Licensees owned by
him effective upon court approval, termination of the Offset Agreement and prior
written notification.
The Company uses and the Private Company from time to time, also uses
Wincig & Wincig, a law firm of which Bernard Wincig, a director of the Company
and a stockholder, is a partner. Mr. Wincig received approximately $164,000 of
legal fees from the Company and the LPS and an aggregate of approximately
$55,131 from the Private Company during the fiscal year ended August 30, 1997.
On December 11, 1997, Klaussner purchased 10,000 shares of the Company's
Series A Convertible Preferred Stock (the "Preferred Stock") for $5,000,000. In
connection with such purchase, Klaussner waived
45
any defaults under the Credit and Security Agreement and approximately
$2,965,650 of the proceeds of such investment were used to pay all balances due
to Klaussner which had been billed and outstanding for more than 60 days. The
Preferred Stock is non-voting and is convertible, commencing on September 1,
1999 (subject to acceleration as described below), into 1,424,500 shares of
Common Stock (an effective conversion price of $3.51 per share), subject to
adjustment for stock splits, stock dividends and similar events. The Common
Stock underlying the Preferred Stock represents approximately 19.9% of the
outstanding Common Stock as of December 11, 1997, after giving effect to such
conversion. The Preferred Stock has a liquidation preference of $5,000,000. No
cash dividends are to be paid on the Common Stock unless the holders of the
Preferred Stock receive the same dividend on the Preferred Stock on an
"as-converted" basis. The convertibility of the Preferred Stock can be
accelerated under certain circumstances, including (i) if any person or group
(other than Harley J. Greenfield, Edward B. Seidner, Fred Love or Jara
Enterprises, Inc.) becomes the beneficial owner of 12.5% or more of the
Company's voting stock, (ii) the execution of an agreement providing for the
acquisition of the Company or substantially all of its assets or the acquisition
of a subsidiary or subsidiaries which generate in excess of 10% of the Company's
revenues, (iii) if Harley Greenfield is no longer the Company's Chief Executive
Officer or if the Continuing Directors (as defined) do not constitute a majority
of the Board of Directors, (iv) the commencement by a third party of a tender or
exchange offer for the Common Stock, (v) the adoption of a plan of liquidation,
or (vi) if any person commences a proxy solicitation without the approval of the
Company's Board of Directors. In connection with the Klaussner Investment,
Klaussner received the right of first refusal (the "Right"), if the Company
sells Common Stock or Common Stock equivalents (such as options or convertible
securities) at a price (or an effective price in the case of equivalents) of
less than $3.51 per share to purchase of Common Stock (or equivalents such as
options or convertible securities). Klaussner will have the Right so long as it
owns at least 10% of the outstanding Common Stock (on an as converted basis).
Klaussner also received certain demand registration rights to require the
Company, at the Company's expense, to register the shares of Common Stock
underlying the Preferred Stock and any shares it acquires upon exercise of the
Right.
In connection with the Klaussner Investment, the Credit and Security
Agent was modified to provide a late payment fee at a rate of .67% per month for
invoices the Company pays later than 60 days.
In fiscal 1997, Klaussner gave the Company $1,075,000 of vendor
allowances for advertising and $1,166,000 of allowances for a repair program and
in December 1997, Klaussner made the Klaussner Investment. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
also see "Business- Sources of Supply" for other transactions with Klaussner.
46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K.
--------------------------------------------------------------
(a) Financial Statements. See the Index immediately following the
signature page.
(b) Reports on Form 8-K.
During the quarter ended August 30, 1997, the Company did not
file Current Reports on Form 8-K.
(c) EXHIBITS.
3.1 - Certificate of Incorporation of the Company
(Incorporated herein by reference to Exhibit 3.1 to
the Company's Registration Statement -File Nos.
33-22214 and 33-10800 (the "Registration
Statement")).
3.2 - Certificate of Designations, Preferences and Rights
of Series A Preferred Stock.
3.3 - By-Laws of the Company. (Incorporated herein by
reference to Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended August 26,
1995).
4.1 - Form of Underwriter's Warrant for the purchase of
shares of Common Stock (Incorporated herein by
reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-2 - File No.
33-47871 (the "Registration Statement on Form S-2")).
10.1 - Incentive and Non-Qualified Stock Option Plan, as
amended (Incorporated herein by reference to Exhibit
10.4 to the Registration Statement).
10.2 - Stock Option Agreement, dated March 21, 1991, between
Jennifer Convertibles, Inc. and JCI Consultant L.P.
(Incorporated herein by reference to Exhibit 2 to the
Company's Current Report on Form 8-K dated March 21,
1991).
47
10.3 - Voting Trust Agreement, dated March 21, 1991, between
Harley J. Greenfield, Jennifer Convertibles, Inc. and
JCI Consultant L.P. (Incorporated herein by reference
to Exhibit 3 to the Company's Current Report on Form
8-K dated March 31, 1991).
10.4 - Registration and Sales Agreement, dated March 21,
1991, between Jennifer Convertibles, Inc. JCI
Consultant, L.P., Harley J. Greenfield, Fred J. Love,
Edward B. Seidner and Jara Enterprises, Inc.
(Incorporated herein by reference to Exhibit 4 to the
Company's Current Report on Form 8-K dated March 21,
1991).
10.5 - Agreement of Limited Partnership of Jennifer Chicago,
L.P. (the "Partnership"), dated July 24, 1991
(Incorporated herein by reference to Exhibit 1 to the
Company's Current Report on Form 8-K dated July 24,
1991 - related to series of agreements related to
Limited Partnership of Jennifer Chicago L.P.).
10.6 - Purchase Option Agreement, dated July 24, 1991,
between Jennifer Convertibles, Inc. and the limited
partner of the Partnership (Incorporated herein by
reference to Exhibit 2 to the Company's Current
Report on Form 8-K dated July 24, 1991).
10.7 - Omnibus Agreement, dated July 24, 1991, between
Jennifer Convertibles, Inc. and the Partnership
(Incorporated herein by reference to Exhibit 3 to the
Company's Current Report on Form 8-K dated July 24,
1991).
10.8 - Warehousing and Purchasing Agreement, dated July 24,
1991, between Jennifer Convertibles Inc., and the
Partnership (Incorporated herein by reference to
Exhibit 4 to the Company's Current Report on Form 8-K
dated July 24, 1991).
10.9 - Amended and restated 1991 Incentive and Non-Qualified
Stock Option Plan (Incorporated herein by reference
to Exhibit 10.29 to the Registration Statement on
Form S-2).
10.10 - Amendment to Stock Option Agreement dated February
25, 1992 between the Company and JCI (Incorporated
herein by reference to Exhibit 1 to the Company's
Current Report on Form 8-K dated February 25, 1992).
10.11 - Letter Agreement dated February 25, 1992 among the
Company, JCI and Harley J. Greenfield, amending a
Voting Trust Agreement (Incorporated herein by
48
reference to Exhibit 2 to the Company's Current
Report on Form 8-K dated February 25, 1992).
10.12 - Amended and Restated Registration and Sale Agreement
dated as of February 25, 1992 among the Company, JCI,
Harley J. Greenfield, Fred J. Love, Edward B. Seidner
and Jara (Incorporated herein by reference to Exhibit
3 to the Company's Current Report on Form 8-K dated
February 25, 1992).
10.13 - Warehousing Agreement, dated as of December 31, 1993,
between Jennifer Convertibles, Inc. and Jennifer
Warehousing, Inc. (Incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for
the quarterly period ending February 26, 1994).
10.14 - Purchasing Agreement, dated as of December 31, 1993,
between Jennifer Convertibles, Inc. and Jara
Enterprises, Inc. (Incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for
the quarterly period ending February 26, 1994).
10.15 - Advertising Agreement, dated as of December 31, 1993,
between Jennifer Convertibles, Inc. and Jara
Enterprises, Inc. (Incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for
the quarterly period ending February 26, 1994).
10.16 - Amendment No. 1 to Warehousing Agreement, dated as of
May 28, 1994, amending the Warehousing Agreement
referred to in 10.29 and the related Rebate Note.
(Incorporated herein by reference to Exhibit 10.34 to
the Company's Annual Report on Form 10-K for the
fiscal year ended August 27, 1994).
10.17 - Amendment No. 1 to Purchasing Agreement, dated as of
May 28, 1994, amending the Purchasing Agreement
referred to in 10.30. (Incorporated herein by
reference to Exhibit 10.35 to the Company's Annual
Report on Form 10-K for the fiscal year ended August
27, 1994).
10.18 - License Agreement, dated as of October 28, 1993,
among Jennifer Convertibles Licensing Corp. and Jara
Enterprises, Inc. (Incorporated herein by reference
to Exhibit 2 to the Company's Current Report on Form
8-K dated November 30, 1993).
49
10.19 - Letter Agreement with JCI Consultant, L.P.
(Incorporated herein by reference to the Company's
Current Report on Form 8-K dated August 1, 1994).
10.20 - Agreement, dated as of May 19, 1995, among Jennifer
Convertibles, Inc., Jennifer Purchasing Corp., Jara
Enterprises, Inc. and the licensees signatory
thereto. (Incorporated herein by reference to Exhibit
10.38 to the Company's Annual Report on Form 10-K for
the fiscal year ended August 26, 1995.)
10.21 - Agreement, dated as of November 1, 1995, among
Jennifer Convertibles, Inc., Jennifer Purchasing
Corp., Jara Enterprises, Inc. and the licensees
signatory thereto. (Incorporated herein by reference
to Exhibit 10.39 to the Company's Annual Report on
Form 10-K the for fiscal year ended August 26, 1995.)
10.22 - Settlement Agreement, dated as of March 8, 1996,
between Jennifer Convertibles, Inc. and Jara
Enterprises, Inc. (Incorporated by reference to
Exhibit 3 to the Company's Current Report on Form 8-K
dated March 18, 1996).
10.23 - Memorandum of Understanding for Settlement of
Jennifer Convertibles Securities Litigation
(Incorporated by reference to Exhibit 1 to the
Company's Current Report on Form 8-K dated March 18,
1996).
10.24 - Memorandum of Understanding for Settlement of Certain
Derivative Claims (Incorporated by reference to
Exhibit 2 to the Company's Current Report on Form 8-K
dated March 18, 1996).
10.25 - Form of Note, dated November 1994, made by Jara
Enterprises, Inc. to Harley J. Greenfield and Edward
B. Seidner. (Incorporated herein by reference to
Exhibit 10.43 to the Company's Annual Report on Form
10-K for the fiscal year ended August 26, 1995.)
10.26 - Form of Option, dated November 7, 1994 to purchase
Common Stock from Fred Love, Jara Enterprises, Inc.
and certain subsidiaries to Harley J. Greenfield and
Fred Love. (Incorporated herein by reference to
Exhibit 10.44 to the Company's Annual Report on Form
10-K for the fiscal year ended August 26, 1995.)
10.27 - Form of Subordination Agreement, dated as of August
9, 1996, by Harley J. Greenfield and Edward B.
Seidner. (Incorporated herein by reference to Exhibit
50
10.45 to the Company's Annual Report on Form 10-K for
the fiscal year ended August 26, 1995.)
10.28 - Credit and Security Agreement, dated as of March 1,
1996, among Klaussner Furniture Industries, Inc.
("Klaussner") and Jennifer Convertibles, Inc. and the
other signatories thereto (Incorporated by reference
to Exhibit 4 to the Company's Current Report on Form
8-K dated March 18, 1996).
10.29 - 1997 Stock Option Plan
10.30 - Stock Purchase Agreement, dated December 11, 1997,
between Klaussner and the Company.
10.31 - Registration Rights Agreement, dated December 11,
1997 between Klaussner and the Company.
10.32 - Waiver and Modification Agreement, dated December 11,
1997, between Klaussner and related entities and
Jennifer Purchasing Corp., Jennifer Convertibles,
Inc., Jennifer Convertibles Licensing Corp., and
Jennifer L.P. III.
11.1 - Statement re computation of Net (Loss) Per Share (for
fiscal years ended August 30, 1997, August 31, 1996
and August 26, 1995).
22.1 - Subsidiaries of the Company. (Incorporated herein by
reference to Exhibit 22.1 on the Company's Annual
Report on Form 10-K for fiscal year ended August 27,
1994.)
(d) Financial Statement Schedules.
All Schedules are omitted for the reason that they are not
required or are not applicable, or the required information is
shown in the consolidated financial statements or notes
thereto.
51
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JENNIFER CONVERTIBLES, INC.
By: /S/ HARLEY J. GREENFIELD
-----------------------------------
Harley J. Greenfield, Chairman
of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated below.
[Enlarge/Download Table]
NAME POSITION DATE
---- -------- ----
/S/ HARLEY J. GREENFIELD
--------------------------------------
Harley J. Greenfield Chairman of the Board and Chief Executive December 11, 1997
Officer (Principal Executive Officer)
/S/ GEORGE J. NADEL
--------------------------------------- Executive Vice President, Chief Financial December 11, 1997
George J. Nadel Officer and Treasurer (Principal Financial
Officer and Principal Accounting Officer)
/S/ EDWARD B. SEIDNER
-------------------------------------
Edward B. Seidner Director December 11, 1997
/S/ BERNARD WINCIG Director December 11, 1997
----------------------------------
Bernard Wincig
/S/ EDWARD BOHN Director December 11, 1997
----------------------------------
Edward Bohn
/S/ KEVIN J. COYLE Director December 11, 1997
----------------------------------
Kevin J. Coyle
/S/ RAMI ABADA President and Director December 11, 1997
----------------------------------
Rami Abada
52
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Index to Financial Statements
Independent Auditors' Report.........................................F1
Consolidated Balance Sheets at August 30, 1997 and
August 31, 1996 ...................................................F3
Consolidated Statements of Operations for the years ended
August 30, 1997, August 31, 1996 and August 26, 1995.................F4
Consolidated Statements of Stockholders' Equity
(Capital Deficiency) for the years ended August 30, 1997,
August 31, 1996 and August 26, 1995..................................F5
Consolidated Statements of Cash Flows for the years ended
August 30, 1997, August 31, 1996 and August 26, 1995.................F6
Notes to the Consolidated Financial Statements.......................F7
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Jennifer Convertibles, Inc.
Woodbury, New York
We have audited the accompanying consolidated balance sheets of Jennifer
Convertibles, Inc. (the "Company") and subsidiaries as at August 30, 1997 and
August 31, 1996, and the related consolidated statements of operations,
stockholders' equity (capital deficiency) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Jennifer Convertibles, Inc. and subsidiaries at August 30, 1997 and August 31,
1996, and the consolidated results of their operations and their cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
We were also engaged to audit the accompanying consolidated statements of
operations, stockholders' equity (capital deficiency) and cash flows of the
Company for the year ended August 26, 1995. These financial statements are the
responsibility of the Company's management.
The Company recorded significant charges and credits in the fiscal year ended
August 26, 1995 as to which it was unable to furnish us with sufficient
documentation to enable us to determine whether any portion of such charges and
credits was applicable to the year ended August 27, 1994.
As discussed in Notes 1 and 3, a company owned by three officers of the Company
(the "Private Company") performed certain services (including purchasing,
warehousing and inventory control, distribution, fabric protection, advertising
and data processing) on behalf of the Company for all or part of the year ended
August 26, 1995. The Private Company was unable to provide us with documentation
for certain of the transactions performed by the Private Company on behalf of
the Company for the year ended August 26, 1995.
The Company did not have an adequate system of internal accounting control over
the financial information processed for the Company by the Private Company prior
to August 26, 1995. Further, the chief financial officer of the Company has
stated that he was unable to maintain internal controls over the financial data
processed by the Private Company on behalf of the Company and that the Company
was seriously deficient regarding the adequacy of internal controls that support
its operations prior to August 26, 1995. As a result of this lack of control,
the chief financial officer has stated that he was unable to provide certain
representations we requested regarding the Company's statements of operations
and cash flows for the year ended August 26, 1995.
F1
Because of the matters discussed in the preceding three paragraphs, the scope of
our work was not sufficient to enable us to express, and we do not express, an
opinion on the results of operations, and cash flows for the year ended August
26, 1995.
As discussed in Note 9, in December 1994 and January 1995, the Company and
certain of its officers became defendants in class and derivative actions. The
Company is attempting to settle the above litigations and has agreed to terms
which, subject to the court approval, would settle the class action and
derivative litigations. Further, in May 1995, the Securities and Exchange
Commission commenced an investigation relating to the aforementioned matters.
The outcome of these matters is not presently determinable.
Attention is directed to Note 1 with respect to various operational problems
which the Company has experienced in the past three years and management's plans
for contending with these problems. Attention is also directed to Notes 1, 3 and
9 with respect to various related party transactions.
Richard A. Eisner & Company, LLP
New York, New York
November 21, 1997
Except for the second paragraph of Note 12,
December 11, 1997
F2
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JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except for share data)
ASSETS
(SEE NOTE 5) AUGUST 30, 1997 AUGUST 31, 1996
--------------- ---------------
Current assets:
Cash and cash equivalents $ 3,405 $ 3,600
Accounts receivable 1,149 1,588
Merchandise inventories 7,943 8,221
Refundable income taxes 0 23
Prepaid expenses and other current assets 477 454
-------- --------
Total current assets 12,974 13,886
Store fixtures, equipment and leasehold improvements,
at cost, net 7,669 8,739
Due from Private Company and Unconsolidated Licensees, net
of reserves of $6,898 and $7,324 at August 30, 1997
and August 31, 1996 -- --
Deferred lease costs and other intangibles, net 1,001 1,317
Goodwill, at cost, net 553 568
Other assets (primarily security deposits) 801 925
-------- --------
$ 22,998 $ 25,435
======== ========
LIABILITIES AND (CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable, trade $ 16,614 $ 15,746
Customer deposits 8,841 8,875
Accrued expenses and other current liabilities 4,777 5,022
-------- --------
Total current liabilities 30,232 29,643
Deferred rent and allowances 5,712 5,868
Long-term obligations under capital leases 421 230
-------- --------
Total liabilities 36,365 35,741
-------- --------
Commitments and contingencies
(Capital deficiency)
Preferred stock, par value $.01 per
share. Authorized 1,000,000 shares;
no shares issued -- --
Common stock, par value $.01 per share
Authorized 10,000,000 shares; issued and
outstanding 5,700,725 shares at August 30, 1997
and August 31, 1996 57 57
Additional paid-in capital 22,911 22,911
Notes receivable from warrant holders (300) (300)
Accumulated (deficit) (36,035) (32,974)
-------- --------
(13,367) (10,306)
-------- --------
$ 22,998 $ 25,435
======== ========
Attention is directed to the foregoing Accountants' Report and
to the accompanying Notes to the Consolidated Financial Statements.
F3
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JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data)
Year ended Year ended Year ended
August 30, 1997 August 31, 1996 August 26, 1995
--------------- --------------- ---------------
(52 Weeks) (53 Weeks) (52 Weeks)
Net sales $ 97,789 $ 106,041 $ 126,074
----------- ----------- -----------
Cost of sales, including store occupancy,
warehousing, delivery and fabric protection
(including charges from Private Company of
$10,390, $11,836, and $13,883) 67,114 72,708 86,964
Selling, general and administrative expenses 32,904 37,618 45,955
Depreciation and amortization 1,840 1,852 2,261
Provision for litigation settlement costs -- -- 500
(Recovery) provision for losses on amounts due from
Private Company and Unconsolidated Licensees (426) 952 3,088
Loss from store closings 55 191 1,670
----------- ----------- -----------
101,487 113,321 140,438
----------- ----------- -----------
Operating (loss) (3,698) (7,280) (14,364)
----------- ----------- -----------
Other income (expense):
Royalty income 374 375 523
Interest income 67 195 311
Interest expense (28) (47) (48)
Other income, net 319 880 1,670
----------- ----------- -----------
732 1,403 2,456
----------- ----------- -----------
(Loss) before income taxes (2,966) (5,877) (11,908)
Income taxes 95 146 160
----------- ----------- -----------
Net (loss) ($3,061) ($6,023) ($12,068)
=========== =========== ===========
Net (loss) per common share ($0.54) ($1.06) ($2.12)
=========== =========== ===========
Weighted average number of common shares 5,700,725 5,700,725 5,700,725
=========== =========== ===========
Attention is directed to the foregoing Accountants' Report and to the
accompanying Notes to the Consolidated Financial Statements.
F4
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JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Capital Deficiency)
Fiscal Years ended August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands, except for share data)
Notes
Common Stock Additional Receivable
------------------------- paid-in from warrant Accumulated
Shares Par value capital holders (deficit) Totals
------ --------- ------- ------- --------- ------
Balances at August 27, 1994 5,700,725 $ 57 $ 22,911 $ (300) $ (14,883) $ 7,785
Net (loss) -- -- -- -- (12,068) (12,068)
--------- -------- --------- --------- --------- ---------
Balances at August 26, 1995 5,700,725 57 22,911 (300) (26,951) (4,283)
Net (loss) -- -- -- -- (6,023) (6,023)
--------- -------- --------- --------- --------- ---------
Balances at August 31, 1996 5,700,725 57 22,911 (300) (32,974) (10,306)
Net (loss) -- -- -- -- (3,061) (3,061)
--------- -------- --------- --------- --------- ---------
Balances at August 30, 1997 5,700,725 $ 57 $ 22,911 $ (300) $ (36,035) $ (13,367)
========= ======== ========= ========= ========= =========
Attention is directed to the foregoing Accountants' Report and to
the accompanying Notes to the Consolidated Financial Statements.
F5
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JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Year Ended Year Ended Year Ended
August 30, 1997 August 31, 1996 August 26, 1995
--------------- --------------- ---------------
(52 Weeks) (53 Weeks) (52 Weeks)
---------- ---------- ----------
Cash flows from operating activities:
Net (loss) ($ 3,061) ($ 6,023) ($12,068)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,840 1,852 2,261
(Recovery) provision for losses on amounts due from
Private Company and Unconsolidated Licensees (426) 952 3,088
Loss from store closings 40 191 1,670
Deferred rent (62) 246 656
Provision for warranty costs 204 -- --
Changes in operating assets and liabilities:
Decrease in merchandise inventories 278 1,211 716
Decrease in refundable income taxes 23 108 2,127
(Increase) decrease in prepaid expenses (30) 315 956
Decrease (increase) in accounts receivable 439 916 (785)
Decrease in other current assets 7 93 1,374
Decrease (increase) in due from Private Company
and Unconsolidated Licensees 426 (952) (1,256)
Decrease (increase) in other assets 124 46 (567)
Increase (decrease) in accounts payable trade 868 (362) 717
(Decrease) in customer deposits (34) (142) (443)
(Decrease) increase in accrued expenses and
and other current liabilities (501) (1,499) 1,206
-------- -------- --------
Net cash provided by (used in) operating activities 135 (3,048) (348)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (206) (989) (4,292)
Deferred lease costs and other intangibles 64 15 (1,580)
Decrease in due from limited partners -- -- 1,000
-------- -------- --------
Net cash (used in) investing activities (142) (974) (4,872)
-------- -------- --------
Cash flows from financing activities:
Payments of obligations under capital leases (188) (107) (140)
-------- -------- --------
Net cash (used in) financing activities (188) (107) (140)
-------- -------- --------
Net (decrease) in cash and cash equivalents (195) (4,129) (5,360)
Cash and cash equivalents at beginning of year 3,600 7,729 13,089
-------- -------- --------
Cash and cash equivalents at end of year $ 3,405 $ 3,600 $ 7,729
======== ======== ========
Supplemental disclosure of cash flow information:
Income taxes paid (refunded) during the year $ 95 $ 108 ($ 2,127)
======== ======== ========
Interest paid $ 28 $ 47 $ 48
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Acquisition of equipment through capital lease financing $ 379 -- --
======== ======== ========
See Note 9 - Commitments, Contingencies and other Matters
Attention is directed to the foregoing Accountants' Report and to
the accompanying Notes to the Consolidated Financial Statements.
F6
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
(1) BUSINESS AND BASIS OF PREPARATION
The consolidated financial statements include the accounts of Jennifer
Convertibles, Inc. and subsidiaries (the "Company") and as described below,
certain licensees. The Company is the owner and licensor of domestic sofabed
specialty retail stores that specialize in the sale of a complete line of
sofabeds and companion pieces such as loveseats, chairs and recliners and
specialty retail stores that specialize in the sale of leather furniture. As at
August 30, 1997 and August 31, 1996, 84 and 86 Company-owned stores operated
under the Jennifer Convertibles, Jennifer Leather and Jennifer Living Rooms
names.
Commencing in the latter part of the fiscal year ended August 31,
1992, the Company began licensing stores to limited partnerships ("LP's") of
which a subsidiary of the Company is the general partner. The Company's
subsidiary made nominal capital contributions to the LP's and the limited
partners contributed approximately $6,660. All of the LP's have had losses since
inception and the Company has made advances to them to fund such losses. The
Company has control of the LP's and, as a result, consolidates the accounts of
the LP's in its financial statements. Included in the Company's Consolidated
Statement of Operations are the losses of the LP's in excess of the limited
partners' capital contributions. As at August 30, 1997 and August 31, 1996, the
LP's operated 63 and 64 stores under the Jennifer Convertibles name.
The Company has also licensed stores to parties which may be deemed
affiliates ("Unconsolidated Licensees"). Under the applicable license
agreements, the Company is entitled to a royalty of 5% of sales. As at August
30, 1997 and August 31, 1996, 11 stores were operated by such Unconsolidated
Licensees and the results of their operations are not included in the
consolidated financial statements (See Notes 3 and 9).
Also not included in the consolidated financial statements are the
results of operations of 22 stores in the New York Metropolitan Area which are
owned by a company (the "Private Company") which, until November 1994, was owned
by three of the officers/directors/principal stockholders of the Company. In
November 1994, the Private Company redeemed the stock in the Private Company of
two of the principal stockholders (Harley Greenfield and Edward Seidner) for a
note in the amount of $10,273 collateralized by the assets of the Private
Company and due in 2023 (See Note 9). In connection with such transaction, Fred
Love, the remaining principal stockholder, granted Messrs. Greenfield and
Seidner options expiring in November 2004 to purchase the 585,662 shares of the
Company's Common Stock owned by him and the Private Company for $15.00 per
share.
The Company, the LP's, the Private Company and the Unconsolidated
Licensees have had numerous transactions with each other as more fully discussed
in Note 3. Further, the Company had made advances to the Private Company and the
Unconsolidated Licensees which have been reserved for in full due to uncertainty
of collection. Because of the numerous related party transactions, the results
of operations are not necessarily indicative of what they would be if all
transactions were with independent parties.
F7
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company incurred net losses in
each of the last three fiscal years ended August 30, 1997. In addition, at such
date, the Company has both a working capital deficiency of $17,258 and a capital
deficiency of $13,367. Further, at such date, the Company is in default of the
provisions of a Credit and Security Agreement with its largest supplier and has
obtained a waiver of such default. Operating losses have continued subsequent to
that date through October 1997, resulting in increases in the deficiencies.
Additionally, as more fully discussed in Note 9, the Company is involved in the
following unresolved matters which may have a significant impact on the
Company's operations and financial condition:
a) Potential claims by the Company to recover damages recommended
in a report by an independent committee of the Board of
Directors appointed to investigate a complaint relating to
transactions between the Company and the Private Company.
b) Litigation consisting of 11 class action complaints and six
derivative action lawsuits.
c) A formal investigation into the affairs of the Company
commenced on May 3, 1995 by the Securities and Exchange
Commission.
Management has addressed certain of the aforementioned issues, as follows:
o As discussed in Note 9, the Company has agreed to terms
which, subject to court approval, would not only settle the
class action and derivative litigations but change its
operating relationship with the Private Company and resolve
outstanding disputes relating to transactions between the
Company and the Private Company.
o Approximately 40 unprofitable stores have been closed in
1995 and 1996 and expense reduction plans have been
implemented throughout all operational areas of the Company.
o As discussed in Note 5, the Company has entered into a
credit and security agreement with its largest supplier,
Klaussner Furniture Industries, Inc. ("Klaussner") (which
accounts for approximately 81% of the Company's purchases of
merchandise) which, based on current terms, effectively
extended the payment terms for merchandise shipped from 60
days to 81 days. Additionally, allowances of $2,241 were
obtained from Klaussner for fiscal 1997 of which $1,166
reduced cost of goods sold and $1,075 reduced selling, general
and administrative expenses.
o As discussed in Note 12, the Company sold to Klaussner
10,000 shares of convertible preferred stock for $5,000.
F8
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Jennifer
Convertibles, Inc., its subsidiaries and the LP's. A subsidiary of the Company
is the general partner of each of the LP's.
FISCAL YEAR
The Company has adopted a fiscal year ending on the last Saturday in
August which would be either 52 or 53 weeks long.
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid instruments with a
maturity of three months or less to be cash equivalents.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost (determined on
the first-in, first-out method) or market and are physically located, as
follows:
8/30/97 8/31/96
------- -------
Showrooms $4,271 $ 3,963
Warehouses 3,672 4,258
------ -------
$7,943 $ 8,221
====== =======
Vendor discounts and allowances in respect to merchandise purchased by the
Company are included as a reduction of inventory and cost of sales.
STORE FIXTURES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Store fixtures and equipment, including property under capital leases,
are carried at cost less accumulated depreciation and amortization. Depreciation
is computed using the straight-line method over estimated useful lives or, when
applicable, the life of the lease, whatever is shorter. Betterments and major
remodeling costs are capitalized. Leasehold improvements are capitalized and
amortized over the shorter of their estimated useful lives or the terms of the
respective leases.
GOODWILL
Goodwill consists of the excess of cost of the Company's investments
in certain subsidiaries over the fair value of net assets acquired. Impairment
is assessed based on cash flows of the related stores. Goodwill is being
amortized over forty years from the acquisition date using the straight-line
method. Accumulated amortization at August 30, 1997 and August 31, 1996 amounted
to $574 and $556, respectively.
F9
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
DEFERRED LEASE AND OTHER INTANGIBLE COSTS
Deferred lease costs, consisting primarily of lease commissions and
payments made to assume existing leases are deferred and amortized over the term
of the lease.
Pre-opening costs are expenses associated with the opening of new
stores are deferred and amortized over a one-year period.
DEFERRED RENT AND ALLOWANCES
Pursuant to certain of the Company's leases, rent expense charged to
operations differs from rent paid because of the effect of free rent periods and
work allowances granted by the landlord. Accordingly, the Company has recorded
deferred rent and allowances of $5,712 and $5,868 at August 30, 1997 and August
31, 1996, respectively. Rent expense is calculated by allocating total rental
payments, including those attributable to scheduled rent increases reduced by
work allowances granted, on a straight-line basis, over the respective lease
term.
REVENUE RECOGNITION
Sales are recognized upon delivery of the merchandise to the customer. A
minimum deposit of 50% is typically required upon placing a non-financed sales
order.
(LOSS) PER SHARE
(Loss) per share for the years ended August 30, 1997, August 31, 1996
and August 26, 1995 were computed by dividing the net (loss) by the weighted
average number of shares of Common Stock outstanding. Options and warrants
outstanding are not included because their effect is anti-dilutive.
ADVERTISING
Advertising costs are expensed as incurred.
WARRANTIES
Estimated warranty costs are expensed in the same period that sales
are recognized.
CONCENTRATION OF RISKS
The Company purchases 92% of its inventory from two suppliers (81% and
11%, respectively) under normal or extended trade terms. The larger supplier,
Klaussner, has executed a Credit and Security Agreement with the Company (See
Note 5).
The Company utilizes many local banks as depositories for cash
receipts received at its showrooms. Such funds are transferred weekly to
concentration accounts maintained at one commercial bank. At August 30, 1997 and
August 31, 1996, amounts on deposit with this one bank totalled 76% and 86%,
respectively, of total cash.
F10
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
USE OF ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include accounts receivable, accounts payable
and customer deposits. The carrying amount of these instruments approximate fair
value due to their short-term nature.
RECENT PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share". SFAS
128 established new standards for computing and presenting earnings per share.
SFAS 128 is effective for periods ending after December 15, 1997. The above
pronouncement will not have an effect on the net (loss) per share information
presented in the consolidated financial statements.
(3) RELATED PARTY TRANSACTIONS
Prior to January 1, 1994, merchandise was purchased and warehoused for
the Company and the LP's by the Private Company under a 15-year Warehousing
Agreement dated November 3, 1986. In connection with this agreement, the Private
Company also provided services relating to purchasing, distribution, customer
service, data entry processing and other related services. All such services
have been transferred to the direct control of the Company's management except
for distribution, inventory control reporting and its data processing. The
Company and LP's pay a monthly warehousing fee (unchanged since 1986) based on
5% of the retail sales prices and a portion of fabric protection revenue
collected from customers. Additionally, the Private Company provides fabric
protection, lifetime warranty services and freight services at pre-determined
rates. The Company's cost of sales includes these charges. Revenue from
customers for fabric protection services is included in net sales.
Indicated below are the amounts charged by the Private Company:
Year Ended
-----------------------------
8/30/97 8/31/96 8/26/95
------- ------- -------
INCLUDED IN COST OF SALES:
Freight $ 2,827 $ 3,042 $ 3,775
Fabric protection services 2,543 2,972 3,804
Warehousing fees at 5% 4,890 5,302 6,304
Additional warehouse fees (Note 9) 130 520 --
------- ------- -------
TOTAL $10,390 $11,836 $13,883
----- ======= ======= =======
The Company has negotiated new operating arrangements with the Private
Company, subject to court approval of the settlement of various class and
derivative actions (See Note 9).
F11
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
Effective January 1, 1994, the Company assumed the responsibility from
the Private Company for purchasing merchandise for itself, the LP's, the
Unconsolidated Licensees and the Private Company. During the years ended August
30, 1997, August 31, 1996 and August 26, 1995, approximately $10,671, $10,471
and $12,500, respectively, of inventory at cost (before rebates) was purchased
by the Private Company through the Company and $1,883, $1,900 and $3,105,
respectively, of inventory at cost (before rebates) was purchased by the
Unconsolidated Licensees through the Company. In addition, effective January 1,
1994, the Private Company transferred to the Company the right to receive the
benefit of any vendor discounts and allowances in respect to merchandise
purchased by the Company on behalf of the LP's and certain other licensees. The
Company had always been entitled to the benefit of such discounts in respect to
merchandise purchased by the Company for its stores. To evidence its obligation
for certain accrued discounts, the Private Company executed a promissory note in
the amount of $1,000. This note, which bears interest at 8% per annum, is
payable in equal monthly installments over three years commencing August 1, 1994
and was repaid in full in the year ended August 30, 1997. In addition, since the
Private Company retained the right to receive the benefit of any discounts
refunded or credited by suppliers in respect of merchandise purchased by the
Private Company through the Company for the year ended August 26, 1995, an
amount equal to $692 was credited to the Private Company on account of discounts
for such period, $583 was credited for the year ended August 31, 1996 and $590
was credited for the year ended August 30, 1997.
Prior to January 1, 1994, the Company was party to Advertising Agreements
with the Private Company. Effective January 1, 1994, the Company assumed the
responsibility of advertising for itself, the LP's, the Unconsolidated Licensees
and the Private Company. Under the new arrangement, the Private Company and
Unconsolidated Licensees are charged a share of advertising costs. Such charges
aggregated $2,218, $2,374 and $2,498 for the years ended August 30, 1997, August
31, 1996 and August 26, 1995, respectively.
Two executive officers of the Company own interests in certain
Unconsolidated Licensee stores. Rami Abada, Executive Vice President and Chief
Operating Officer of the Company, owned a 20% interest (until October 1996) in
Southeastern Florida Holding Corp. ("S.F.H.C.") which owns six licensed stores.
During the years ended August 30, 1997, August 31, 1996 and August 26, 1995,
S.F.H.C. incurred approximately $166, $160 and $185, respectively, in royalty
expense to the Company. The same executive also owned (until October 1996) a 20%
interest in two other corporations that are also part of the Unconsolidated
Licensees. During the years ended August 30, 1997, August 31, 1996 and August
26, 1995, such corporations incurred approximately $74, $81 and $97,
respectively, in royalty expense to the Company. Ronald Rudzin, Senior Vice
President - Retail Stores of the Company, owns one licensed store and his father
owns two licensed stores which, during the years ended August 30, 1997, August
31, 1996 and August 26, 1995 incurred royalty expense aggregating approximately
$131, $134 and $239, respectively, to the Company (See Note 10).
In October 1996, Rami Abada transferred his 20% interest in S.F.H.C.
to individuals who are also limited partners in LP's III, IV and V (see Note
11). In turn, he received the remaining 80% equity interest in the two corporate
Unconsolidated Licensees, described in the preceding paragraph, that were owned
by such individuals.
F12
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
By agreement (the "Offset Agreement") dated November 1, 1995, the
Private Company and the Company acknowledged that as of August 26, 1995 the
Private Company owed the Company $9,268, certain Unconsolidated Licensees owed
the Company $2,118 for merchandise purchased (of which $1,866 was past due) and
the Company owed the Private Company $11,455 for warehousing fees, freight and
fabric protection services. In addition, the Private Company agreed to assume
the obligations of certain Unconsolidated Licensees in the amount of $1,866 and
to offset the amounts owed to the Company by the Private Company and such
licensees against the amounts owed to the Private Company by the Company.
By agreement dated March 1, 1996, the Private Company and the Company
agreed to continue to offset, on a monthly basis, amounts owed by the Private
Company and certain Unconsolidated Licensees to the Company for purchasing,
advertising and other services and matters against amounts owed by the Company
to the Private Company for warehousing services, fabric protection, freight and
other services and matters. The proposed settlement agreement contemplates that
the Offset Agreement will be modified to provide that to the extent either party
owes the other an amount in excess of $1,000 for current obligations, such
excess will be paid in cash.
All amounts due from the Private Company and Unconsolidated Licensees
are fully reserved since these entities have losses and/or capital deficiencies.
In connection with the uncertainty of collectibility and in
consideration of the potential additional financial support that the Company may
provide to the Private Company and the Unconsolidated Licensees, the Company
will account for subsequent transactions with these entities on an offset basis.
However, if the result of the offset is a receivable due from them, then such
net amount will be generally recognized only at the time when cash is received
from these entities. A reserve has been provided in the consolidated financial
statements for amounts due from these entities, as follows:
[Download Table]
Unconsolidated
Licensees
Private (Other Than
Company S.F.H C.) S.F.H.C. Totals
------- --------- -------- ------
AT AUGUST 30, 1997:
Gross amount due $ 2,335 $ 2,355 $ 2,208 $ 6,898
Reserves (2 335) (2,355) (2,208) (6,898)
------- ------- ------- -------
Net Amount $ -0- $ -0- $ -0- $ -0-
======= ======= ======= =======
AT AUGUST 31, 1996:
Gross amount due $ 2,486 $ 2,537 $ 2,301 $ 7,324
Reserves (2,486) (2,537) (2,301) (7,324)
------- ------- ------- -------
Net Amount $ -0- $ -0- $ -0- $ -0-
======= ======= ======= =======
AT AUGUST 26, 1995:
Gross amount due $ 2,410 $ 1,167 $ 2,795 $ 6,372
Reserves (2,410) (1,167) (2,795) (6,372)
------- ------- ------- -------
Net Amount $ -0- $ -0- $ -0- $ -0-
======= ======= ======= =======
F13
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
The Private Company has stated that, if the settlement described in
Note 9 is not consummated, it may assert claims of approximately $1,200 against
the Company for various additional amounts owed from prior years. The Company
believes the claims are either without merit or would be exceeded by the amount
of counter-claims the Company would make under such circumstances. Accordingly,
the Company has not provided for any losses that may occur as a result of this
assertion.
Until October 28, 1993, the Private Company owned certain trademarks
and had granted the Company a royalty-free license to use and to sublicense and
franchise the use of such trademarks throughout the world, except New York
State. On October 28, 1993, the licensor, for nominal consideration, assigned
these trademarks to the Company. The Company then granted the Private Company a
perpetual, royalty-free license to use and to sublicense and franchise the use
of such trademarks in the State of New York. The license is exclusive in such
territory, subject to certain exceptions.
Effective September 1, 1994, Harley Greenfield, the President and
Chief Executive Officer, and Edward Seidner, who became an Executive Vice
President on such date, began receiving a salary of $400 and $300 per annum,
respectively, from the Company. Such amounts were reduced, effective February 1,
1996 to $320 and $240 per annum, respectively. In addition, they receive
substantial economic benefits from the Private Company (see Note 3).
Effective January 1, 1994, Rami Abada, Executive Vice President and
Chief Operating Officer, and Ronald Rudzin, Senior Vice President - Retail
Stores, each began receiving a salary of $150 per annum from the Company. Such
amounts were reduced, effective February 1, 1996 to $120 each per annum. In
addition, they receive substantial economic benefits from the Private Company
and certain Unconsolidated Licensees.
Another director (and stockholder) of the Company received
approximately $164, $188 and $336 in legal fees in the fiscal years ended in
1997, 1996 and 1995, respectively. Further, he owned, until May 1995, a 20%
interest in each of two Private Company stores and receives economic benefits
from the Private Company.
(4) STORE FIXTURES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
August 30, August 31,
1997 1996
---------- ----------
Automobiles $ 68 $ 68
Store fixtures and furniture 6,097 6,129
Leasehold improvements 6,498 6,434
Computer equipment 1,446 1,026
-------- --------
14,109 13,657
Less: Accumulated depreciation
and amortization (6,440) (4,918)
-------- --------
$ 7,669 $ 8,739
======== ========
At August 30, 1997 and August 31, 1996, equipment cost includes $1,286
and $907, and accumulated depreciation and amortization includes $608 and $465
on equipment under capital leases.
F14
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
(5) CREDIT AND SECURITY AGREEMENT WITH KLAUSSNER:
On March 5, 1996, the Company and Klaussner executed a Credit and
Security Agreement that provides that Klaussner effectively extended the payment
terms for merchandise shipped from 60 days to 81 days and was provided with
security interest in all the Company's assets including accounts receivable,
inventory, store fixtures and equipment, as well as the assignment of
leaseholds, trademarks and a license agreement to operate the Company's business
in the event of default and non-payment.
At August 30, 1997, the Company owed Klaussner $10,677, of which
$1,990 exceeds the extended payments terms referred to above. On December 11,
1997, Klaussner formally waived the default.
In addition, Klaussner loaned $1,440 to the Private Company. The $1,440
was used to pay down the mortgage obligation on the warehouse owned by the
Private Company. The $1,440 (all of which has been paid at August 30, 1997) is
in addition to $3,500 (outstanding balance $1,000 at August 30, 1997) loaned to
the Private Company by Klaussner prior to January 1, 1994.
(6) INCOME TAXES
Components of income tax expense are as follows:
Year Ended
-----------------------------------
8/30/97 8/31/96 8/26/95
------- ------- -------
Current:
Federal $ -- $ -- $ --
State 95 146 160
Deferred:
Federal -- -- --
State -- -- --
---- ---- ----
$ 95 $146 $160
==== ==== ====
Expected tax expense (benefit) based on the statutory rate is
reconciled with actual tax expense (benefit) as follows:
[Download Table]
Percent of Pre-Tax Earnings (Loss)
Year Ended
----------------------------------
8/30/97 8/31/96 8/26/95
------- ------- -------
"Expected" tax (benefit) ( 34.0)% (34.0)% (34.0)%
Increase (reduction) in taxes resulting from:
State income tax, net of
federal income tax benefit 2.0% 1.6 % 1.4 %
Non-deductible items 1.7% 1.0 % .5 %
Other 2.0% (2.7)% (1.8)%
Increase in valuation allowance 31.3% 36.6 % 35.2 %
------ ------- -------
3.0% 2.5 % 1.3 %
====== ======= =======
F15
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
The principal components of deferred tax assets, liabilities and the
valuation allowance are as follows:
[Download Table]
August 30, 1997 August 31, 1996
--------------- ---------------
Deferred tax assets:
Federal and state net operating
loss carryforwards $ 6,160 $ 5,378
Reserve for losses on loans and
advances 2,759 2,928
Accrued partnership losses 1,420 1,385
Deferred rent expense 1,235 1,326
Inventory capitalization 198 216
Other expenses for financial
reporting, not yet deductible
for taxes 656 578
-------- --------
Total deferred tax assets, before
valuation allowance 12,428 11,811
Less: Valuation allowance (11,073) (10,113)
-------- --------
Total deferred tax assets $ 1,355 $ 1,698
======== =======
Deferred tax liabilities:
Difference in book and tax basis
of fixed assets $ 1,295 $ 1,571
Other 60 127
-------- --------
Total deferred tax liabilities 1,355 1,698
-------- --------
Net deferred tax assets $ -0- $ -0-
======== =======
The Company's deferred tax asset has been fully reserved since it is
considered more likely than not that the amount will not be realized. During the
years ended August 30, 1997, August 31, 1996 and August 26, 1995, the valuation
allowance increased by $960, $2,144 and $4,202, respectively.
As of August 30, 1997, the Company has a net operating loss
carryforward of approximately $15,000, expiring $6,000 in the year 2010, $7,000
in the year 2011 and $2,000 in the year 2012.
Federal income tax returns filed for the 1993 and 1994 tax years are
being examined by the Internal Revenue Service. In managements' opinion, the
outcome of these examinations are not expected to have a material effect on the
Company's financial position.
F16
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
(7) WARRANTS
In the fiscal year ended August 27, 1994, under the terms of the
limited partnership agreements for LP III, LP IV and LP V (see Note 11), the
three limited partners each purchased for $170 five-year warrants to purchase
60,000 shares of the Company's Common Stock at an exercise price of $15.625 per
share. Each of the limited partners paid approximately $70 in 1994 and issued a
$100 term note to the Company as payment for the warrants. These notes bear
interest at a rate of 7.12% per annum and are payable over ten years (with 10%
of principal due annually). For each annual principal payment which is not made,
10,564 of the warrants shall be cancelled. The notes receivable from warrant
holders are recorded in (Capital Deficiency).
(8) STOCK OPTIONS PLANS
In November 1986, the Company adopted an Incentive and Non-Qualified
Stock Option Plan (the "1986 Plan") under which 150,000 shares of Common Stock
were reserved for issuance to selected management and other key employees of the
Company. The Amended and Restated 1991 Incentive and Non-Qualified Stock Option
Plan (the "1991 Plan" and together with the 1986 Plan hereinafter referred to as
the "Plans") was adopted by the Company in September 1991 and amended in April
1992. Under the 1991 Plan, 700,000 shares of Common Stock were reserved for
issuance to selected management and other key employees of the Company. The
terms of both Plans are substantially similar. The exercise price with respect
to qualified incentive options may not be less than 100% of the fair market
value of the Common Stock at the date of grant.
From time to time, the Company grants additional stock options outside
of the Plans to individuals or entities in recognition of contributions made to
the Company.
Additional information with respect to the Company's stock options
under and outside the Plans is as follows:
[Download Table]
Options Exercisable Options
--------------------------- ---------------------------
Weighted Weighted
Average Average
Exercise Exercise
Number of Price Number of Price
Shares Per Share Shares Per Share
--------- --------- --------- ---------
Outstanding at 8/27/94 736,547 $ 7.73 545,053 $ 6.83
======= ======
Granted 137,500 $ 3.43
Cancelled ( 37,500) $10.67
---------- ------ ------- ------
Outstanding at 8/26/95 836,547 $ 6.89 628,051 $ 7.01
---------- ------ ======= ======
Granted - $ -
Cancelled ( 25,000) $ 2.75
---------- ------ ------- ------
Outstanding at 8/31/96 811,547 $ 6.80 706,883 $ 7.07
---------- ------ ======= ======
Granted 732,000 $ 2.00
Cancelled ( 264,500) $ 8.00
Expired ( 50,000) $ 2.75 - -
---------- ------ ------- ------
Outstanding at 8/30/97 1,229,047 $ 3.99 480,381 $ 7.07
========== ====== ======= ======
F17
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
See Note 11 with respect to options outstanding held by JCI to
purchase 1,200,000 shares of Common Stock of the Company.
The number of shares of Common Stock reserved for options available
for grant under the Plans was 9,953 at August 30, 1997. The weighted average
remaining contractual life of the outstanding options is 7.6 years.
In May 1997, the Company adopted the 1997 Stock Option Plan (the "1997
Plan") under which 500,000 shares of common stock were reserved for issuance.
The 1997 Plan is subject to shareholder approval.
The Company applies APB No. 25 in accounting for its stock option
plan, which requires the recognition of compensation expense for the difference
between the fair value of the underlying common stock and the grant price of the
option at the grant date. Had the compensation expense been determined based
upon the fair value at the grant date, as prescribed under SFAS No. 123, the
Company's net loss for the year ended August 30, 1997 would have been as
follows:
Net (Loss):
As reported $(3,061)
Pro forma under SFAS 123 $(3,141)
(Loss) per share:
As reported $( .54)
Pro forma under SFAS 123 $( .55)
The fair value of each option granted is estimated at $1.22 on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
Risk-free interest rate 6.95%
Expected life of options 5
Expected stock price volatility 69%
Expected dividend yield 0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options.
F18
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
(9) COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
LEASES
The Company and LP's lease retail store locations under operating
leases for varying periods through 2009 which generally are renewable at the
option of the lessee. Certain leases contain provisions for additional rental
payments based on increases in certain indexes. Future minimum lease payments
and future minimum sublease rentals for all noncancelable leases with initial
terms of one year or more consisted of the following at August 30, 1997:
YEAR ENDING AUGUST
--------------------------------------
1998......................... $ 11,570
1999......................... 11,293
2000......................... 10,779
2001......................... 10,042
2002......................... 9,344
Thereafter................... 19,795
--------
$ 72,823
========
The Company has guaranteed the lease obligation of the California
warehouse which is operated by the Private Company. The annual lease obligation
for this location is $133 and the lease expires on September 30, 1998.
Rental expense for all operating leases amounted to approximately
$13,657, $14,166 and $15,770, net of sublease income of $166, $170 and $301, for
the years ended August 30, 1997, August 31, 1996 and August 26, 1995,
respectively.
The Company and LP's have long-term capital leases for certain equipment.
The leases are for periods of three to five years with an option to purchase at
the end of the lease periods for a nominal price.
The following is a schedule of future lease payments for the capital
leases at August 30, 1997:
YEAR ENDING AUGUST
----------------------------------------
1998.............................. $ 286
1999.............................. 261
2000.............................. 42
-----
589
Amount representing interest...... ( 24)
-----
Present value of minimum
lease payments................... 565
Less: Current portion............ 144
-----
$ 421
=====
F19
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The components of accrued expenses and other current liabilities are:
8/30/97 8/31/96
------- -------
Advertising $1,419 $ 958
Payroll 809 744
Legal 162 216
Accounting 217 356
Store closings 248 455
Settlement costs 500 500
Sales tax 424 778
Warranty 204 --
Other 794 1,015
------ ------
$4,777 $5,022
====== ======
ADVERTISING EXPENSE
Advertising expense for the years ended August 30, 1997, August 31,
1996 and August 26, 1995 aggregated $10,893, $12,265 and $15,729, respectively.
OTHER
CONCLUSIONS OF THE INDEPENDENT COMMITTEE
A draft complaint ("Complaint") on behalf of an unnamed plaintiff was
delivered to the Company in March 1994. The Complaint raised certain issues and
potential causes of action that may exist in favor of the Company against the
Private Company and others. The Company's President advised the Board of
Directors that, in his view, the Complaint was without merit. The Board
appointed an independent committee (the "Committee") consisting of one director
to investigate the allegations in the Complaint and certain other matters.
On November 22, 1994, the same director who was on the Committee
submitted a letter to the President of the Company which contained information
relevant to the (1) Funding of S.F.H.C. (See Note 11) and (2) the funding of
Limited Partnerships (LP's) III through V (See Note 11). The letter essentially
detailed the flow of funds from the Private Company, certain Unconsolidated
Licensees and the Company to S.F.H.C. and its subsidiary ("Summit").
Additionally, it disclosed that as of August 27, 1994, S.F.H.C. had a receivable
from officers of $1,861. It asserted that neither (a) the payment to fund
S.F.H.C.'s purchase of the stock of Summit nor (b) the capital contributions to
LP's III through V were obtained from sources outside the Company or the Private
Company.
On December 2, 1994, the Board of Directors of the Company received
the Summary Report of Counsel to the Independent Committee which, amongst other
matters, concluded that it "has reviewed many significant related party
transactions and recommends to the Board that the Company assert claims to
recover damages for harm caused the Company". On January 26, 1995, the Board of
Directors received the "Final Report of Counsel to the Independent Committee of
the Board of Directors" which reached the same conclusions and recommendations.
F20
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
On March 10, 1995, the Board of Directors received the "Response of
Harley Greenfield to the January 26, 1995 Final Report of Counsel to the
Independent Committee" that asserted that there were no valid claims. On April
3, 1995, it received a similar response from a financial consultant to the
Company to the letter dated November 22, 1994 from Michael Colnes to Harley
Greenfield that asserted that there was nothing improper.
CLASS ACTION AND DERIVATIVE ACTION LAWSUITS
Between December 6, 1994 and January 5, 1995, the Company was served
with eleven class action complaints and six derivative action lawsuits which
deal with losses suffered as a result of the decline in market value of the
Company's stock as well as the Company having "issued false and misleading
statements regarding future growth prospects, sales, revenues and net income".
The ultimate outcome of these matters is not presently determinable (see below).
PROPOSED SETTLEMENT OF DERIVATIVE LITIGATION
In March 1996, the Company signed a Memorandum of Understanding
("Derivative Memorandum") for the purpose of settling all of the claims
involving those parties in the derivative litigation. The Derivative Memorandum
is subject to a settlement of all claims against the Company, its present and/or
former officers, directors, certain accountants, consultants and
representatives, the Private Company, its present and/or former officers,
directors, employees, accountants, consultants and/or representatives and the
discontinuance of the class action litigation presently pending. It also is
conditioned upon mutual releases between the Company and the Private Company.
Attorney's fees will be funded by an insurance carrier for one of the defendants
other than the Company for $500. The Private Company will pay $165 in cash and
the Company will pay the remaining portion of fees and expenses in "Preferred
Stock". The Preferred Stock will have an aggregate value of $130, paying an
annual dividend of 7% and convertible into Common Stock (at such time as the
Company's Common Stock trades at $7.00 per share or higher) at $7.00 per share.
This settlement is subject to final court approval. In accordance with FASB
Statement No. 5, the $130 value of the Preferred Stock has been accrued in the
fiscal year ended August 31, 1995 as part of estimated settlement costs.
A group of shareholders claiming to own approximately 8.5% of the
outstanding shares of the Company have filed (as a group) objections to the
fairness of the settlement in the Derivative Memorandum. The group has requested
deposition and document discovery in advance of any hearing on the fairness of
the settlement, and the Company has provided some document and deposition
discovery voluntarily. However, the group of objectors has made a motion for
additional discovery which the Company has opposed. The motion is still pending.
PROPOSED SETTLEMENT OF CLASS ACTION LITIGATION
In March 1996, the Company and the parties in the class action
litigation signed a Memorandum of Understanding ("Class Memorandum") which is
subject to a Stipulation of Settlement to be submitted to the court for final
approval. The Class Memorandum provides that settlement of the class action
litigation is contingent upon final court approval of the proposed settlement of
the derivative litigation referred to above.
F21
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
The Class Memorandum provides for the payment to certain members of
the class and their attorneys of an aggregate maximum amount of $7,000 in cash
and Preferred Stock having a value of $370. (Terms and conditions of such
Preferred Stock are described above.) The cash portion of the settlement will be
funded entirely by insurance company proceeds. In accordance with FASB Statement
No. 5, the $370 value of the Preferred Stock has been accrued in the fiscal year
ended August 26, 1995.
The proposed settlement of the class action litigation is a claims
made settlement. All claimants who purchased the Company's Common Stock during
the period from December 9, 1992 through December 2, 1994 and who held their
stock through December 2, 1994, will be entitled to participate in the
settlement.
PROPOSED SETTLEMENT WITH THE PRIVATE COMPANY
The Company signed an agreement ("Settlement Agreement") with the
Private Company subject to court approval and settlement of the derivative and
class action litigation. The Settlement Agreement restructures the relationship
between the Private Company and the Company in order to reduce and eliminate any
alleged actual or potential conflicts of interest.
A) (Warehouse Services):
The Settlement Agreement contemplates that until December 31, 1997,
the Company will pay the Private Company for all services under the warehousing
agreement 8.3% of the retail sales prices, less the costs of certain services
that will be assumed by the Company previously provided by the Private Company,
but no lower than 7.2% of sales. For 1998, the fee will be 7.2% (see B below).
Upon the effective date, the Company will no longer pay the Private Company
separately for "fabric protection" services. The Company has also agreed to pay
an additional warehouse fee up to $650 related to the calendar year 1996 because
the total retail sales of the Company were less than $135 million. Of such
amount, $520 was expensed during the year ended August 31, 1996 and $130 was
expensed during the year ended August 30, 1997. The Company has also agreed to
pay a re-delivery fee to the Private Company of 3% of selling price for customer
deliveries that have to be re-delivered to customers under certain
circumstances. In calendar 1997 and 1998, if an annual sales level of $140
million is achieved, the Private Company will pay back 50% of the additional
warehouse fee described above in each of such years. To the extent such
additional fee is not so repaid in full, starting on January 1, 1999, the
Private Company will repay the balance of such additional fee over seven years
without interest.
The Company believes the effective date of such changes will be the
date court approval is obtained. The Private Company has stated that the
effective date is March 1996. The Company believes this claim is without merit
and has not provided for any losses that may accrue as a result of this
assertion which could approximate $1,200.
B) (Assignment of Real Property Interests of Warehouses):
The Settlement Agreement contemplates that, effective January 1, 1999,
the Company will receive all real property interests in the various warehouses
serving the business along with the leasehold interests subject to mortgages and
other security agreements.
F22
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
On June 30, 1996, the Private Company sold the Inwood, New York
warehouse which has been the principal warehouse in the distribution system. In
connection with this sale, the Settlement Agreement contemplates that the
Company will receive from the Private Company payments of $25 per month for 84
months commencing January 1, 1999. The Agreement also contemplates that,
effective December 1, 1996, the warehouse fee will be reduced to 7.2% of the
retail sales prices and fabric protection revenue collected from customers.
C) (Warehouse Services to the Private Company):
Commencing January 1, 1999 through December 31, 2005, the Company will
provide the Private Company all warehousing services for 2% of the Private
Company's delivered retail selling prices, plus a fee for "fabric protection"
services.
D) (Freight Charges):
The Company will continue to pay all freight charges (for inventory
delivered to warehouses) through December 31, 1998, based upon an agreed
schedule with the Private Company.
E) (Assignment of Interest in Certain Limited Partnerships and
Other Corporate Licensee):
The Settlement Agreement contemplates that the Private Company will
purchase the limited partnership interests of the limited partnerships known as
LP III, LP IV and LP V and the equity interest of the shareholders of S.F.H.C.
and assign these interests to the Company. (On December 31, 1996, the purchase
of these limited partnership interests was completed by the Private Company and
the purchase of S.F.H.C. will occur upon court approval of the settlement.) The
Company, in turn, will release the limited partners and the shareholders,
officers and directors of S.F.H.C. from all claims and/or obligations owed to
S.F.H.C. The former shareholders of S.F.H.C. will receive new ten year warrants
to purchase an aggregate of 180,000 shares of Common Stock at $7.00 per share.
F) (Inter-Company Accounts):
The Settlement Agreement contemplates that commencing January 1, 1999,
the Private Company will pay the Company under the offset agreement (described
in J, below) $1,400 in resolution of certain inter-company account balances as
of August 26, 1995 at $17 per month to be applied toward principal and interest
at 6%, until repaid.
G) (License of Computer Programs):
Commencing January 1, 1999, the Private Company will license the
Company to use and change the Private Company's computer programs without fee.
The Company will also assume the obligations and personnel of the Computer
Department, presently maintained by the Private Company.
F23
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
H) (Warranty and Fabric Protection):
Upon execution of the Settlement Agreement, the Company will be
responsible for any claims for breach of warranty relating to "fabric
protection" in connection with sales by both the Company and the Private
Company.
I) (Amounts Due From Officers of S.F.H.C. of $1,200):
The Settlement Agreement contemplates that the Private Company will
assume and pay $1,200 of the debt of the officers of S.F.H.C. owed to S.F.H.C.
This amount will be paid to the Company in 84 equal monthly installments,
without interest, beginning January 1, 1999.
J) (Offset Agreements):
On November 1, 1995 and March 1, 1996, the Company and the Private
Company entered into offset agreements. Such offset agreements permit the two
companies to offset their current obligations to each other for merchandise
purchases, warehouses fees, fabric protection fees and freight. The Settlement
Agreement contemplates that amounts owing in excess of $1,000 at any time will
be paid in cash. As part of the offset agreement, the Private Company agreed to
assume certain liabilities owed to the Company by the Unconsolidated Licensees.
The Company, the Private Company and the Unconsolidated Licensees have been
accounting for current obligations in this manner since the start of the fiscal
year ended August 26, 1995. On February 21, 1997, the Company and the Private
Company entered into a Shortfall and Old Account Agreement (Shortfall Agreement)
which will become effective upon court approval. This Shortfall Agreement grants
a credit to the Private Company under previous offset agreements of the amount,
if any, by which the Company's consolidated sales (including the consolidated
sales of S.F.H.C.) in any month commencing January 1, 1997 to December 31, 1998
are less than the target sales for such month times the warehousing fee
percentage (presently 5%). Actual sales in excess of target sales may be carried
over (and back) and added to actual sales of succeeding or preceding months. As
of August 30, 1997, the Company (including the consolidated sales of S.F.H.C.),
was $1,948 short of target sales which, at the 5% warehouse fee, would equate to
a $97 payment.
K) (Royalties):
The Settlement Agreement contemplates that the Unconsolidated
Licensees will pay to the Company any royalties owed under the offset agreement.
The Private Company will pay royalties owed of $100 for stores that the
Unconsolidated Licensees have closed commencing January 1, 1999 in 84 equal
monthly installments without interest.
L) (Subordination):
Subject to court approval of the Settlement Agreement, Messrs.
Greenfield and Seidner have agreed to subordinate, until January 1, 1999, their
right to receive payments in respect of the $10,273 owed to them by the Private
Company, if the Private Company is in default in the payment of any cash
obligation to the Company arising after August 7, 1996 after giving effect to
any offsets as between Messrs. Greenfield and Seidner and the Private Company.
Such subordination does not apply to any distribution in respect of a
disposition of substantially all of the assets of the Private Company.
F24
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
On December 9, 1994, the Company was advised that the Securities and
Exchange Commission (SEC) was conducting an inquiry of the Company's affairs "to
determine whether there have been violations of the federal securities laws".
The SEC requested that the Company voluntarily provide certain documents in
connection with its December 2, 1994 press release "concerning the adjustment in
the valuation of certain subsidiaries on the Company's balance sheet". Since
that date, the SEC has also requested the Final Report of Counsel to the
Independent Committee of the Board of Directors and the November 22, 1994 letter
from a director of the Company to the President (as more fully described above).
Additionally, the SEC requested the "responses" to these documents and the
Company furnished them with the "Response of Harley Greenfield to the January
26, 1995 Final Report of Counsel to the Independent Committee" dated March 10,
1995 and the "Response of Jerome I. Silverman to the letter dated November 22,
1994 from Michael Colnes to Harley Greenfield" dated April 3, 1995.
On May 3, 1995 the SEC commenced a formal investigation into the
affairs of the Company. Subpoenas have been issued to the Company and certain of
its current and former management to furnish various contracts and accounting
records which have been complied with. The outcome of the SEC investigation is
not presently determinable.
NASDAQ DELISTING
Effective April 17, 1995, the NASDAQ Listing Qualifications Committee
(the "Qualifications Committee") reviewed the request of the Company for an
extension of its current exception to the filing requirements for continued
listing on the NASDAQ National Market. The Qualifications Committee determined
to deny the Company's request and accordingly, the Company's Common Stock was
delisted from the NASDAQ stock market.
(10) SALE OF SUBSIDIARIES
In September 1990, the Company sold two of its stores to a licensee of a
New York store, and effective December 27, 1990, the Company sold four of its
stores for the assumption of certain liabilities and $10 in cash per store to
the same licensee. During the fiscal year ended August 27, 1994, one of the
purchasers of such stores, formerly an employee of the Private Company, became
an executive officer of the Company. The Company also entered into a ten-year
license agreement with the purchasers pursuant to which such stores pay the
Company a royalty of 5% of their sales for the right to use the "Jennifer
Convertibles" name (See Note 3).
F25
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
The purchasers assumed the liabilities owed by such stores, including
liabilities owed to the Company, in the form of six ten-year, non-interest
bearing promissory notes with aggregate annual payments of approximately $150,
with additional payments required based upon sales in excess of certain minimum
amounts. The balance of the notes, net of imputed interest at the rate of 8%,
which have been reserved for in full in the consolidated financial statements,
are as follows:
August 30, August 31,
---------- ----------
1997 1996
---- ----
Notes receivable $ 434 $ 554
Less: imputed interest ( 67) (120)
----- -----
Notes receivable, net $ 367 $ 434
===== =====
(11) OTHER AGREEMENTS
JCI CONSULTING AGREEMENT
On July 29, 1994, the Company reached an agreement with JCI
Consultant, L.P. ("JCI") to terminate a February 25, 1992 consulting agreement
with JCI pursuant to which, among other things, JCI rendered advice on the
establishment and financing of Company-owned and licensed stores.
JCI has retained all rights in and to the options to purchase
1,200,000 shares of Common Stock at $8.00 per share which were previously
granted to JCI. Such options terminate on March 21, 2001 and became exercisable
on April 1, 1996. Under a ten-year Voting Trust Agreement expiring March 21,
2001, the Chief Executive Officer and President of the Company will be the
voting trustee for the shares of Common Stock which may be received by JCI upon
the exercise of the option. Furthermore, in connection with the termination of
the Consulting Agreement, JCI agreed that, except for the aforementioned option
shares, it would not at any time acquire, directly or indirectly, more than 5%
of the issued and outstanding shares of Common Stock of the Company for a period
ending July 29, 2000.
Contemporaneous with the granting of the options to JCI, the Company,
JCI, the Principal Stockholders and the Private Company entered into a
registration and sale agreement (the "Registration Agreement") pursuant to which
JCI has certain demand and "piggy-back" registration rights. Subject to certain
exceptions, the Registration Agreement grants a right of first refusal to the
Company to purchase all option shares which are proposed to be sold. If the
Company declines to exercise such right of first refusal, the Principal
Stockholders and the Private Company will have the right of first refusal.
CHICAGO PARTNERSHIP AGREEMENT
In July, 1991, the Company entered into agreements pursuant to which a
limited partnership, Jennifer Chicago, L.P. (the "Chicago Partnership"), was
established for the purpose of operating Jennifer Convertibles stores in the
Chicago, Illinois metropolitan area. Pursuant to a 20-year License Agreement,
the Company receives a royalty of 5% of sales from the Chicago Partnership's
stores and has given the Chicago Partnership the exclusive right to open
Jennifer Convertibles stores in the defined territory.
F26
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
Pursuant to the Partnership Agreement, the limited partner (a party
related to JCI) contributed $990 to the Partnership and agreed to make
additional capital contributions of up to $100. The Company, as general partner,
made a capital contribution of $10. Under the Partnership Agreement, allocations
and distributions shall, subject to certain exceptions, be made 99% to the
limited partner and 1% to the General Partner. The Company has consolidated and
recorded the operating losses of the Partnership in excess of the limited
partner's capital contributions in the Consolidated Statements of Operations
(see Note 1). Under a Purchase Option Agreement, the Company has the right to
purchase all the limited partners' interests in the Partnership for a price
equal to the fair market value thereof, as determined by one or more investment
bankers selected by the Company and the limited partners. Also, the limited
partner can put its interest to the Private Company if certain executives of the
Company and the Private Company own less than 700,000 shares of the Company's
common stock.
LP III, LP IV AND LP V
In 1992, the Company entered into three additional Limited Partnership
Agreements (the "Agreements") establishing LP's III, IV and V which required the
limited partners to invest $1,000 in each partnership. The Agreements called for
the opening of 25 Jennifer Convertible stores in each partnership. Under the
terms of the Agreements, the Company was to receive a fee of $10 per store, plus
a royalty of 5% of the partnership's sales. The Company has recorded the
operating losses of the LP's in excess of the limited partners capital
contributions in the Consolidated Statements of Operations (see Note 1). As part
of the Agreements, the Company received options to purchase the limited
partners' interest commencing January 1999 at a price of five times the
partnership's earnings before income taxes for the prior year, as defined. Also,
pursuant to the agreement, the limited partners can put their interest to the
Company for either 100,000 shares of stock of the Company or $1,000 compounded
at 25% if there is a change in management, as defined, through the year 2002.
The investors have also purchased, for approximately $510, warrants ("Original
Warrants") exercisable between June 1994 and June 1998 to purchase 180,000
shares of the Company's Common Stock at an exercise price of $15.625 per share.
As of August 30, 1997, the limited partners have paid approximately $210 and
signed ten year notes to pay $300 as payment for these warrants (See Note 7).
In connection with the proposed settlement with the Private Company
(see Note 9), on December 31, 1996, the Private Company acquired the limited
partners' interest in these partnerships.
(12) SUBSEQUENT EVENTS
In September and November 1997, the Company opened letters of credit
in favor of an Italian supplier of leather furniture aggregating $1,350 by
depositing these funds into an interest bearing money market account. The
supplier draws down on these letters of credit as shipments are made. These
letters of credit expire over various dates to June 30, 1998. As of November 20,
1997, $850 of these credits remain outstanding.
F27
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
August 30, 1997, August 31, 1996 and August 26, 1995
(In thousands except for share amounts)
On December 11, 1997, the Company sold to Klaussner 10,000 shares of
Series A Preferred Stock ("Preferred Stock"), convertible into 1,424,500 shares
of the Company's common stock for $5,000. These shares are non-voting, have a
liquidation preference of $5,000 and do not pay dividends (except if declared on
the common stock). The preferred stock is not convertible until September 1,
1999, or earlier under certain circumstances (e.g. if another person or group
acquires 12.5% or more of the common stock or there are certain changes in
management or the Board of Directors), and has other rights associated with it.
In addition, the Credit and Security Agreement with Klaussner was modified to
include a late fee of .67% per month for invoices the Company pays beyond the
normal 60 day terms.
F28
Dates Referenced Herein and Documents Incorporated by Reference
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