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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended August 28, 1999
Commission File number 1-9681
JENNIFER CONVERTIBLES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-2824646
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(State or other jurisdiction (I.R.S. Employer of incorporation or
organization) Identification No.)
419 Crossways Park Drive
Woodbury, New York 11797
(Address of principal executive office) 5712
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(Primary Standard
Industrial Classification
Code Number)
Registrant's telephone number, including area code (516) 496-1900
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01
----------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days. (See definition of
affiliate in Rule 12b-2 of the Exchange Act.)
Aggregate market value of voting stock held by non-affiliates of registrant as
of November 14, 1997: $ 12,826,631
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Shares of common stock outstanding as of November 19, 1999: 5,704,058
List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document
is incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for indemnification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
PART I
Item 1. BUSINESS.
UNLESS OTHERWISE SET FORTH HEREIN, WHEN WE USE THE TERM "WE" OR ANY DERIVATION
THEREOF, WE MEAN JENNIFER CONVERTIBLES, INC., A DELAWARE CORPORATION, AND ITS
DIRECT OR INDIRECT SUBSIDIARIES.
BUSINESS OVERVIEW
We are the owner and licensor of the largest group of sofabed specialty
retail stores in the United States, with 123 Jennifer Convertibles(R) stores
located on the Eastern seaboard, in the Midwest, on the West Coast and in the
Southwest as of August 28, 1999. Of these 123 Jennifer Convertibles(R) stores,
we owned 52 and licensed 71 as of August 28, 1999. These 71 licensees pay us a
royalty and include several stores which are owned or operated by an affiliated
private company, Jara Enterprises, Inc. Such number does not include 23 Jennifer
Convertible stores which are owned or operated by the private company on a
royalty-free basis. As of August 28, 1999, we also owned an additional 32
"Jennifer Leather" stores.
Jennifer Convertibles(R) stores specialize in the retail sale of a
complete line of sofabeds and companion pieces, such as loveseats, chairs and
recliners, designed and priced to appeal to a broad range of consumers. The
sofabeds and companion pieces are made by several manufacturers and range from
high-end merchandise to relatively inexpensive models. We are the largest dealer
of Sealy(R) sofabeds in the United States. Each of our stores has a kiosk
devoted to mattress sales. The Jennifer Leather stores specialize in the retail
sale of leather livingroom furniture. In fiscal 1997, we also opened two test
Jennifer Living Room stores which sell a broad range of livingroom furniture,
including furniture of the type sold in Jennifer Convertibles and Jennifer
Leather stores. We display merchandise in attractively decorated settings
designed to show the merchandise as it would appear in the customer's home. In
order to generate sales, our licensees and we rely on the attractive image of
the stores, competitive pricing, prompt delivery and extensive advertising.
We believe that the image presented by our stores is an important
factor in our overall marketing strategy. Accordingly, stores are designed to
display our merchandise in attractive settings. All of our stores are of a
similar clearly-defined style, are designed as showrooms for the merchandise and
are carpeted, well-lighted and well-maintained. Inventories for delivery are
maintained in separate warehouses. We display a variety of sofabeds and
companion pieces (including cocktail tables) at each Jennifer Convertibles
retail location with carpeting and accessories. In contrast to certain of our
competitors that primarily target particular segments of the market, we attempt
to attract customers covering a broad socioeconomic range of the market and,
accordingly, offer a complete line of sofabeds made by a number of manufacturers
in a variety of styles at prices currently ranging from approximately $299 to
$2,200. The Jennifer Leather stores similarly offer a complete line of leather
living room furniture in a variety of styles and colors at prices currently
ranging from approximately $599 to $5,000. We also generally feature attractive
price incentives to promote the purchase of merchandise. In addition to offering
merchandise by brand name manufacturers, we offer merchandise at our Jennifer
Convertibles and Jennifer Leather stores under the "Jennifer" brand name for
sofabeds and under the "Bellissimo Collection" brand name for leather
merchandise.
1
Although each style of sofabed, loveseat, chair and recliner is
generally displayed at Jennifer Convertibles stores in one color and fabric,
samples of the other available colors and fabrics are available. On selected
merchandise, up to 2,000 different colors and fabrics are available for an
additional charge. To maximize the use of our real estate and to offer customers
greater selection and value, we, as is common in the mattress industry, sell
various sizes of sofabeds with various sizes of mattresses but display only one
size of sofabed at our stores. We also offer leather furniture in a number of
different grades of leather and colors. We currently emphasize contemporary and
traditional sofabeds and companion pieces in the Jennifer Convertibles stores
and in the Jennifer Leather stores. We generate additional revenue by selling
tables and offering related services, such as fabric protection and a lifetime
warranty. Fabric protection services are obtained from, and the warranty is
given by, the private company which retains approximately 1/3 of the revenues
generated from such services. This private company operates 27 Jennifer
Convertibles stores, 21 of which it owns and six of which it licenses or
manages. We do not own or collect any royalties from 23 of such stores which are
located in New York. However, the private company operates these stores in
substantially the same way as we operate our stores. The private company is
owned by Fred Love, an individual who is currently one of our principal
stockholders and formerly was one of our directors. Mr. Love is also the
brother-in-law of Harley J. Greenfield, our Chairman of the Board, Chief
Executive Officer, director and principal stockholder. See "Notes to
Consolidated Financial Statements Footnote - Related Party Transactions" and
"Certain Relationships and Related Transactions."
Merchandise ordered from inventory is generally available to be
delivered within two weeks. Customers who place special orders for items, colors
or fabrics not in inventory must generally wait four to six weeks for delivery,
except for Italian leather merchandise which may take up to 20 weeks. We believe
that our delivery times on stocked items and special orders are significantly
faster than the usual delivery times for furniture and that our ability to offer
quick delivery of merchandise represents a significant competitive advantage.
OPERATIONS
Generally, our stores are open seven days per week. They are typically
staffed by a manager, one full-time salesperson and in some cases, one or more
part-time salespersons, as dictated by the sales volume and customer traffic of
each particular store. In some cases, where sales volume and customer traffic so
warrant, stores may be staffed with one to three additional full-time
salespersons. Our licensed stores are substantially the same in appearance and
operation as our other stores.
Our licensees and we have district managers throughout the United
States. The district managers supervise store management and monitor stores
within their assigned district to ensure compliance with operating procedures.
District managers report to and coordinate operations in their district with our
executive management.
An inventory of approximately 70% of the items displayed in the stores,
in the colors and fabrics displayed, is usually stocked at the private company's
warehouse facilities which are described below. Our licensees and we typically,
except in the case of certain financed sales, require a minimum cash, check or
credit card deposit of 50% of the purchase price when a sales order is given,
with the balance, if any, payable in cash or by bank check, certified or
2
official, upon delivery of the merchandise. The balance of the purchase price is
collected by the independent trucker making the delivery.
MARKETING
We advertise in newspapers, radio and on television in an attempt to
saturate our marketplaces. Our approach to advertising requires us to establish
a number of stores in each area we enter. This concentration of stores enables
area advertising expenses to be spread over a larger revenue base and to
increase the prominence of the local advertising program.
We create advertising campaigns for use by our stores which also may be
used by the private company stores. The private company bears a share of
advertisement costs in New York. However, we also advertise independently of the
private company outside of the New York metropolitan area. We are entitled to
reimbursement from most of our licensees, which are responsible for their
respective costs of advertising; however, the approach and format of such
advertising is usually substantially the same for us and our licensees. We also
have the right to approve the content of all licensee advertising. See "Certain
Relationships and Related Transactions."
In order to further understand our markets, we carefully monitor our
sales and obtain other information reflecting trends in the furniture industry
and changes in customer preferences. We also review industry publications,
attend trade shows and maintain close contact with our suppliers to aid in
identifying trends and changes in the industry.
LEASING STRATEGY AND CURRENT LOCATIONS
We consider the ability to obtain attractive, high-traffic store
locations to be critical to the success of our stores. Together with outside
real estate consultants, we select sites and negotiate leases on behalf of our
licensees. The site selection process involves numerous steps, beginning with
the identification of territories capable of sustaining a number of stores
sufficient to enable such stores to enjoy significant economies of scale,
particularly in advertising, management and distribution. Significant factors in
choosing a territory include market demographics and the availability of
newspapers and other advertising media to efficiently provide an advertising
umbrella in the new territory.
Once a territory is selected, we pick the specific locations within
such territory. Although a real estate consultant typically screens sites within
a territory and engages in preliminary lease negotiations, each site is
inspected by one of our officers and we are responsible for approval of each
location. The leased locations are generally in close proximity to heavily
populated areas, shopping malls, and other competing retail operations which are
on or near major highways or major thoroughfares, are easily accessible by car
or other forms of transportation and provide convenient parking.
The locations currently leased by our licensees and us range in size
from 1,900 square feet to a little over 8,000 square feet. We anticipate that
stores opened in the future will range from approximately 2,000 square feet to
4,000 square feet. Stores may be freestanding or part of a strip shopping
center.
3
In fiscal 1999, we closed two stores and opened four new stores. We
will continue to selectively close stores where the economics so dictate and we
plan to aggressively open additional stores if attractive opportunities present
themselves.
SOURCES OF SUPPLY
We currently purchase merchandise for our stores, the stores of our
licensees and for the private company, from a variety of domestic manufacturers
generally on 60 to 90 day terms. We also purchase from overseas manufacturers on
varying terms. Our purchasing power combined with the purchasing power of our
licensees and of the private company enables us to receive the right, in some
instances, to market exclusively certain products, fabrics and styles. See
"Certain Relationships and Related Transactions."
Our principal supplier of sofabeds is Klaussner Furniture Industries,
Inc., which also manufactures furniture under the Sealy(R) brand name. Sealy(R)
brand name sofabeds are our largest selling brand name item and we believe that
Sealy(R) brand name mattresses are the largest selling mattresses in the world
and have the highest consumer brand awareness. We are the largest sofabed
specialty retailer and the largest Sealy(R) sofabed dealer in the United States.
During the fiscal year ended August 28, 1999, we purchased
approximately 77% of our merchandise from Klaussner. Leather furniture is
purchased primarily from Klaussner, Softline S.p.A., Italdesign, Natuzzi and
Ashley. The loss of Klaussner as a supplier could have a material adverse effect
on our operations and on our financial well-being. In March 1996, as part of a
series of transactions with Klaussner, we, among other things, granted Klaussner
a security interest in substantially all of our assets in exchange for improved
credit terms under a credit and security agreement with Klaussner. In addition,
in December 1997, Klaussner purchased $5,000,000 of our convertible preferred
stock. In fiscal 1997, Klaussner also gave us certain vendor credits for
advertising and repairs. In fiscal 1998 and 1999, Klaussner gave us certain
vendor credits for repairs only. In addition, in December 1999, Klaussner agreed
to loan us $150,000 per store to fund the addition of up to 10 new stores. Any
such loans are subject to acceleration if we do not purchase at least 50% of our
upholstered furniture by dollar volume from Klaussner. See "Certain
Relationships and Related Transactions" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a more detailed
description of these transactions, Klaussner's $5,000,000 investment and other
transactions with Klaussner.
LICENSING ARRANGEMENTS
The stores we license include certain limited partnership licensees
whose accounts are included in our consolidated financial statements which we
refer to in this report as our "LP's", and also include other licensees whose
accounts are not so included which we refer to as "unconsolidated licensees".
Our arrangements with our licensees typically involve providing the licensee
with a license, bearing a royalty of 5% of sales, to use the name Jennifer
Convertibles(R). Our existing licensing arrangements are not uniform and vary
from licensee to licensee. Generally, however, we either manage the licensed
stores or, if the licensee is a partnership, have a subsidiary act as general
partner of such partnership, in each case, for 1% of the licensee's profits. The
arrangements generally have a term ranging between 10 and 20 years
4
and may include options on the licensee's part to extend the license for
additional periods. These arrangements may also involve the grant of exclusivity
as to defined territories. In some cases, we also have an option to purchase the
licensee or the licensed stores for a price based on an established formula or
valuation method. Investors in certain licensees have, in certain circumstances,
including a change of control in our ownership, the right to put their
investments to us for a price based upon an established formula or valuation
method. The private company currently provides warehousing, fabric protection
and other services to licensees on substantially the same basis as such services
are provided to us and we purchase merchandise for the licensees. We also
provide certain accounting services to certain licensees for which we generally
charge $6,000 per store per annum. As of August 28, 1999, we were owed an
aggregate of $6,207,000 for royalties, advances and merchandise by our
licensees, a substantial portion of which was overdue. Of such amount,
$2,324,000 due from LP's is eliminated in our financial statements as a result
of the consolidation of these limited partnerships and $3,883,000 due from our
unconsolidated licensees was reserved against in such financial statements due
to doubts as to collectibility. Most of the investors in the licensees have
other relationships with us or our current or former management and, in December
1996, the private company acquired the limited partnership interests in those
limited partnerships owning an aggregate of 49 licensed stores. See "Certain
Relationships and Related Transactions."
WAREHOUSING AND RELATED SERVICES
Pursuant to a warehousing agreement with the private company, which
expires in 2001, we currently utilize the warehousing and distribution
facilities leased and operated by the private company consisting of a 236,000
square foot warehouse facility in North Carolina, and satellite warehouse
facilities in New Jersey and California. These warehouse facilities service our
owned and licensed stores and the private company's stores.
Although we are not obligated to use the warehouse facilities of the
private company, we have done so to avoid the disruption and the administrative
and other costs associated with developing and maintaining the infrastructure
required to manage warehousing and handling independently. The warehousing
agreement provides that the private company is not obligated to provide services
for more than 300 of our owned stores. We pay the private company a monthly
warehouse fee equal to 5% of the retail selling price of all merchandise
delivered from the warehouse facilities to customers of our owned stores, except
for stores opened subsequent to July 1, 1999, which are not charged the 5% fee.
Such fee includes 5% of the retail selling price of any related services, such
as fabric protection, provided in connection with such merchandise. In addition,
the private company has separately contracted with our licensees to provide
warehousing and handling services for licensed stores for a fee equal to 5% of
the retail price of merchandise delivered to the licensees' customers and on
other terms substantially similar to those set forth under the warehousing
agreement.
The private company also provides to us a number of other services,
including fabric protection and warranty services. In addition to the fee for
warehousing, we pay the private company a portion, which is approximately
one-third, of fabric protection revenues from our customers except for such
revenues from customers of stores opened subsequent to July 1, 1999, of which we
retain 100%. We also pay the private company for freight charges based on quoted
freight rates for arranging delivery of our merchandise. See "Certain
Relationships and Related Transactions."
5
TRADEMARKS
The trademarks Jennifer Convertibles(R), Jennifer Leather(R), Jennifer
House(R), With a Jennifer Sofabed, There's Always a Place to Stay(R),
Jenni-Pedic(R), Elegant Living(R), Jennifer's Worryfree Guarantee(R), Jennifer
Living Rooms(R) (with logo) and Bellissimo Collection(R) are registered with the
U.S. Patent and Trademark Office and are now owned by us. The private company,
as licensee, was granted a perpetual royalty-free license to use and sublicense
these proprietary marks (other than the ones related to Jennifer Leather) in the
State of New York, subject to certain exceptions, including nine stores
currently owned by us and operating in New York and two more which the private
company has agreed we may open on a royalty-free basis. See "Certain
Relationships and Related Transactions."
EMPLOYEES
As of August 28, 1999, we employed 443 people, including six executive
officers. We train personnel to meet our expansion needs by having our most
effective managers and salespersons train others and evaluate their progress and
potential for us. We believe that our employee relations are satisfactory. None
of our employees are represented by a collective bargaining unit. We have never
experienced a strike or other material labor dispute.
COMPETITION
We compete with other furniture specialty stores, major department
stores, individual furniture stores and regional furniture chains, some of which
have been established for a long time in the same geographic areas as our stores
(or areas where we or our licensees may open stores). We believe that the
principal areas of competition with respect to our business are store image,
price, delivery time, selection and service. We believe that we compete
effectively with such retailers because our stores offer a broader assortment of
convertible sofabeds than most of our competitors and, as a result of volume
purchasing, we are able to offer our merchandise at attractive prices. We also
advertise more extensively than many of our competitors and offer substantially
faster delivery on most of our items.
Item 2. PROPERTIES.
We maintain our executive offices in Woodbury, New York pursuant to a
lease which expires in the year 2005.
As of August 28, 1999, the LP's and we lease all of our store locations
pursuant to leases which expire between 1999 and 2013. During fiscal 2000, eight
leases will expire, although the lessee has an option to renew each such lease.
The leases are usually for a base term of at least five years. For additional
information concerning the leases, see Note 9 of "Notes to Consolidated
Financial Statements."
Item 3. LEGAL PROCEEDINGS.
We are involved in a number of proceedings described below.
6
SETTLEMENT OF CLASS ACTION LITIGATION
On November 30, 1998, the court approved the settlement of a series of
11 class actions commenced in December 1994 against us, various of our present
and former officers and directors, and certain third parties, in the United
States District Court for the Eastern District of New York. The complaints in
all of these actions alleged that we and the other named defendants violated
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder in connection with the press release issued by us on or about
December 2, 1994. All of these class actions were consolidated under the caption
In Re Jennifer Convertibles, Case No. 94 Civ. 5570, pending in the Eastern
District of New York. The settlement provides for the payment to certain members
of the class and their attorneys of an aggregate maximum amount of $7 million in
cash and preferred stock having a value of $370,000. The cash portion of the
settlement was funded entirely by insurance company proceeds. We issued 26,664
shares of series B preferred stock, convertible into 18,664 shares of our common
stock. These shares are non-voting, have a liquidation preference of $5.00 per
share or $133,000 in total, and accrue dividends at the rate of $.35 per share
per annum. The cumulative unpaid dividends at August 28, 1999 totaled $7,000.
The preferred stock is convertible at our option at any time after the common
stock trades at a price of at least $7.00 per share.
THE DERIVATIVE LITIGATION
Beginning in December 1994, a series of six actions were commenced as
derivative actions on our behalf, against Harley J. Greenfield, Fred J. Love,
Edward B. Seidner, Bernard Wincig, Michael J. Colnes, Michael Rosen, Al Ferarra,
William M. Apfelbaum, Glenn S. Meyers, Lawrence R. Haut, the private company,
Jerome I. Silverman, Jerome I. Silverman Company, Selig Zises and BDO Seidman &
Co.1 in: (a) the United States District Court for the Eastern District of New
York, entitled Philip E. Orbanes V. Harley J. Greenfield, et al., Case No. CV
94-5694 (DRH) and Meyer Okun and David Semel V. Al Ferrara, et al., Case No. CV
95-0080 (DRH); Meyer Okun Defined Benefit Pension Plan, et al. V. Bdo Seidman &
Co., Case No. CV 95-1407 (DRH); and Meyer Okun Defined Benefit Pension Plan V.
Jerome I. Silverman Company, et. al., Case No. CV 95-3162 (DRH); (b) the Court
of Chancery for the County of New Castle in the State of Delaware, entitled
Massini V. Harley Greenfield, et. al., Civil Action No. 13936 (WBC); and (c) the
Supreme Court of the State of New York, County of New York, entitled Meyer Okun
Defined Benefit Pension Plan V. Harley J. Greenfield, et. al., Index No.
95-110290.
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1 Each of these individuals and entities is named as a defendant in at
least one action.
7
The complaints in each of these actions assert various acts of
wrongdoing by the defendants, as well as claims of breach of fiduciary duty by
our present and former officers and directors, including but not limited to
claims relating to the matters described in our December 2, 1994 press release.
As described in prior filings, we had entered into settlement
agreements as to the derivative litigation subject, in the case of certain of
such agreements, to court approval of such settlement by a certain date. Such
court approval was not obtained by such date, and in July 1998, the private
company exercised its option to withdraw from the settlement. We are currently
negotiating with the private company with respect to a new settlement. However,
there can be no assurance that a settlement will be reached or as to the terms
of such settlement.
OTHER LITIGATION
We are also subject, in the ordinary course of business, to a number of
litigations in relation to leases for those of our stores which we have closed
or relocated. Management does not believe the outcome of such litigations will
be material to our financial position.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The principal market for our common stock during the two fiscal years
ended August 28, 1999 and August 29, 1998 was the NASDAQ Bulletin Board. The
following table sets forth, for the fiscal periods indicated, the high and low
bid prices of our common stock on the Bulletin Board. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
High Low
----- -----
Fiscal Year 1998:
1st Quarter..................... $2 1/2 $1 3/4
2nd Quarter..................... 2 1/2 1 3/16
3rd Quarter..................... 2 1/32 1 9/16
4th Quarter..................... 2 1/2 1 11/16
8
High Low
----- -----
Fiscal Year 1999:
1st Quarter..................... $1 15/16 $1 7/8
2nd Quarter..................... 2 9/16 2 3/8
3rd Quarter..................... 3 2 13/16
4th Quarter..................... 2 13/16 2 1/16
As of November 16, 1999, there were approximately 229 holders of record
and approximately 1,510 beneficial owners of our common stock. On October 29,
1999, the closing bid and asked prices of the common stock as reported on the
NASDAQ Bulletin Board were $1 3/4 and $2, respectively.
DIVIDEND POLICY
We have never paid a dividend on our common stock and we do not
anticipate paying dividends on the common stock at the present time. We
currently intend to retain earnings, if any, for use in our business. There can
be no assurance that we will ever pay dividends on our common stock. Our
dividend policy with respect to the common stock is within the discretion of the
Board of Directors and its policy with respect to dividends in the future will
depend on numerous factors, including our earnings, financial requirements and
general business conditions.
Item 6. SELECTED FINANCIAL DATA.
The following table presents certain selected financial data for Jennifer Convertibles, Inc. and subsidiaries
(in thousands, except share data)
OPERATIONS DATA: Year Ended Year Ended Year Ended Year Ended Year Ended
08/28/1999 08/29/1998 08/30/1997 08/31/1996 08/26/1995
----------- ----------- ---------- ---------- ----------
Net sales 109,284 111,541 97,789 106,041 126,074
----------- ----------- ---------- ---------- ----------
Cost of sales, including store occupancy,
warehousing, delivery and fabric protection 71,607 74,054 67,114 72,708 86,964
Selling, general and administrative expenses 35,890 35,984 32,904 37,618 45,955
Depreciation and amortization 1,668 1,727 1,840 1,852 2,261
Termination of consulting agreement,
legal and other costs -- -- -- -- 500
(Recovery) provision for losses on amounts due from
Private Company and Unconsolidated Licensees (42) (196) (426) 952 3,088
Loss from store closings (9) 355 55 191 1,670
----------- ----------- ---------- ---------- ----------
109,114 111,924 101,487 113,321 140,438
----------- ----------- ---------- ---------- ----------
Operating income (loss) 170 (383) (3,698) (7,280) (14,364)
----------- ----------- ---------- ---------- ----------
Other income (expense):
Royalty income 388 386 374 375 523
Interest income 171 108 67 195 311
Interest expense (106) (172) (28) (47) (48)
Other income, net 150 271 319 880 1,670
----------- ----------- ---------- ---------- ----------
603 593 732 1,403 2,456
----------- ----------- ---------- ---------- ----------
Income (loss) before income taxes 773 210 (2,966) (5,877) (11,908)
Income taxes 403 120 95 146 160
----------- ----------- ---------- ---------- ----------
Net income (loss) $ 370 $ 90 ($3,061) ($6,023) ($12,068)
=========== =========== ========== ========== ==========
Basic income (loss) per share $ 0.06 $ 0.02 ($0.54) ($1.06) ($2.12)
=========== =========== ========== ========== ==========
Diluted income (loss) per share $ 0.05 $ 0.01 ($0.54) ($1.06) ($2.12)
=========== =========== ========== ========== ==========
Weighted average common shares outstanding
basic income (loss) per share 5,701,559 5,700,725 5,700,725 5,700,725 5,700,725
Effect of potential common shares issuances:
Stock options 22,077 32,641
Convertible preferred stock 1,430,722 1,068,375
----------- ----------- ---------- ---------- ----------
Weighted average common shares outstanding
diluted income (loss) per share 7,154,358 6,801,741 5,700,725 5,700,725 5,700,725
=========== =========== ========== ========== ==========
Cash Dividends -- -- -- -- --
=========== =========== ========== ========== ==========
Store data: 08/28/99 08/29/98 08/30/97 08/31/96 08/26/95
----------- ----------- ---------- ---------- ----------
Company-owned stores open
at the end of period 84 82 84 86 90
Consolidated licensed stores open
at the end of period 62 62 63 64 68
Licensed stores not consolidated
open at end of period 9 11 11 11 11
----------- ----------- ---------- ---------- ----------
Total stores open at end of period 155 155 158 161 169
=========== =========== ========== ========== ==========
Balance Sheet Date: 08/28/99 08/29/98 08/30/97 08/31/96 08/26/95
----------- ----------- ---------- ---------- ----------
Working capital (deficiency) ($10,581) ($11,110) ($17,258) ($15,757) ($10,988)
Total assets 26,145 24,099 22,998 25,435 33,871
Long-term obligations 63 49 421 230 337
Total liabilities 34,181 32,547 36,365 35,741 38,154
(Capital deficiency) stockholders' equity (8,036) (8,448) (13,367) (10,306) (4,283)
(Capital deficiency) stockholders' equity per share ($1.41) ($1.48) ($2.34) ($1.81) ($0.75)
9
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE U.S. PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, AS AMENDED. THESE STATEMENTS INVOLVE
KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES THAT MAY CAUSE OUR ACTUAL RESULTS OR
OUTCOMES TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO RISK FACTORS
SUCH AS UNCERTAINTY AS TO THE OUTCOME OF THE LITIGATION CONCERNING US, FACTORS
AFFECTING THE FURNITURE INDUSTRY GENERALLY, SUCH AS THE COMPETITIVE AND MARKET
ENVIRONMENT, AND MATTERS WHICH MAY AFFECT OUR SUPPLIERS OR THE PRIVATE COMPANY.
IN ADDITION TO STATEMENTS, WHICH EXPLICITLY DESCRIBE SUCH RISKS AND
UNCERTAINTIES, INVESTORS ARE URGED TO CONSIDER, STATEMENTS LABELED WITH THE
TERMS "BELIEVES," "BELIEF," "EXPECTS," "INTENDS,""PLANS" OR "ANTICIPATES" TO BE
UNCERTAIN AND FORWARD-LOOKING.
OVERVIEW
We are the owner and licensor of sofabed specialty retail stores that
specialize in the sale of a complete line of sofabeds and companion pieces such
as loveseats, chairs and recliners and specialty retail stores that specialize
in the sale of leather furniture.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED AUGUST 28, 1999 COMPARED TO FISCAL YEAR ENDED AUGUST 29,
1998:
Net sales decreased by 2.0% to $109,284,000 for the fiscal year ended
August 28, 1999 as compared to $111,541,000 for the fiscal year ended August 29,
1998. This decrease is primarily attributable to a decrease in the Jennifer
Leather division's net sales of $3,328,000 or 10.2% due to the closing of two
Jennifer Leather stores in the 1999 fiscal year and the closing of two other
Jennifer Leather stores during the 1998 fiscal year. Comparable store sales for
all of our stores open for a full year in each period decreased by 0.8%.
10
Cost of sales decreased by 3.3% to $71,607,000 for the fiscal year
ended August 28, 1999 from $74,054,000 for the fiscal year ended August 29,
1998. Cost of sales as a percentage of sales was 65.5% in fiscal 1999, which
declined from 66.4% in the prior year. The percentage decrease of 3.3% is
primarily due to decreased warehouse costs of $1,200,000 due to the amendment of
the warehouse arrangement with the private company. Included in cost of sales
are charges from the private company for warehouse expenses of $4,262,000,
fabric protection services of $2,292,000 and freight of $2,363,000. This
compared with $5,576,000, $2,592,000 and $2,775,000, respectively, in the
previous year.
Selling, general and administrative expenses were $35,890,000 (32.9% as
a percentage of sales) for the fiscal year ended August 28, 1999 as compared to
$35,984,000 (32.3% as a percentage of sales) for the fiscal year ended August
29, 1998, a decrease of $94,000 from the prior year. The decrease is due to the
decrease in salaries and other operating expenses, which in aggregate amounted
to approximately $974,000, principally due to the decrease in sales. The
decrease in operating expenses was offset by an increase in advertising expenses
of approximately $880,000 which is due to our national television advertising
campaign.
Our receivables from the private company ($3,955,000), the
unconsolidated licensees (other than Southeastern Florida Holding Corp.)
($2,233,000) and Southeastern Florida Holding Corp. ($1,650,000) increased in
the aggregate by $541,000 in the fiscal year ended August 28, 1999 to
$7,838,000. In connection with the uncertainty of collectibility and the
relationship between the private company, certain licensees consisting of our
unconsolidated licensees other than Southeastern Florida Holding Corp.,
Southeastern Florida Holding Corp. and us, we account monthly for transactions
with these entities on an offset basis. If the result of the offset is a
receivable due from them, then such net amount will be generally recognized to
the extent that cash is received from these entities prior to the issuance of
our financial statements. These entities have losses and/or capital deficiencies
and, accordingly, we have fully reserved uncollected amounts which totaled
$6,654,000 at August 28, 1999.
Interest income increased by $63,000 to $171,000 for the fiscal year
ended August 28, 1999 as compared to the prior year. The increase generally
reflects a better cash management program.
Net income in the fiscal years ended August 28, 1999 and August 29,
1998 was $370,000 and $90,000, respectively, an increase of income of $280,000.
The primary reason for the significant improvement is better management of
expenses and the decrease of the warehouse costs, which resulted from an
amendment of the original warehouse agreement with the private company.
11
FISCAL YEAR ENDED AUGUST 29, 1998 COMPARED TO FISCAL YEAR ENDED AUGUST 30,
1997:
Net sales increased by 14.1% to $111,541,000 for the fiscal year ended
August 29, 1998 as compared to $97,789,000 for the fiscal year ended August 30,
1997. This increase is mainly attributable to an increase in the Jennifer
Leather division's net sales of $9,447,000 or 37.9%. In the prior year, the
division suffered from an inability to obtain merchandise due to an overseas
supplier's production problems. Comparable store sales for all of our stores
open for a full year in each period increased by 15.0%.
Cost of sales increased by 10.3% to $74,054,000 for the fiscal year
ended August 29, 1998 from $67,114,000 for the fiscal year ended August 30,
1997. The dollar increase of $6,940,000 is primarily attributable to higher
purchases. Cost of sales as a percentage of sales was 66.4% in fiscal 1998,
which declined from 68.6% in the prior year primarily because of the higher
sales levels. Also included in cost of sales are charges from the private
company for warehouse expenses of $5,576,000, fabric protection services of
$2,592,000 and freight of $2,775,000. This compared with $5,021,000, $2,543,000
and $2,827,000, respectively, in the previous year.
Selling, general and administrative expenses were $35,984,000 (32.3% as
a percentage of sales) for the fiscal year ended August 29, 1998 as compared to
$32,904,000 (33.6% as a percentage of sales) for the fiscal year ended August
30, 1997, an increase of $3,080,000 or 9.4% from the prior year. This increase
was due principally to higher salaries and related benefits of $1,876,000,
principally because of the higher sales volume which generated increased
commissions as well as the assumption by us of certain payroll expenses starting
January 1, 1998 previously funded by the private company totaling $948,000 and
new costs of $991,000 in connection with an enhanced private label credit card
program that commenced in the current fiscal year. Adjustments related to
canceled customer orders declined by $436,000. Advertising expenses declined by
$74,000 to $10,819,000 (9.7% as a percentage of sales) as compared to
$10,893,000 (11.1% as a percentage of sales) in the prior year. The prior year
amount included a credit from Klaussner Furniture Industries, Inc. that totaled
$1,075,000.
Our receivables from the private company ($3,166,000), the
Unconsolidated Licensees (other than Southeastern Florida Holding Corp.)
($2,302,000) and Southeastern Florida Holding Corp. ($1,829,000) increased in
the aggregate by $399,000 in the fiscal year ended August 29, 1998 to
$7,297,000. In connection with the uncertainty of collectibility and the
relationship between the private company, the Private Licensees, Southeastern
Florida Holding Corp. and us, we account monthly for transactions with these
entities on an offset basis. If the result of the offset is a receivable due
from them, then such net amount will be generally recognized only to the extent
that cash is received from these entities prior to the issuance of the financial
statements. These entities have losses and/or capital deficiencies and,
accordingly, we had fully reserved for all amounts due from the private company,
the Private Licensees and Southeastern Florida Holding Corp. in prior years
which totaled $6,696,000 at August 29, 1998.
12
Interest income increased by $41,000 to $108,000 for the fiscal year
ended August 29, 1998 as compared to the prior year. The increase generally
reflects a new cash management program started this year with a new bank.
Net income in the fiscal year ended August 29, 1998 was $90,000 as
compared to a net loss of $3,061,000 in the prior year, a decrease of loss of
$3,151,000. The primary reason for the significant improvement was due to higher
sales which produced greater gross margin dollars and management of expenses,
which was offset by lower income on customer adjustments to canceled orders and
the higher payroll costs from the private company, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As of August 28, 1999, we had an aggregate working capital deficiency
of $10,581,000 compared to a deficiency of $11,110,000 at August 29, 1998 and
had available cash and cash equivalents of $6,907,000 compared to $4,384,000 at
August 29, 1998. The increase of working capital is due to the positive cash
flows from operations of $3,509,000 for the year ended August 28, 1999 as
compared to the negative cash flows from operations of $3,607,000 for the year
ended August 29, 1998. This increase in operating cash flows resulted primarily
from an increase of customer deposits and accounts payable and a decrease in
merchandise inventories. Due to the significant improvement in our positive
operating cash flow, we believe we will have adequate cash flow to fund our
operations for the next fiscal year.
We are continuing to fund the operations of the LP's which continue to
generate operating losses. All such losses have been consolidated in our
consolidated financial statements. Our receivables from the private company, the
unconsolidated licensees, and Southeastern Florida Holding Corp., had been fully
reserved for in prior years. There can be no assurance that the total reserved
amount of receivables of $6,654,000 for the year ended August 28, 1999 will be
collected. It is our intention to continue to fund these operations in the
future. Starting in 1995, the private company and we entered into offset
agreements that permit the two companies to offset their current monthly
obligations to each other in excess of $1,000,000 of credit extended by us to
the private company. Additionally, as part of such agreements, the private
company in November 1995 agreed to assume certain liabilities owed to us by the
unconsolidated licensees and Southeastern Florida Holding Corp. Current
obligations of the private company and the Unconsolidated Licensees as of August
28, 1999 have been paid.
In March 1996, we executed a Credit and Security Agreement with our
principal supplier, Klaussner, which extended the payment terms for merchandise
shipped from 60 days to 81 days. Since the second quarter of the current fiscal
year, we have not exceeded these 60 day payment terms by more than 14 days. As
of August 28, 1999, there were no amounts owed to Klaussner which were over
these extended payment terms. On December 11, 1997, the Credit and Security
Agreement was modified to include a late fee of .67% per month for invoices we
pay beyond the normal 60 day terms. This provision became effective commencing
with the month of January 1998. See "Certain Relationships and Related
Transactions". As part of the Credit and Security Agreement, we granted a
security interest in all of our assets including the collateral assignment of
our leasehold interests, our trademarks and a licensee agreement to operate our
business in the event of default.
13
On December 11, 1997, we sold to Klaussner 10,000 shares of Series A
Convertible Preferred Stock ("Preferred Stock"), convertible into 1,424,500
shares of the Company's Common Stock for $5,000,000. These shares are
non-voting, have a liquidation preference of $5,000,000 and do not pay dividends
(except if declared on the Common Stock). The Preferred Stock is convertible
commencing September 1, 1999 and has other rights associated with it.
On November 30, 1998, the court approved a settlement of all the class
action litigation pending against us. The cash portion of the settlement was
funded entirely by insurance company proceeds. Based upon the proofs of claim
filed, we issued $111,000 in Preferred Stock and we made no cash outlays other
than for legal costs.
In fiscal 1998 and 1997, the LP's and we closed an aggregate of six
stores. In fiscal 1999, two additional stores were closed. Several were closed
for non-performance, but a number of such closings were due to our decision to
combine separate Jennifer Convertibles and Jennifer Leather stores located in
the same demographic areas into one store. The primary benefit of combining both
operations into one store was an elimination of the real estate expenses and
other expenses associated with the closed showroom. Additional benefits realized
included reductions of personnel and, in a number of cases, elimination of
duplicate office equipment and telephone lines. Although combining two stores
into one store generally reduces sales, management believes that sales at the
combined store will generate more profit due to the elimination or reduction of
expenses described above.
For the fiscal years ended August 28, 1999 and August 29, 1998, the
LP's and we together spent $743,000 and $141,000, for each such years, for
capital expenditures. We currently anticipate capital expenditures approximating
$1,300,000 during fiscal 2000 to support the opening of new stores during the
next fiscal year. A portion of our store openings will be funded by Klaussner
pursuant to an agreement, entered into in December 1999, pursuant to which
Klaussner agreed, sbuject to certain conditions, to lend us $150,000 per new
store for up to 10 new stores. Each loan will be evidenced by a three year note,
bearing interest at the LIBO rate plus 3%. The notes are subject to acceleration
under certain circumstances including closing of the stores funded by the loan
if we are purchasing at least 50% of our upholstered furniture by dollar volume
from Klaussner. In addition, Klaussner will be entitled to a premium on the cost
of furniture purchased from it by us for sale to customers of the stores funded
by Klaussner.
YEAR 2000
We recognize the need to ensure that our operations will not be
adversely impacted by potential error from software program calculations using
the year 2000 date. We have completed all modifications, changes and testing
work in regard to all operating programs that utilize the date as a key for
comparison and/or calculation. We realize that while all departmental managers
have signed off on the testing of Y2K, there is no amount of testing that can
ensure 100% compliance. The cost of achieving Year 2000 compliance, including
in-house salaries, wages and benefits, has been estimated at approximately
$450,000, which was primarily paid for by the private company which has the
responsibility of maintaining the MIS department. We have planned for additional
expenditures of approximately $25,000 to correct any minor Y2K software problems
after January 1, 2000.
INFLATION
There was no significant impact on the Company's operations as a result
of inflation during the fiscal year ended August 28, 1999.
14
RISK FACTORS
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains certain forward-looking statements based on
current expectations that involve risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of many factors, including the risk factors set forth
below and elsewhere in this report. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also impair our
business operations. If any of these risks actually occur, our business,
financial condition and operating results could be materially adversely
affected. The cautionary statements made in this annual report on Form 10-K
should be read as being applicable to all forward-looking statements wherever
they appear in this annual report on Form 10-K.
OUR COMPANY HAS EXPERIENCED SUBSTANTIAL LOSSES UNTIL RECENTLY AND CURRENTLY HAS
A NEGATIVE NET WORTH
We achieved a profit of $370,000 and $90,000 in the fiscal years ended
August 28, 1999 and August 29, 1998, respectively. We incurred a net loss of
$3,061,000 in the fiscal year ended August 30, 1997. The furniture business is
cyclical and we may be unable to continue operating profitably, either due to a
change in such cycle, losses from new stores, changes in consumer preferences or
demographics or unknown risks and uncertainties that may cause us to incur
losses from operations. We had a negative net worth of $8,036,000 as of August
28, 1999. Such negative net worth may impair our ability to obtain additional
financing or credit from our suppliers and make it more difficult to obtain
leases from landlords.
THE OUTCOME OF PENDING LITIGATION IS UNCERTAIN AND MAY ENTAIL SIGNIFICANT
EXPENSE
As described under "Legal Proceedings", we are currently involved in
certain derivative litigation. We have spent a substantial amount on legal fees
and other expenses in connection with such litigation. There can be no assurance
that we will settle such litigation or that we will be successful in such
litigation if not settled. In addition, if we are able to settle the litigation,
there can be no assurance that we will be able to do so on terms favorable to
us.
OUR COMPANY COULD SUFFER FROM POTENTIAL CONFLICTS OF INTEREST
Potential conflicts of interest exist since two of our principal
stockholders, directors and officers, Harley J. Greenfield, our Chairman of the
Board and Chief Executive Officer, and Edward B. Seidner, a director and our
Executive Vice President, are owed over $10 million by the private company,
which owns, controls or licenses the private company stores. Accordingly, such
persons derive substantial economic benefits from the private company. In
addition, Fred Love, the owner of the private company, is Mr. Greenfield's
brother-in-law. Circumstances may arise in which the interest of the private
company stores, of the private company or of Mr. Greenfield and Mr. Seidner will
conflict with our interests, including the negotiations to settle the litigation
described above. There are also numerous relationships, and have been numerous
transactions, between us and the private company, including an agreement under
which the
15
private company warehouses merchandise for us and coordinates delivery of such
merchandise and under which we purchase merchandise for the private company. The
private company provides similar services to our licensees. See "Certain
Relationships and Related Transactions."
WE HEAVILY DEPEND ON ONE SUPPLIER
We purchase a significant percentage of our merchandise from Klaussner,
which also manufactures furniture under the Sealy(R) brand name. During the
fiscal year ended August 28, 1999, we purchased approximately 77% of our
merchandise from Klaussner. Since a large portion of our revenues have been
derived from sales of Klaussner products, the loss of this supplier could have a
material adverse impact on us until alternative sources of supply are
established. Klaussner is also a principal stockholder and creditor of ours and
of the private company. Our obligations to Klaussner are secured by
substantially all of our assets. Klaussner's position as a significant creditor
could potentially result in a temporary or permanent loss of our principal
supply of merchandise, if, for example, Klaussner halted supply because we
defaulted on or were late in making our payments to Klaussner. Moreover,
Klaussner's position as a secured creditor, together with our negative net
worth, may make it difficult to obtain substantial supplies from our vendors.
See "Certain Relationships and Related Transactions."
THE CYCLICAL NATURE OF THE FURNITURE INDUSTRY POSES RISKS TO US FROM A PROLONGED
ECONOMIC DOWNTURN
The furniture industry historically has been cyclical, fluctuating with
general economic cycles. During economic downturns, the furniture industry tends
to experience longer periods of recession and greater declines than the general
economy. We believe that the industry is significantly influenced by economic
conditions generally and particularly by consumer behavior and confidence, the
level of personal discretionary spending, housing activity, interest rates,
credit availability, demographics and overall consumer confidence. All of these
factors could be negatively affected by an economic downturn and therefore a
prolonged economic downturn might have a material adverse effect on our
business.
COMPETITION IN THE FURNITURE INDUSTRY COULD COST US SALES AND CAUSE US TO REDUCE
PRICES
The retail sofabed business is highly competitive and includes
competition from traditional furniture retailers and department stores as well
as numerous discount furniture outlets. Our stores may face sharp price cutting,
as well as imitation and other forms of competition, and we cannot prevent or
restrain others from utilizing a similar marketing format. Although we are the
largest sofabed specialty retail dealer in the United States, many of our
competitors have considerably greater financial and other resources than do we.
WE MAY HAVE DIFFICULTY OBTAINING ADDITIONAL FINANCING
Our ability to expand and support our business may depend upon our
ability to obtain additional financing. We may have difficulty obtaining debt
16
financing as all of our assets are pledged to Klaussner as security for the
amounts we owe under the Klaussner Credit and Security Agreement and because of
our negative net worth. From time to time, our financial position has made it
difficult for us to secure third party consumer financing. Inability to offer
such financing adversely affects sales.
HARLEY J. GREENFIELD AND CURRENT MANAGEMENT ARE LIKELY TO RETAIN CONTROL
As of November 19, 1999, Harley J. Greenfield, our Chairman of the
Board and Chief Executive Officer and principal stockholder, beneficially owns
approximately 13.9% of our outstanding shares of common stock. Approximately 31%
of the outstanding common stock is beneficially owned by all officers and
directors as a group, including Messrs. Greenfield and Seidner. Since the
holders of our common stock do not have cumulative voting rights, such officers'
and directors' ownership of our common stock will likely enable them to exercise
significant influence in matters such as the election of our directors and other
matters submitted for stockholder approval. Also, the relationship of such
persons to the private company could serve to perpetuate management's control in
light of the private company's performance of important functions.
OUR FUTURE SUCCESS DEPENDS HEAVILY ON ONE EXECUTIVE
Our future success will depend substantially upon the abilities of
Harley J. Greenfield, our Chairman of the Board and Chief Executive Officer and
one of our principal stockholders. The loss of Mr. Greenfield's services could
materially adversely affect our business and our prospects for the future. We
maintain key-man life insurance on the life of Mr. Greenfield in the amount of
two million ($2,000,000).
WE ARE NOT LIKELY TO DECLARE DIVIDENDS
We have never declared or paid any cash dividends on our capital stock
and do not intend to pay any cash dividends in the foreseeable future. We
currently anticipate that we will retain all our earnings for use in the
operation and expansion of our business and, therefore, do not anticipate that
we will pay any cash dividends in the foreseeable future.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index immediately following the signature page.
17
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Item 10. OUR DIRECTORS AND EXECUTIVE OFFICERS.
The names and ages of our directors and our executive officers as of
November 15, 1999 are as follows:
Position(s) with the
Name Age Company
---- --- --------------------
Harley J. Greenfield 55 Director, Chairman of the Board and
Chief Executive Officer
Edward G. Bohn 54 Director
Kevin J. Coyle 54 Director
Edward B. Seidner 47 Director and Executive Vice President
Bernard Wincig 68 Director
Rami Abada 40 Director, President, Chief Operating
Officer and Interim Chief Financial
Officer
Ronald E. Rudzin 37 Senior Vice President
Leslie Falchook 39 Vice President - Administration
Kevin Mattler 41 Vice President - Store Operations
Our directors are elected at the Annual Meeting of stockholders and
hold office until their successors are elected and qualified. Our officers are
appointed by the Board of Directors and serve at the pleasure of the Board of
Directors. We currently have no compensation or nominating committees.
The Board of Directors held seven meetings during the 1999 fiscal year.
None of the directors attended fewer than 75% of the number of meetings of the
Board of Directors or any committee of which he is a member, held during the
period in which he was a director or a committee member, as applicable.
The Board of Directors has a Stock Option Committee, which, as of
August 28, 1999, consisted of Messrs. Greenfield and Seidner. The Stock Option
Committee had one meeting during the 1999 fiscal year. The Stock Option
Committee is authorized to administer our stock option plans.
18
The Board of Directors has an Audit and Monitoring Committee, which,
during the fiscal year ended August 28, 1999, consisted of Bernard Wincig,
Edward Bohn and Kevin Coyle. During such fiscal year, the Audit and Monitoring
Committee held three meetings. The Audit and Monitoring Committee is responsible
for reviewing the adequacy of the structure of our financial organization and
the implementation of our financial and accounting policies. In addition, the
Audit and Monitoring Committee reviews the results of the audit performed by our
outside auditors before the Annual Report to Stockholders is published. This
committee also monitors transactions between the private company and us.
Set forth below is a biographical description of each of our directors
and executive officers as of November 15, 1999.
HARLEY J. GREENFIELD
Mr. Greenfield has been our Chairman of the Board and Chief Executive
Officer since August 1986 and was our President from August 1986 until December
1997. Mr. Greenfield has been engaged for more than 30 years in the furniture
wholesale and retail business and was one of the co-founders of the private
company which established the Jennifer Convertibles concept in 1975. Mr.
Greenfield is a member of the New York Home Furnishings Association.
EDWARD G. BOHN
Mr. Bohn has been a member of our Board of Directors since February
1995. From March 1995 to May 1997, he was a Consultant for Borlas Sales in
Avenel, New Jersey, an importer/exporter of consumer electronics. Borlas also
handled the sale and installation of software. Since June 1995, he has been a
director of Nuwave Technologies, Inc. From September 1994 to the present, he has
operated as an independent consultant for various companies in financial and
operational matters. Mr. Bohn was employed by Emerson Radio Corporation, which
designs and sells consumer electronics, in various capacities from January 1983
through March 1994. From March 1993 to March 1994, he was the Senior Vice
President-Special Projects; he was Chief Financial Officer from March 1991
through March 1993 and Treasurer/Vice President of Finance prior to that date.
KEVIN J. COYLE
Mr. Coyle was appointed as a member of our Board of Directors in
February 1995. Mr. Coyle is a certified public accountant specializing in
litigation support. Mr. Coyle is also currently serving as the Chief Financial
Officer of FreshDirect of New York, Inc., a company organized to sell perishable
food products directly to consumers over the Internet. Until 1993, Mr. Coyle was
President of Olde Kraft Company Ltd., a retail furniture business operating
seven stores in the New York Metropolitan Area. Mr.
19
Coyle graduated from Queens College with a BS in accounting and is a member of
the American Institute of Certified Public Accountants and the New York State
Society of Certified Public Accountants.
EDWARD B. SEIDNER
Mr. Seidner became a member of our Board of Directors in August 1986
and an Executive Vice President in September 1994. From 1977 until November
1994, Mr. Seidner was an officer and a director of the private company. Mr.
Seidner has been engaged for more than 25 years in the furniture wholesale and
retail business. Mr. Seidner is a member of the New York Home Furnishings
Association.
BERNARD WINCIG
Mr. Wincig became a member of our Board of Directors in September 1986.
Mr. Wincig has been an attorney in private practice since 1962. Mr. Wincig
received his Juris Doctor degree from Brooklyn Law School.
RAMI ABADA
Mr. Abada became our President and a member of our Board of Directors
on December 2, 1997, has been our Chief Operating Officer since April 12, 1994
and became the Interim Chief Financial Officer on September 10, 1999 following
the resignation of George J. Nadel. Mr. Abada was our Executive Vice President
from April 12, 1994 to December 2, 1997. Prior to joining us, Mr. Abada had been
employed by the private company since 1982. Mr. Abada is also a director of CCA
Industries, Inc., a public company engaged in the manufacture and distribution
of health and beauty aid products.
RONALD E. RUDZIN
Mr. Rudzin became our Senior Vice President on April 12, 1994. Prior to
joining us, Mr. Rudzin had been employed by the private company since 1979. Mr.
Rudzin was, and is, in charge of directing our sales force and the sales forces
of the private company stores and our licensed stores.
LESLIE FALCHOOK
Mr. Falchook has been one of our Vice Presidents since September 1986.
Mr. Falchook is primarily involved with our internal operations. Prior to
joining us, Mr. Falchook had been employed by the private company since 1982.
KEVIN MATTLER
Mr. Mattler became our Vice President - Store Operations on April 12,
1994 and has been with us since 1988. Mr. Mattler is involved with, and
supervises, the operation of our stores and, during his tenure with us, Mr.
Mattler has been involved in all facets of our operations. Prior to joining us,
Mr. Mattler had been employed by the private company since 1982.
20
Certain of our directors and former officers are defendants in the
litigation described under "Legal Proceedings" above. See also "Certain
Relationships and Related Transactions."
Item 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth compensation paid for the fiscal years
ended August 28, 1999, August 29, 1998 and August 3o, 1997, or such shorter
period as such employees were employed by us to those persons who were either
(a) the chief executive officer as of August 28, 1999 or (b) one of our four
other most highly compensated executive officers at August 28, 1999 whose total
annual salary and other compensation exceeded $100,000.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------------- ----------------------------------------------------
AWARDS PAYOUTS
-----------------------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION AWARD(S) OPTIONS PAY-OUTS COMPENSATION
POSITION YEAR SALARY($) BONUS($) ($) ($) /SARS (#) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Harley J. Greenfield, 1999 $320,000(1) $63,675 $ 0(1) __ 0(1) __ $ 0(1)
Chairman of the Board 1998 320,000 (1)(2) $ 0 __ 0 __ $ 0
and Chief Executive 1997 320,000 __ $ 0 __ 0 __ $ 0
Officer __
Edward B. Seidner, 1999 $240,000 __ $ 0 __ 0 __ $ 0
Executive Vice President 1998 240,000 __ $ 0 __ 0 __ $ 0
1997 240,000 __ $ 0 __ 0 __ $ 0
George J. Nadel, 1999 $225,000 __ $ 0 __ 0 __ $ 0
Executive Vice President 1998 225,000 __ $ 0 __ 0 __ $ 0
and Chief Financial 1997 225,000 __ $ 0 __ 50,000(3) __ $ 0
Officer
21
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------------- ----------------------------------------------------
AWARDS PAYOUTS
-----------------------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION AWARD(S) OPTIONS PAY-OUTS COMPENSATION
POSITION YEAR SALARY($) BONUS($) ($) ($) /SARS (#) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Leslie Falchook, 1999 $116,000 __ $ 0 __ 0 __ $ 0
Vice President - 1998 116,000 __ $ 0 __ 0 __ $ 0
Administration 1997 116,000 __ $ 0 __ 50,000 __ $ 0
(4)
Rami Abada, President, 1999 $120,000(5) $63,675 $ 0(5) __ 0 (5) __ $ 0(5)
Chief Operating Officer 1998 120,000 (5)(6) $ 0 __ 100,000 __ $ 0
and Interim Chief 1997 120,000 __ $ 0 __ (7) $ 0
Financial Officer __ 100,000 __
(8)
Ronald E. Rudzin, 1999 $120,000 __ $ 0 __ 0 __ $ 0
Senior Vice President 1998 120,000 __ $ 0 __ 0 __ $ 0
1997 120,000 __ $ 0 __ 100,000 __ $ 0
(9)
Kevin Mattler, 1999 $131,000 __ $ 0 __ 0 __ $ 0
Vice President - 1998 $120,000 __ $ 0 __ 0 __ $ 0
Store Operations 1997 $ 96,000 __ $ 0 __ 50,000(10) __ $ 0
- ---------------------
(1) On August 15, 1999, we entered into a five year renewable employment
agreement with Mr. Greenfield under which Mr. Greenfield is entitled to a base
salary of $400,000, subject to certain cost-of-living increases, and incentive
bonuses based on our earnings before interest, taxes, depreciation and
amortization ("EBITDA") and revenues. Mr. Greenfield has voluntarily reduced his
base salary through fiscal 1999 to $320,000.
(2) Such amount was accrued with respect to fiscal 1999, but not yet paid.
(3) On May 6, 1997, Mr. Nadel was granted options to purchase 50,000 shares of
our common stock at $2.00 per share, the market value on the date of grant, in
exchange for the cancellation of the options granted in 1995 to Mr. Nadel to
purchase 25,000 shares of our common stock at $2.50 per share and to purchase
25,000 shares of our common stock at $3.53 per share, in each case the market
value on the date of grant.
(4) On May 6, 1997, Mr. Falchook was granted options to purchase 50,000 shares
of our common stock at $2.00 per share, the market value on the date of grant,
in exchange for the cancellation of options to purchase 20,000 shares of our
common stock at $13.125 per share which were granted in 1993.
(5) On August 15, 1999, we entered into a five year renewable employment
agreement with Mr. Abada under which Mr. Abada is entitled to a base salary of
$400,000 for the first three years and $500,000 thereafter, subject to certain
cost-of-living increases, incentive bonuses based on EBITDA and revenues, and
stock options to purchase 300,000 shares of our common stock at $3.51 per share
which were granted to Mr. Abada in November of 1999. Mr. Abada is entitled to,
and we will pay him for, amounts due to him under the agreement from and
including the date of his agreement.
(6) Such amount was accrued with respect to fiscal 1999, but not yet paid.
(7) On December 3, 1997, Mr. Abada was granted options to purchase 100,000
shares of our common stock at $2.44 per share, the market value on the date of
grant.
22
(8) On May 6, 1997, Mr. Abada was granted options to purchase 100,000 shares of
our common stock at $2.00 per share, the market value on the date of grant.
(9) On May 6, 1997, Mr. Rudzin was granted options to purchase 100,000 shares of
our common stock at $2.00 per share, the market value on the date of grant.
(10) On May 6, 1997, Mr. Mattler was granted options to purchase 50,000 shares
of our common stock at $2.00 per share, the market value on the date of the
grant.
Non-employee directors currently receive a fee of $10,000 per year,
plus $500 per meeting attended which fees amounted to an aggregate of $76,000 in
fiscal 1999. Directors are reimbursed for out-of-pocket expenses incurred in
connection with their services as such.
STOCK OPTION PLANS
We have Incentive and Non-Qualified Stock Option Plans, pursuant to
which, as of August 28, 1999, options to purchase an aggregate of 820,047 shares
of our common stock were outstanding and under which options to purchase an
aggregate of 26,953 shares of common stock were available for grant. In
addition, options granted outside of these plans to purchase an additional
784,000 shares of common stock were outstanding as of August 28, 1999. These
plans are administered by a Stock Option Committee consisting of two persons
appointed by the Board of Directors. As of August 28, 1999, this committee
consisted of Harley Greenfield and Edward B. Seidner. The committee has full and
final authority (a) to determine the persons to be granted options, (b) to
determine the number of shares subject to each option and whether or not options
shall be incentive stock options or non-qualified stock options, (c) to
determine the exercise price per share of the options which, in the case of
incentive stock options, may not be less per share than 100% of the fair market
value per share of the common stock on the date the option is granted or, in the
case of a stockholder owning more than 10% of our capital stock, not less per
share than 110% of the fair market value per share of the common stock on the
date the option is granted, (d) to determine the time or times when each option
shall be granted and become exercisable and (e) to make all other determinations
deemed necessary or advisable in the administration of the plans. In determining
persons who are to receive options and the number of shares to be covered by
each option, the Stock Option Committee considers the person's position,
responsibilities, service, accomplishments, present and future value to us, the
anticipated length of his future service and other relevant factors. Members of
this committee are not eligible to receive options under these plans or
otherwise during the period of time they serve on the committee and for one year
prior thereto, but may receive options after their term on the committee is
over. Officers and directors, other than members of the committee, may receive
options under these plans. The exercise price of all options granted under or
outside of these plans equaled or exceeded the market value of the underlying
shares on the date of grant.
OPTION GRANTS IN LAST FISCAL YEAR
In November, 1999, in connection with his employment contract entered
in August 1999, Mr. Abada was awarded stock options to purchase 300,000 shares
23
of our common stock at $3.51 per share, which exceeds the market value of the
common stock on the date of the grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
Name of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
August 28, 1999 August 28, 1999 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Shares
Acquired On Value
Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
---- ------------- -------- ----------- ------------- ----------- -------------
Harley J. Greenfield (2)(4) N/A N/A 297,047 0 $0 $0
Edward B. Seidner N/A N/A 0 0 0 0
George J. Nadel(3)(4) N/A N/A 33,332 16,668 2,000 1,000
Leslie Falchook(4)(5) N/A N/A 33,332 16,668 2,000 1,000
Rami Abada(6)(7) N/A N/A 99,998 100,002 6,000 6,000
Ronald E. Rudzin(8) N/A N/A 33,332 16,668 2,000 1,000
-------------------
(1) Amount reflects the market value of the underlying shares of our common
stock as reported on the Bulletin Board on August 28, 1999, a bid price
of $2.06, less the exercise price of each option.
(2) Includes (a) 122,047 options granted on September 17, 1991 at an
exercise price of $4.88 per share, (b) 150,000 options granted on April
6, 1992, at an exercise price of $8.375 per share, in connection with
Mr. Greenfield's employment agreement, and (c) 25,000 options granted
on January 25, 1993, at an exercise price of $13.125 per share.
(3) Includes 50,000 options granted on May 6, 1997 to Mr. Nadel at an
exercise price of $2.00 per share in exchange for cancellation of
25,000 options previously granted on August 1, 1995 at an exercise
price of $2.50 per share and 25,000 options granted on February 1, 1995
at an exercise price of $3.53 per share.
(4) All options were granted at an exercise price equal to the market value
of the underlying common stock on the date of grant.
(5) Includes 50,000 options granted on May 6, 1997 to Mr. Falchook at an
exercise price of $2.00 per share in exchange for the cancellation of
20,000 options granted on January 25, 1993 to Mr. Falchook at an
exercise price of $13.125 per share.
(6) Includes 100,000 options granted on May 6, 1997 to Mr. Abada at an
exercise price of $2.00 per share.
(7) Includes 100,000 options granted on December 3, 1997 to Mr. Abada at an
exercise price of $2.44 per share.
(8) Includes 100,000 options granted on May 6, 1997 to Mr. Rudzin at an
exercise price of $2.00 per share.
24
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG JENNIFER CONVERTIBLES, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE S & P HOUSEHOLD FURNISHINGS & APPLIANCES INDEX
Cumulative Total Return
--------------------------------------------------------------------
8/94 8/95 8/96 8/97 8/98 8/99
JENNIFER CONVERTIBLES, INC. 100 40 32 32 23 27
NASDAQ STOCK MARKET (U.S.) 100 135 152 212 200 371
S & P HOUSEHOLD FURNISHINGS & APPLIANCES 100 101 103 131 152 223
*$100 INVESTED ON 8/31/94 IN STOCK OR INDEX -
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING AUGUST 31.
Begin: 08/31/1994
Period End: 08/31/1999
End: 08/31/1999
Beginning
Transaction Closing No. Of Dividend Dividend Shares Ending Cum. Tot.
Date* Type Price** Shares*** per Share Paid Reinvested Shares Return
----- ----------- -------- ---------- --------- -------- ---------- ------ ---------
31-Aug-94 Begin 7.750 12.90 12.903 100.00
31-Aug-95 Year End 3.063 12.90 12.903 39.52
31-Aug-96 Year End 2.500 12.90 12.903 32.26
31-Aug-97 Year End 2.500 12.90 12.903 32.26
31-Aug-98 Year End 1.813 12.90 12.903 23.39
31-Aug-99 End 2.110 12.90 12.903 27.23
* Specified ending dates or ex-dividends dates.
** All Closing Prices and Dividends are adjusted for stock splits and stock
dividends.
*** 'Begin Shares' based on $100 investment.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of November 30, 1999, information
regarding the beneficial ownership of our common stock by (a) each person who is
known to us to be the owner of more than five percent of our common stock, (b)
each of our directors, (c) each of the executive officers whose total annual
salary and other compensation for fiscal year 1999 exceeded $100,000, and (d)
all directors and executive officers as a group. Information as to David A.
Belford and the Pacchia, Grossman, Shaked, Wexford Group, Hans J. Klaussner and
Klaussner is based on Schedules 13D filed by such persons or group:
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL
BENEFICIAL OWNER OWNERSHIP (1) PERCENT OF CLASS
---------------- ----------------- ----------------
Harley J. Greenfield (2) 835,336 (2)(3) 13.9%
Edward B. Seidner (2) 553,914 (2)(4) 9.7
Fred J. Love (2) 585,662 (2)(5)(6) 10.3
Jara Enterprises, Inc. (the private company) (2) 293,579 (6) 5.1
David A. Belford (7) 394,000 (7) 6.9
Pacchia, Grossman, Shaked, Wexford Group (8) 482,100 (8) 8.5
Bernard Wincig (9) 147,239 (9) 2.6
Edward G. Bohn (10) 25,000 (10) 0.4
Kevin J. Coyle (10) 31,250 (10) 0.5
Leslie Falchook (11) 60,932 (11) 1.1
George J. Nadel (12) 33,332 (12) 0.6
Rami Abada (13) 152,998 (13) 2.6
Ronald E. Rudzin (14) 129,166 (14) 2.2
Kevin Mattler (15) 33,332 (15) 0.6
Hans J. Klaussner and Klaussner Furniture 1,424,500 (16) 19.9
Industries, Inc. (16)
All directors and executive 1,969,167 (2)(3)(4)(9) 31.2
officers as a group (10)(11)(13)(14)(15)
(nine (9) persons)
--------------------
(1) All of such shares are owned directly with sole voting and investment
power, unless otherwise noted below.
25
(2) The address of Messrs. Greenfield and Seidner is c/o Jennifer
Convertibles, Inc., 419 Crossways Park Drive, Woodbury, New York 11797.
The address of Fred J. Love and the private company is One Ames Court,
Plainview, New York 11803. Mr. Greenfield and Mr. Love are
brothers-in-law.
(3) Includes (a) 292,831 shares underlying options granted to Mr. Greenfield
by Mr. Love and the private company, over which Mr. Greenfield has no
voting power but has shared dispositive power, as such shares may not be
disposed of without his consent and (b) 297,047 shares of common stock
underlying vested options granted to Mr. Greenfield by us, with respect
to which shares Mr. Greenfield would have sole voting and dispositive
power upon exercise of such options. Does not include 300,000 shares of
common stock underlying options to acquire convertible preferred stock
granted to Mr. Greenfield by Klaussner subsequent to November 30, 1999.
See "Executive Compensation."
(4) Includes 292,831 shares underlying the options granted to Mr. Seidner by
Mr. Love and the private company, over which Mr. Seidner has no voting
power but has shared dispositive power, as such shares may not be
disposed of without his consent.
(5) Includes 293,579 shares of common stock owned by the private company,
over which Mr. Love has sole voting and dispositive power, which,
together with 292,083 shares owned directly by Mr. Love, are subject to
the options granted to Mr. Greenfield by Mr. Love and the options granted
to Mr. Seidner by Mr. Love and the private company, and which may not be
disposed of without the consent of the relevant optionee.
(6) All of such shares are beneficially owned by Mr. Love, the sole
stockholder of the private company. Includes shares of our common stock
owned by three of the private company's wholly-owned subsidiaries. Mr.
Love has sole voting and shared dispositive power over such shares, as
such shares are subject to the options granted by him to Mr. Greenfield
and Mr. Seidner and may not be disposed of without the consent of the
relevant optionee. The private company's address is One Ames Court,
Plainview, New York 11803.
(7) The address of David A. Belford is 2097 S. Hamilton Road, Suite 200,
Columbus, Ohio 43232.
(8) Represents the shares of our common stock owned by a group which was
formed to object to the prior proposed settlement of the derivative
litigation referred to in "Legal Proceedings." The group consists of the
following persons and entities, each of which has the sole and shared
power to vote and dispose, and total beneficial ownership, of the shares
of common stock set forth opposite such persons' or entity's name: (1)
Anthony J. Pacchia - sole 11,000, shared 20,700, total 31,700; (2) F&Co.,
Inc. as Custodian for Pacchia under IRA Account - sole 16,000, shared
15,700, total 31,700; (3) Anthony J. Pacchia, P.C., (Money Purchase) fbo
Pacchia - sole 2,500, shared 29,200, total 31,700; (4) Sandra Pacchia
Custodian for Lee Pacchia - sole 1,100, shared 30,600, total 31,700; (5)
Sandra Pacchia Custodian for Tom Pacchia - sole 1,100, shared 30,600,
total 31,700; (6) Anthony T. Pacchia and Gloria Pacchia - sole 1,000,
shared 15,000, total 16,000; (7) Anthony T. Pacchia, IRA Rollover - sole
15,000, shared 1,000, total 16,000; (8) Kenneth S. Grossman, Trustee,
Profit Sharing Plan DLJSC - Custodian fbo Kenneth S. Grossman - sole
96,400, shared 3,500, total 99,900; (9) Kenneth S. Grossman - 3,500 sole,
96,400 shared, total 99,900; (10) IRA fbo Patricia Berger, DLJSC as
custodian - sole 3,500, shared 0, total 3,500, (11) Ellen Grossman,
Custodian for Andrew Grossman UGMA/ NY - sole 5,000, shared 0, total
5,000; (12) IRA fbo Howard Berger, DLJSC as custodian - sole 3,500,
shared 0, total 3,500; (13) IRA fbo Jill Berger, DLJSC as custodian,
Rollover Account - sole 3,500, shared 0, total 3,500; (14) IRA fbo
Herbert Berger, DLJSC as custodian - sole 5,000, shared 0, total 5,000;
(15) Marilyn Levy - sole 5,000, shared 0, total 5,000; (16) Ellen
Grossman, Custodian for Joshua Grossman UGMA/NY - sole 5,000, shared 0,
total 5,000; (17) Amir Shaked - sole 37,700, shared 1,300, total 39,000;
(18) IRA fbo Amir Shaked - sole 1,300, shared 37,700, total 39,000; (19)
Wexford Special Situations 1996, L.P. - sole 0, shared 142,783, total
142,783; (20) Wexford Special Situations 1996 Institutional L.P. - sole
0, shared 25,764, total 25,764; (21) Wexford Special Situations 1996
Limited - sole 0, shared 7,859, total 7,859; (22) Wexford-Euris Special
Situations 1996, L.P. - sole 0, shared 36,094, total 36,094; (23) Wexford
Management LLC - sole 0, shared 212,500, total 212,500; (24) IRA fbo
Zachery Goldwyn - sole 52,500, shared 0, total 52,500. The address for
group members (a) 1-5 is 602 Orchard Street, Cranford, New Jersey 07106,
(b) 6 and 7 is 31 Center Board Drive, Bayville, New Jersey 08721, (c)
8-9, 11, 16, 17 and 18 is 620 Fifth Avenue, 7th Floor, New York, New York
10020, (d) 10 and 14 is 31 Wisconsin Avenue, N. Massapequa, New York
11578, (e) 12 and 13 is 58 Alpine Way, Dix Hills, New York 11746, (f) 15
is 155 East 76th Street, New York, New York 10022, (g) 19-21 and 23-24 is
411 West Putnam Avenue, Greenwich, Connecticut 06830, and (h) 22 is c/o
Hemisphere Fund Managers Ltd., Harbour Centre, Georgetown, Grand Cayman
Islands, B.W.I.
26
(9) Includes 8,800 shares of our common stock owned by Mr. Wincig's wife and
27,666 shares of our common stock underlying exercisable options. Does
not include 1,334 shares of our common stock underlying options which
have not yet vested.
(10) Includes, as to each individual, 25,000 shares of our common stock
underlying exercisable options.
(11) Includes 33,332 shares of our common stock underlying options which are
currently exercisable options, but does not include 16,668 shares of our
common stock underlying options which are not currently exercisable.
(12) Includes 33,332 shares of our common stock underlying options which are
currently exercisable options, but does not include 16,668 shares of
common stock underlying options which are not currently exercisable.
(13) Includes 99,998 shares of our common stock underlying options which are
currently exercisable options, but does not include 400,002 shares of our
common stock underlying options which are not currently exercisable.
(14) Includes 66,666 shares of our common stock underlying options which are
currently exercisable options, but does not include 33,334 shares of our
common stock underlying options which are not currently exercisable.
(15) Includes 33,332 shares of our common stock underlying exercisable
options, but does not include 16,668 shares of our common stock
underlying options which are not currently exercisable.
(16) Represents 1,424,500 shares underlying convertible preferred stock issued
to Klaussner in connection with Klaussner's $5,000,000 investment.
Includes 300,000 shares of common stock subject to options to acquire
preferred stock granted to Mr. Greenfield by Klaussner subsequent to
November 30, 1999. See "Certain Relationships and Related Transactions."
Based on information contained in the Schedule 13D filed by Klaussner and
its owner, Hans J. Klaussner, Mr. Klaussner is the sole stockholder of
the parent of Klaussner and, accordingly, may be deemed the beneficial
owner of the shares owned by Klaussner. The principal address of
Klaussner is 405 Lewallen Street, Asheboro, North Carolina 27203. Hans J.
Klaussner's address is 7614 Gegenbach, Germany.
Based on our review of reports filed by our directors, executive officers
and 10% shareholders on Forms 3, 4 and 5 pursuant to Section 16 of the
Securities and Exchange Act of 1934, all such reports were filed on a timely
basis during fiscal year 1999.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
THE PRIVATE COMPANY
Until November 1994, Harley J. Greenfield, Fred J. Love and Edward B.
Seidner, each owned 33- 1/3% of the private company, which, together with its
subsidiaries, owns or licenses the private company stores. In November of 1994,
Messrs. Greenfield and Seidner sold their interests in the private company for
long-term notes and options to purchase the shares of our common stock which are
owned by Mr. Love and the private company. As a result of such sale, Mr. Love
now beneficially owns 100% of the private company. The private company is
responsible for the warehousing for our owned stores, our licensed stores and
the private company stores and leases and operates the warehouse facilities for
such stores. Until December 31, 1993, the private company was also responsible
for the purchasing and for certain advertising and promotional activities for
our owned stores, our licensed stores and the private company stores. Effective
January 1, 1994, we assumed the responsibility for purchasing and advertising
for ourselves, our licensees, and the private company stores. The private
company is responsible for a share of all advertising production costs and costs
of publication of promotional material within the New York area. Until October
27
28, 1993, a corporation of which Messrs. Greenfield, Seidner and Love each owned
33-1/3%, owned the trademarks "Jennifer Convertibles(R)" and "With a Jennifer
Sofabed, There's Always a Place to Stay(R)." On October 28, 1993, these
trademarks were assigned to us from such corporation for nominal consideration,
and we agreed to license such trademarks to the private company in New York, as
described below. Mr. Love is, and until November 1994, Mr. Seidner was, an
executive officer and director of the private company.
As noted above, in November 1994, Mr. Greenfield and Mr. Seidner sold
their interests in the private company in exchange for long-term promissory
notes from the private company and options to purchase the shares of our common
stock which are owned by the private company and Mr. Love. These notes are due
in December 2023. Only interest is payable on the notes until December 1, 2001
and, thereafter, principal is payable monthly through the maturity date. These
notes amount to $10,273,204 in aggregate principal, of which $5,136,602 is owned
by Mr. Greenfield and $5,136,602 is owned by Mr. Seidner. The notes bear
interest at a rate of 7.5% per annum although a portion of such interest was
deferred for a period of time. During the fiscal year ended August 28, 1999, Mr.
Greenfield and Mr. Seidner each received approximately $330,000 of interest on
their promissory notes from the private company. These notes are secured by (a)
a security interest in the private company's personal property, (b) Mr. Love's
personal guarantee of the private company's performance under the Notes, and (c)
a stock pledge by Mr. Love of his stock in the private company to secure his
obligations under the guarantees. The options owned by Mr. Greenfield and Mr.
Seidner to purchase the Jennifer common stock owned by Mr. Love and the private
company and referred to above are exercisable for an aggregate of 585,662 shares
of such common stock, of which 292,831 are owned by Mr. Greenfield and 292,831
by Mr. Seidner at a price of $15.00 per share until they expire on November 7,
2004. In addition, Mr. Greenfield and Mr. Seidner each owe $1,354,000 to the
private company as of August 28, 1999.
THE LICENSE
Pursuant to a license agreement between us and the private company, the
private company has the perpetual, royalty-free right to use, sublicense and
franchise the use of the trademarks "Jennifer Convertibles(R)," with "Jennifer
Sofabeds, There's Always a Place to Stay(R)" in the state of New York. The
license is exclusive in such territory, subject to certain exceptions including
nine stores operated by us in New York on a royalty-free basis and up to two
additional stores which the private company has agreed may be opened in New York
on a royalty-free basis.
THE PURCHASING AND WAREHOUSING AGREEMENT
As set forth in "Business-Warehousing and Related Services," the private
company provides certain warehouse facilities and related services, including
arranging for goods to be delivered to such facilities and to customers pursuant
to a warehousing agreement between the private company and us. The private
company is reimbursed by us and its licensees for the freight charges on such
deliveries at predetermined freight rates. The private company also provides
fabric protection services, including a life-time warranty, to our customers and
our licensees.
28
We retain approximately 2/3 of the revenues from fabric protection and the
warranty. During the fiscal year ended August 28, 1999, the LP's and we paid
warehouse fees under an Offset Agreement dated March 1, 1996 to the private
company aggregating approximately $4,262,000. During the fiscal year ended
August 28, 1999, the LP's and we also paid $2,363,000 under the Offset Agreement
for freight charges and $2,292,000 for fabric protection to the private company.
On February 9, 1999, we entered into an amendment to the warehouse agreement
which reduced the monthly warehousing fees by $150,000 or an aggregate of
$1,200,000 through August 31, 1999 when the amendment terminated. In December of
1999, the $150,000 per month arrangement was extended, effective as of September
1, 1999, and the private company also agreed that stores opened by us after June
1, 1999 would not be charged the 5% warehousing fee or fabric protection
charges.
Pursuant to a purchasing agreement, we are obligated to purchase
merchandise for the private company on the same terms as we purchase merchandise
for ourselves. During the fiscal year ended August 28, 1999, the private company
purchased from us approximately $11,646,000 of merchandise, net of discounts and
allowances, which was paid under the Offset Agreement.
THE OFFSET AGREEMENT
By agreement dated November 1, 1995, the private company and we agreed as
to certain amounts owed, as of August 26, 1995, to each other and owed by
certain licensees consisting of our unconsolidated licensees other than
Southeastern Florida Holding Corp. which we refer to as the "Private Licensees."
In addition, the private company agreed to assume the obligations of the Private
Licensees referred to above and to offset the amounts owed to us by the private
company against the amounts owed to the private company by us. By the Offset
Agreement dated March 1, 1996, we agreed to continue to offset, on a monthly
basis, amounts owed by the private company and the Private Licensees to us for
purchasing, advertising, and other services and matters against amounts owed by
us to the private company for warehousing services, fabric protection, freight
and other services and matters. The parties are currently operating under the
terms of an unsigned offset agreement which provides for cash payments of
current amounts due in excess of $1,000,000 owed to us. In addition, since
January 1, 1998, we have assumed certain payroll expenses previously funded by
the private company which totaled $1,408,000 in the fiscal year ended August 28,
1999 and $948,000 for the fiscal year ended August 29, 1998.
As of August 28, 1999, the private company owed to us $1,184,000 for
current charges for fiscal 1999 under the Offset Agreement which have since been
fully paid. The private company paid for all current charges under the Offset
Agreement during fiscal 1999. Amounts owed by the private company and certain
licensees to us as of August 28, 1999 which consist of unpaid amounts from
fiscal 1996 and prior years totaling $6,654,000, are reserved against in the
accompanying consolidated financial statements due to uncertain collectibility.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
29
THE ADVERTISING AGREEMENT
Under the advertising agreement between the private company and us, the
private company and the unconsolidated licensees bear their share of all
advertising production costs and costs of publication of promotional advertising
material within the New York area. During the fiscal year ended August 28, 1999,
the charges for such costs totaled $2,240,000.
JENNIFER LIVING ROOMS
In September 1996, we opened two test "Jennifer Living Rooms" stores in
St. Louis, Missouri. Under its license with us, the private company also has the
royalty-free right to open "Jennifer Living Rooms" stores in New York. In
October 1996, the private company began operating a test store in New York under
the name "Jennifer Living Rooms."
OTHER MATTERS
As described under the heading "The Committee" below, a committee of the
Board of Directors consisting of Michael Colnes concluded that we had claims
against Messrs. Greenfield, Love, Seidner and the private company. During fiscal
1999, we paid legal fees for Harley J. Greenfield of $3,846 in connection with
these matters.
JCI CONSULTANT, L.P.
Until August 20, 1999, JCI Consultant, L.P. was the beneficial owner of
more than 5% of our stock. Related parties of JCI Consultant, L.P. owned, until
we purchased it as of September 1, 1994, Jennifer L.P. II, a limited partnership
which operated, pursuant to a license agreement with us, 21 Jennifer Convertible
stores in the Detroit, St. Louis, Indianapolis, Milwaukee and Kansas City
metropolitan areas.
On August 20, 1999, we entered into an L.P. Option Purchase and
Termination Agreement with Jennifer Chicago Ltd., an Illinois corporation, and
our wholly-owned subsidiary, Jenco Partners, L.P., a limited partnership which
was the sole limited partner of Jennifer Chicago, L.P., a Delaware limited
partnership operating 14 stores in Chicago, JCI Consultant L.P., a limited
partnership which owned options to purchase 1,200,000 shares of our common
stock, Selig Zises, a principal stockholder of Jenco Partners and JCI
Consultant, Jay Zises, the private company, Fred Love, Harley J. Greenfield and
Edward B. Seidner pursuant to which (a) Jennifer Chicago Ltd. acquired, from
Jenco Partners, 100% of the limited partnership interest in Jennifer Chicago
L.P. and (b) the options held by JCI Consultant to purchase 1,200,000 shares of
our common stock at an exercise price of $8.00 per share were terminated. As
consideration for the above, we paid an aggregate of $699,000 consisting of
$252,000 in cash and a promissory note in the principal amount of $447,000. Such
note bears interest at prime plus 3% per annum
30
with the principal payable in two installments as follows: $223,500 to be paid
on February 1, 2000 and the remaining $223,500 to be paid on September 1, 2000.
During the fiscal year ended August 28, 1999, we earned $498,000 of
royalties from our partnership interest in Jennifer Chicago, which is eliminated
in the financial statements due to the consolidation of the LP's for financial
statement purposes.
In further connection with the above L.P. Option Purchase and Termination
Agreement, Jennifer Chicago Ltd., the private company, Mr. Greenfield, Mr. Love,
Mr. Seidner and we on the one hand and the Zises, JCI Consultant and Jenco
Partners on the other, entered into mutual releases. The Zises also agreed not
to, directly or indirectly, acquire any beneficial interest in our common stock
until December 31, 2010.
ADDITIONAL MATTERS
Currently, Rami Abada, our President and Chief Operating Officer, owns
two corporations which each own a licensed Jennifer Convertibles store. During
the year ended August 28, 1999, such corporations purchased $735,000 of
merchandise and incurred royalties of $81,000, all of which were paid in full
under the Offset Agreement. Such corporations have received financing from the
private company, with a balance of $889,337 as of August 28, 1999, and, by a
letter agreement dated March 14, 1998 among Mr. Abada, the two corporations and
us, all amounts owed by the two corporations to us incurred subsequent to
September 1, 1996 were paid through the allocation of amounts to be credited to
the private company under the Offset Agreement. During the fiscal year ended
August 28, 1999, Mr. Abada received $330,000 of salary, severance pay,
distributions and other payments from such licensees and the private company.
Currently, Ronald Rudzin, our Senior Vice President, owns one licensed
Jennifer Convertibles store. He previously owned two such stores but he sold one
of these to the private company in January of 1999 and the private company now
operates this store on a royalty-free basis. Mr. Rudzin's mother currently owns
two licensed Jennifer Convertibles stores. As of August 28, 1999, all amounts
owed by the three corporations to us which amounts were incurred subsequent to
September 1, 1996 were paid through the allocation of amounts to be credited to
the private company under the Offset Agreement. During the year ended August 28,
1999, such corporations purchased $1,373,000 of merchandise from us and incurred
$115,000 of additional charges with us, all of which were paid in full under the
Offset Agreement. During the fiscal year ended August 28, 1999, Mr. Rudzin
received approximately $210,000 of salary, distributions and other payments from
such licensees and the private company.
Amounts owed to us, other than for current charges, by the corporate
licensees referred to above, each of which is a Private Licensee, have been
fully reserved against in the accompanying financial statements
31
for the 1997, 1998 and 1999 fiscal years due to uncertain collectibility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
From time to time the private company and we use the services of Wincig &
Wincig, a law firm of which Bernard Wincig, one of our directors and
stockholders, is a partner. Mr. Wincig and his firm received approximately
$153,208 of legal fees from us and the LP's and an aggregate of approximately
$23,052 from the private company during the fiscal year ended August 28, 1999.
On December 11, 1997, Klaussner purchased 10,000 shares of our Series A
Convertible Preferred Stock for $5,000,000. In connection with such purchase,
Klaussner waived any of our defaults under the Credit and Security Agreement we
entered into with Klaussner in 1996 and approximately $2,965,650 of the proceeds
of the $5,000,000 investment were used to pay all balances due to Klaussner
which had been billed and outstanding for more than 60 days. The preferred stock
is non-voting and is currently convertible into 1,424,500 shares of common stock
at an effective conversion price of $3.51 per share, subject to adjustment for
stock splits, stock dividends and similar events. The common stock underlying
the preferred stock represents approximately 19.9% of the outstanding common
stock as of August 28, 1999, after giving effect to such conversion. The
preferred stock has a liquidation preference of $5,000,000. No cash dividends
are to be paid on the common stock unless the holders of the preferred stock
receive the same dividend on the preferred stock on an "as-converted" basis. If
we sell our common stock or equivalents of our stock such as options or
convertible securities at a price, or an effective price in the case of
equivalents, of less than $3.51 per share, then, in connection with its
$5,000,000 investment, Klaussner has the right of first refusal to purchase such
stock or stock equivalents at that price. Klaussner will have this right so long
as it owns at least 10% of the outstanding common stock on an as converted
basis. Klaussner also received certain demand registration rights to require us,
at our expense, to register the shares of common stock underlying its preferred
stock and any shares it acquires upon exercise of this right.
In December 1999, in order to provide Harley J. Greenfield with an
incentive to remain our Chief Executive Officer, Klaussner granted Mr.
Greenfield an option to purchase 2,106 shares of preferred stock owned by
Klaussner. Such shares are convertible into 300,000 shares of our common stock.
The exercise price of the option is $5.00 per share of such underlying common
stock. The option is exercisable until August 31, 2004, unless terminated
earlier by certain events, including Mr. Greenfield's ceasing to be our Chief
Executive Officer.
In further connection with Klaussner's $5,000,000 investment, the Credit
and Security Agreement was modified to provide a late payment fee at a rate of
.67% per month for invoices we pay beyond the normal 60 day term.
In fiscal 1999, Klaussner gave us $1,889,000 of allowances for a repair
program. In addition, in December 1999, Klaussner entered into an agreement with
us pursuant to which it agreed, subject to certain conditions, to loan $150,000
to each of our subsidiaries which operates or intends to operate a new store
32
approved by Klaussner. The agreement provides that the maximum aggregate amount
of the loans will be $1,500,000 (10 stores). Each such loan will be evidenced by
a three-year note, bearing interest at the then LIBO rate for three-month loans
plus 3%. Payment of the notes may be accelerated under certain conditions,
including the closing of the store funded by the related loan or if we are not
purchasing at least 50% by dollar volume of our upholstered furniture from
Klaussner. As additional consideration, we have agreed to pay an additional
premium on furniture purchased from Klaussner to satisfy orders originating from
new stores funded by these loans. Such premium would be 3% of the customary cost
of such merchandise until the note is paid in full and would decrease to 2% for
the 10 years after the note is paid. Such premium payments would cease after
such 10-year period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and also see "Business - Sources of Supply"
for other transactions with Klaussner.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS.
See the Index immediately following the signature page.
(b) REPORTS ON FORM 8-K.
Jennifer Convertibles, Inc. Current Report on Form 8-K dated
August 20, 1999 and filed September 3, 1999 reporting on an
Item 5 event.
(c) EXHIBITS.
3.1 - Certificate of Incorporation, incorporated herein by
reference to Exhibit 3.1 to our Registration
Statement - File Nos. 33-22214 and 33-10800.
3.2 - Certificate of Designations, Preferences and Rights
of Series A Preferred Stock, incorporated herein by
reference to Exhibit 3.2 to our Annual Report on Form
10-K for the year ended August 30, 1997.
33
3.3 - Certificate of Designations, Preferences and Rights
of Series B Preferred Stock, incorporated herein by
reference to Exhibit 3.3 to our Annual Report on Form
10-K for the year ended August 29, 1998.
3.4 - By-Laws, incorporated herein by reference to Exhibit
3.2 to our Annual Report on Form 10-K for the year
ended August 26, 1995.
10.1 - Incentive and Non-Qualified Stock Option Plan,
incorporated herein by reference to Exhibit 10.4 to
the Registration Statement.
10.2 - Amended and Restated 1991 Incentive and Non-Qualified
Stock Option Plan incorporated herein by reference to
Exhibit 10.29 to the Registration Statement on Form
S-2.
10.3 - Warehousing Agreement, dated as of December 31, 1993,
between Jennifer Convertibles, Inc. and Jennifer
Warehousing, Inc., incorporated herein by reference
to our Quarterly Report on Form 10-Q for the
quarterly period ending February 26, 1994.
10.4 - Purchasing Agreement, dated as of December 31, 1993,
between Jennifer Convertibles, Inc. and Jara
Enterprises, Inc., incorporated herein by reference
to our Quarterly Report on Form 10-Q for the
quarterly period ending February 26, 1994.
10.5 - Advertising Agreement, dated as of December 31, 1993,
between Jennifer Convertibles, Inc. and Jara
Enterprises, Inc., incorporated herein by reference
to our Quarterly Report on Form 10-Q for the
quarterly period ending February 26, 1994.
10.6 - Amendment No. 1 to Warehousing Agreement, dated as of
May 28, 1994, amending the Warehousing Agreement
referred to in 10.3 and the related Rebate Note,
incorporated herein by reference to Exhibit 10.34 to
our Annual Report on Form 10- K for the fiscal year
ended August 27, 1994.
34
10.7 - Amendment No. 1 to Purchasing Agreement, dated as of
May 28, 1994, amending the Purchasing Agreement
referred to in 10.4., incorporated herein by
reference to Exhibit 10.35 to our Annual Report on
Form 10-K for the fiscal year ended August 27, 1994.
10.8 - License Agreement, dated as of October 28, 1993,
among Jennifer Licensing Corp. and Jara Enterprises,
Inc., incorporated herein by reference to Exhibit 2
to our Current Report on Form 8-K dated November 30,
1993.
10.9 - Agreement, dated as of May 19, 1995, among Jennifer
Convertibles, Inc., Jennifer Purchasing Corp., Jara
Enterprises, Inc. and the licensees signatory
thereto, incorporated herein by reference to Exhibit
10.38 to our Annual Report on Form 10- K for the
fiscal year ended August 26, 1995.
10.10 - Agreement, dated as of November 1, 1995, among
Jennifer Convertibles, Inc., Jennifer Purchasing
Corp., Jara Enterprises, Inc. and the licensees
signatory thereto, incorporated herein by reference
to Exhibit 10.39 to our Annual Report on Form 10- K
for fiscal year ended August 26, 1995.
10.11 - Form of Note, dated November 1994, made by Jara
Enterprises, Inc. to Harley J. Greenfield and Edward
B. Seidner, incorporated herein by reference to
Exhibit 10.43 to our Annual Report on Form 10-K for
the fiscal year ended August 26, 1995.
10.12 - Form of Option, dated November 7, 1994 to purchase
common stock from Fred Love, Jara Enterprises, Inc.
and certain subsidiaries to Harley J. Greenfield and
Fred Love, incorporated herein by reference to
Exhibit 10.44 to our Annual Report on Form 10-K for
the fiscal year ended August 26, 1995.
10.13 - Form of Subordination Agreement, dated as of August
9, 1996, by Harley J. Greenfield and Edward B.
Seidner, incorporated herein by reference to Exhibit
10.45 to our Annual Report on Form 10-K for the
fiscal year ended August 26, 1995.
10.14 - Credit and Security Agreement, dated as of March 1,
1996, among Klaussner Furniture Industries, Inc.,
Jennifer Convertibles, Inc. and the other signatories
thereto, incorporated herein by reference to Exhibit
4 to our Current Report on Form 8-K dated March 18,
1996.
35
10.15 - 1997 Stock Option Plan, incorporated herein by
reference to Exhibit 10.29 to our Annual Report on
Form 10-K for the fiscal year ended August 31, 1997.
10.16 - Stock Purchase Agreement, dated December 11, 1997,
between Klaussner and Jennifer Convertibles, Inc.,
incorporated herein by reference to Exhibit 10.30 to
our Annual Report on Form 10-K for fiscal year ended
August 30, 1997.
10.17 - Registration Rights Agreement, dated December 11,
1997, between Klaussner and Jennifer Convertibles,
Inc., incorporated herein by reference to Exhibit
10.31 to our Annual Report on Form 10-K for fiscal
year ended August 30, 1997.
10.18 - Waiver and Modification Agreement, dated December 11,
1997, among Klaussner and related entities and
Jennifer Purchasing Corp., Jennifer Convertibles,
Inc., Jennifer Licensing Corp., and Jennifer L.P.
III, incorporated herein by reference to Exhibit
10.32 to our Annual Report on Form 10-K for the
fiscal year ended August 30, 1997.
10.19 - L.P. and Option Purchase and Termination Agreement,
dated as of August 20, 1999, among Jennifer
Convertibles, Inc., Jennifer Chicago Ltd., an
Illinois corporation and a wholly-owned subsidiary of
Jennifer Convertibles, Inc., Jenco Partners, L.P., a
limited partnership, which is the sole limited
partner of Jennifer Chicago, L.P., a Delaware Limited
partnership, JCI Consultant, L.P., a limited
partnership which owned certain options to purchase
capital stock of Jennifer Convertibles, Inc., Selig
Zises, a principal of Jenco Partners, L.P. and JCI
Consultant, L.P., Jay Zises, Jara Enterprises, Inc.,
Fred J. Love, and, Harley J. Greenfield and Edward B.
Seidner, incorporated herein by reference to our
Current Report on Form 8-K dated August 20, 1999 and
filed September 3, 1999 reporting on an Item 5 event.
10.20 - General Release, made as of August 20, 1999, by JCI
Consultant, L.P., Jenco Partners L.P., Jay Zises and
Selig Zises for the benefit of Jennifer Convertibles,
Inc., Jennifer Chicago Ltd., Jara Enterprises, Inc.,
Harley J. Greenfield, Fred J. Love and Edward B.
Seidner, incorporated herein by reference to our
Current Report on Form 8-K dated August 20, 1999 and
filed September 3, 1999 reporting on an Item 5 event.
10.21 - General Release, made as of August 20, 1999, by
Jennifer Convertibles, Inc., Jennifer Chicago Ltd.,
Jara Enterprises, Inc., Harley J. Greenfield, Fred J.
Love an Edward B. Seidner for the benefit of JCI
Consultant, L.P., Jenco Partners L.P., Jay Zises and
Selig Zises, incorporated herein by reference to our
Current Report on
36
Form 8-K dated August 20, 1999 and filed September 3,
1999 reporting on an Item 5 event.
10.22 - Note, dated as of September 1, 1999, in the principal
amount of $447, 000 to the order of Jenco Partners,
L.P. from Jennifer Convertibles, Inc., incorporated
herein by reference to our Current Report on Form 8-K
dated August 20, 1999 and filed September 3, 1999
reporting on an Item 5 event.
10.23 - Employment Agreement, dated as of August 15, 1999,
between Harley J. Greenfield and Jennifer
Convertibles, Inc.
10.24 - Employment Agreement, dated as of August 15, 1999,
between Rami Abada and Jennifer Convertibles, Inc.,
as amended.
10.25 - Agreement, dated as of September 1, 1999, between
Jennifer Convertibles, Inc. and Jara Enterprises,
Inc.
10.26 - Agreement, dated as of September 1, 1999 between
Jennifer Convertibles, Inc. and Jara Enterprises,
Inc.
10.27 - Loan Agreement dated as of December 8, 1999, between
Jennifer Convertibles, Inc. and Klaussner Furniture
Industries, Inc.
10.28 - Stock Option Agreement dated as of December 8, 1999,
between Harley J. Greenfield and Klaussner Furniture
Industries, Inc.
10.29 - Registration Rights Agreement, dated as of December
10, 1999, by Jennifer Convertibles, Inc. in favor of
Harley J. Greenfield in connection with the Stock
Option Agreement, dated as of December 8, 1999.
21.1 - Subsidiaries, incorporated herein by reference to
Exhibit 22.1 to our Annual Report on Form 10-K for
fiscal year ended August 27, 1994.
(d) FINANCIAL STATEMENT SCHEDULES.
All Schedules are omitted for the reason that they are not
required or are not applicable, or the required information is
shown in the consolidated financial statements or notes
thereto.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JENNIFER CONVERTIBLES, INC.
By: /s/ HARLEY J. GREENFIELD
------------------------------------------
Harley J. Greenfield, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated below.
NAME POSITION DATE
/s/ HARLEY J. GREENFIELD Chairman of the Board December 10, 1999
------------------------ and Chief Executive
Harley J. Greenfield Officer (Principal
Executive Officer)
/s/ EDWARD B. SEIDNER Director December 10, 1999
------------------------
Edward B. Seidner
/s/ BERNARD WINCIG Director December 10, 1999
------------------------
Bernard Wincig
/s/ EDWARD BOHN Director December 10, 1999
------------------------
Edward Bohn
/s/ KEVIN J. COYLE Director December 10, 1999
------------------------
Kevin J. Coyle
/s/ RAMI ABADA President, Director, Chief December 10, 1999
------------------------ Operating Officer and
Rami Abada Interim Chief Financial
Officer
38
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 1999, August 29, 1998 and August 30, 1997
(In thousands except for share amounts)
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Index to Financial Statements
Independent Auditors' Report.........................................F1
Consolidated Balance Sheets at August 28, 1999 and
August 29, 1998 ...................................................F2
Consolidated Statements of Operations for the years ended
August 28, 1999, August 29, 1998 and August 30, 1997...............F3
Consolidated Statements of (Capital Deficiency) for the years ended
August 28, 1999, August 29, 1998, and August 30, 1997 .............F4
Consolidated Statements of Cash Flows for the years ended
August 28, 1999, August 29, 1998 and August 30, 1997...............F5
Notes to Consolidated Financial Statements...........................F6
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except for share data)
ASSETS
(SEE NOTE 5)
August 28, 1999 August 29, 1998
--------------- ---------------
Current assets:
Cash and cash equivalents $ 6,907 $ 4,384
Accounts receivable 31 500
Merchandise inventories 9,634 10,018
Due from Private Company and Unconsolidated Licensees, net
of reserves of $6,654 and $6,696 at August 28, 1999
and August 29, 1998 1,184 601
Prepaid expenses and other current assets 596 388
-------- --------
Total current assets 18,352 15,891
Store fixtures, equipment and leasehold improvements
at cost, net 5,377 6,147
Deferred lease costs and other intangibles, net 611 783
Goodwill, at cost, net 1,142 535
Other assets (primarily security deposits) 663 743
-------- --------
$ 26,145 $ 24,099
======== ========
LIABILITIES AND (CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable, trade $ 15,030 $ 14,917
Customer deposits 8,757 6,892
Accrued expenses and other current liabilities 4,447 5,192
Amounts payable under acquisition agreement 699
-------- --------
Total current liabilities 28,933 27,001
Deferred rent and allowances 5,185 5,497
Long-term obligations under capital leases 63 49
-------- --------
Total liabilities 34,181 32,547
-------- --------
Commitments and contingencies (Notes 9 and 10)
(Capital Deficiency):
Preferred stock, par value $.01 per share
Authorized 1,000,000 shares
Series A Convertible Preferred-10,000 shares issued
and outstanding at August 28, 1999 and August 29, 1998
(liquidation preference $5,000)
Series B Convertible Preferred-26,664 shares issued
and outstanding at August 28, 1999 (liquidation preference $133)
Common stock, par value $.01 per share
Authorized 10,000,000 shares; issued and
outstanding 5,704,058 and 5,700,725 shares at
August 28, 1999 and August 29, 1998, respectively 57 57
Additional paid-in capital 27,482 27,710
Notes receivable from warrant holders (270)
Accumulated (deficit) (35,575) (35,945)
-------- --------
(8,036) (8,448)
-------- --------
$ 26,145 $ 24,099
======== ========
See Notes to Consolidated Financial Statements.
F2
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data)
Year ended Year ended Year ended
August 28, 1999 August 29, 1998 August 30, 1997
--------------- --------------- ---------------
(52 weeks) (52 weeks) (52 weeks)
Net sales $ 109,284 $ 111,541 $ 97,789
----------- ----------- -----------
Cost of sales, including store occupancy,
warehousing, delivery and fabric protection
(including charges from the Private Company of
$8,917, $10,943, and $10,390) 71,607 74,054 67,114
Selling, general and administrative expenses 35,890 35,984 32,904
Recovery of amounts due from
Private Company and Unconsolidated Licensees (42) (196) (426)
(Income) loss from store closings (9) 355 55
Depreciation and amortization 1,668 1,727 1,840
----------- ----------- -----------
109,114 111,924 101,487
----------- ----------- -----------
Operating income (loss) 170 (383) (3,698)
Other income (expense):
Royalty income 388 386 374
Interest income 171 108 67
Interest expense (106) (172) (28)
Other income, net 150 271 319
603 593 732
Income (loss) before income taxes 773 210 (2,966)
Income taxes 403 120 95
----------- ----------- -----------
Net income (loss) $ 370 $ 90 ($3,061)
=========== =========== ===========
Basic income (loss) per common share $ 0.06 $ 0.02 ($0.54)
Diluted income (loss) per common share $ 0.05 $ 0.01 ($0.54)
Weighted average common shares outstanding
basic income (loss) per share 5,701,559 5,700,725 5,700,725
Effect of potential common share issuance:
Stock options 22,077 32,641 --
Convertible preferred stock 1,430,722 1,068,375 --
----------- ----------- -----------
Weighted average common shares outstanding
diluted income (loss) per share 7,154,358 6,801,741 5,700,725
=========== =========== ===========
See Notes to the Consolidated Financial Statements.
F3
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of (Capital Deficiency)
Years Ended August 28, 1999, August 29, 1998 and August 30, 1997
(In thousands, except share data)
Notes
Preferred stock Preferred stock Additional receivable
Series A Series B Common Stock paid-in from warrant Accumulated
Shares Par Value Shares Par Value Shares Par Value capital holders (deficit) Totals
-------- --------- -------- --------- --------- --------- --------- ------------ ----------- ---------
Balances at August 31, 1996 -- -- -- -- 5,700,725 $ 57 $ 22,911 $ (300) $ (32,974) $ (10,306)
Net (loss) -- -- -- -- -- -- -- -- (3,061) (3,061)
Balances at August 30, 1997 -- -- -- -- 5,700,725 57 22,911 (300) (36,035) (13,367)
Write off of notes receivable
from warrant holders -- -- -- -- -- -- (30) 30 -- --
Net income -- -- -- -- -- -- -- -- 90 90
Sale of Series A
Preferred Stock 10,000 -- -- -- -- -- 4,829 -- -- 4,829
-------- ------ -------- ------ --------- --------- --------- --------- ---------- ---------
Balances at August 29, 1998 10,000 -- -- -- 5,700,725 57 27,710 (270) (35,945) (8,448)
Write off of notes receivable
from warrant holders -- -- -- -- -- -- (270) 270 -- --
Exercise of stock options -- -- -- -- 3,333 0 6 -- -- 6
Purchase of stock options -- -- -- -- -- -- (75) -- -- (75)
Issuance of Series B
Preferred Stock -- -- 26,664 -- -- -- 111 -- -- 111
Net income -- -- -- -- -- -- -- -- 370 370
-------- ------ -------- ------ --------- --------- --------- --------- ---------- ---------
Balances at August 28, 1999 10,000 0 26,664 0 5,704,058 $ 57 $ 27,482 $ 0 $ (35,575) $ (8,036)
======== ====== ======== ====== ========= ========= ========= ========= ========== =========
See Notes to Consolidated Financial Statements.
F4
JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Year Ended Year Ended Year Ended
August 28, 1999 August 29, 1998 August 30, 1997
--------------- --------------- ---------------
(52 weeks) (52 weeks) (52 weeks)
Cash flows from operating activities:
Net income (loss) $ 370 $ 90 ($3,061)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 1,668 1,727 1,840
Provision for warranty costs 100 100 204
(Income) loss from store closings (9) 355 40
Deferred rent (313) (183) (62)
Recovery of amounts due from
Private Company and Unconsolidated Licensees (42) (196) (426)
Changes in operating assets and liabilities:
Decrease (increase)in merchandise inventories 384 (2,075) 278
Decrease in refundable income taxes -- -- 23
(Increase) decrease in prepaid expenses
and other current assets (208) 89 (23)
Decrease in accounts receivable 469 649 439
(Increase) decrease in due from Private Company
and Unconsolidated Licensees (541) (405) 426
Decrease in other assets, net 81 9 124
Increase (decrease) in accounts payable trade 113 (1,697) 868
Increase (decrease) in customer deposits 1,865 (1,949) (34)
(Decrease) in accrued expenses
and other payables (428) (121) (501)
------- ------- -------
Net cash provided by (used in) operating activities 3,509 (3,607) 135
------- ------- -------
Cash flows from investing activities:
Capital expenditures (743) (141) (206)
Decrease in deferred lease costs
and other intangibles -- 16 64
------- ------- -------
Net cash (used in) investing activities (743) (125) (142)
------- ------- -------
Cash flows from financing activities:
Payments of obligations under capital leases (243) (118) (188)
Sale of Series A Preferred Stock -- 4,829 --
------- ------- -------
Net cash (used in) provided by financing activities (243) 4,711 (188)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 2,523 979 (195)
Cash and cash equivalents at beginning of year 4,384 3,405 3,600
------- ------- -------
Cash and cash equivalents at end of year $ 6,907 $ 4,384 $ 3,405
======= ======= =======
Supplemental disclosure of cash flow information:
Income taxes paid $ 418 $ 102 $ 95
======= ======= =======
Interest paid $ 106 $ 172 $ 28
======= ======= =======
Supplemental disclosure of non-cash financing activities:
Issuance of Series B Preferred Stock-in settlement
of liability $ 111
Acquisition of Limited Partnership interest and stock options
through the issuance of notes payable $ 699
Acquisition of equipment through capital lease financing $ 379
======= =======
See Notes to Consolidated Financial Statements.
F5
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 1999, August 29, 1998 and August 30, 1997
(In thousands except for share amounts)
(1) BUSINESS AND BASIS OF PREPARATION
The consolidated financial statements include the accounts of Jennifer
Convertibles, Inc. and subsidiaries (the "Company") and as described below,
certain licensees. The Company is the owner and licensor of domestic sofabed
specialty retail stores that specialize in the sale of a complete line of
sofabeds and companion pieces such as loveseats, chairs and recliners and
specialty retail stores that specialize in the sale of leather furniture. As at
August 28, 1999 and August 29, 1998, 84 and 82 Company-owned stores operated
under the Jennifer Convertibles, Jennifer Leather and Jennifer Living Rooms
names.
The Company licensed stores to limited partnerships ("LP's") of which
a subsidiary of the Company is the general partner. The LP's have had losses
since inception and the Company has made advances to fund such losses. The
Company has control of the LP's and, as a result, consolidates the accounts of
the LP's in its financial statements. Included in the Company's Consolidated
Statement of Operations are the losses of the LP's in excess of the limited
partners' capital contributions. As at August 28, 1999 and August 29, 1998, the
LP's operated 62 stores under the Jennifer Convertibles name.
The Company has also licensed stores to parties, certain of which may
be deemed affiliates ("Unconsolidated Licensees"). Under the applicable license
agreements, the Company is entitled to a royalty of 5% of sales. As at August
28, 1999 and August 29, 1998, 9 and 11, stores respectively, were operated by
such Unconsolidated Licensees and the results of their operations are not
included in the consolidated financial statements.
Also not included in the consolidated financial statements are the
results of operations of 25 stores in New York which are owned or operated by a
company (the "Private Company") which, until November 1994, was owned by three
of the officers/directors/principal stockholders of the Company. In November
1994, the Private Company redeemed the stock in the Private Company of two of
the principal stockholders (Harley Greenfield and Edward Seidner) for notes in
the amount of $10,273 collateralized by the assets of the Private Company and
due in 2023. In connection with such transaction, Fred Love, the remaining
principal stockholder, granted Messrs. Greenfield and Seidner options expiring
in November 2004 to purchase the 585,662 shares of the Company's Common Stock
owned by him and the Private Company for $15.00 per share.
The Company, the LP's, the Private Company and the Unconsolidated
Licensees have had numerous transactions with each other as more fully discussed
in Note 3. Further, the Company had made advances to the Private Company and the
Unconsolidated Licensees which have been substantially reserved for. Because of
the numerous related party transactions, the results of operations are not
necessarily indicative of what they would be if all transactions were with
independent parties.
F6
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 1999, August 29, 1998 and August 30, 1997
(In thousands except for share amounts)
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company was profitable in the
fiscal years ended August 28, 1999 and August 29, 1998 and during fiscal 1999
net cash was generated by operating activities. Unprofitable stores have been
closed, including 8 stores during fiscal 1997 through 1999, and expense
reduction plans have been implemented throughout all operational areas of the
Company. Additionally, significant purchase allowances have been received from
the Company's principal vendor (see Note 5).
On November 30, 1998, the court approved the settlement of all class
action litigation against the Company, the cash portion of which was funded
entirely by the Company's insurance carriers. In addition, on September 23,
1998, the Company was advised by the Securities and Exchange Commission that a
formal investigation into the affairs of the Company had been terminated and no
enforcement action had been recommended. As of August 28, 1999, pending
unresolved matters relate to derivative action lawsuits and potential claims by
the Company to recover damages (see Note 10).
At August 28, 1999, the Company has both a working capital deficiency
of $10,581 and a capital deficiency of $8,036. As discussed in Note 5, the
Company has entered into a credit and security agreement with its largest
supplier and the owner of the outstanding shares of the Series A convertible
preferred stock, Klaussner Furniture Industries, Inc. ("Klaussner") (which in
fiscal 1999 accounted for approximately 77% of the Company's purchases of
merchandise) which, effectively extended the payment terms for merchandise
shipped. As of August 28, 1999, accounts payable includes $10,620 due to
Klaussner ($10,078 at August 29, 1998).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Jennifer
Convertibles, Inc., its subsidiaries and the LP's. A subsidiary of the Company
is the general partner of each of the LP's.
FISCAL YEAR
The Company has adopted a fiscal year ending on the last Saturday in
August which would be either 52 or 53 weeks long.
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid instruments with a
maturity of three months or less to be cash equivalents.
F7
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 1999, August 29, 1998 and August 30, 1997
(In thousands except for share amounts)
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost (determined on
the first-in, first-out method) or market and are physically located, as
follows:
8/28/99 8/29/98
------- --------
Showrooms $ 4,203 $ 4,113
Warehouses 5,431 5,905
------- --------
$ 9,634 $ 10,018
======= ========
Vendor discounts and allowances in respect to merchandise purchased by the
Company are included as a reduction of inventory and cost of sales.
STORE FIXTURES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Store fixtures and equipment, including property under capital leases,
are carried at cost less accumulated depreciation and amortization. Depreciation
is computed using the straight-line method over estimated useful lives or, when
applicable, the life of the lease, whatever is shorter. Betterments and major
remodeling costs are capitalized. Leasehold improvements are capitalized and
amortized over the shorter of their estimated useful lives or the terms of the
respective leases.
GOODWILL
Goodwill consists of the excess of cost of the Company's investments
in certain subsidiaries over the fair value of net assets acquired. Impairment
is assessed based on cash flows of the related stores. Goodwill is being
amortized over periods of ten to forty years from the acquisition date using the
straight-line method. Accumulated amortization at August 28, 1999 and August 29,
1998 amounted to $610 and $592, respectively.
DEFERRED LEASE AND OTHER INTANGIBLE COSTS
Deferred lease costs, consisting primarily of lease commissions and
payments made to assume existing leases, are deferred and amortized over the
term of the lease.
DEFERRED RENT AND ALLOWANCES
Pursuant to certain of the Company's leases, rent expense charged to
operations differs from rent paid because of the effect of free rent periods and
work allowances granted by the landlord. Rent expense is calculated by
allocating total rental payments, including those attributable to scheduled rent
increases reduced by work allowances granted, on a straight-line basis, over the
respective lease term. Accordingly, the Company has recorded deferred rent and
allowances of $5,185 and $5,497 at August 28, 1999 and August 29, 1998,
respectively.
F8
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 1999, August 29, 1998 and August 30, 1997
(In thousands except for share amounts)
REVENUE RECOGNITION
Sales are recognized upon delivery of the merchandise to the customer.
A minimum deposit of 50% is typically required upon placing a non-financed sales
order. The Company also finances sales and sells financed receivables on a
non-recourse basis to a finance company. Fees paid to the finance company are
included in selling, general and administrative expenses.
EARNINGS (LOSS) PER SHARE
Basic income (loss) per common share is computed by dividing the net
income (loss) after reduction for $7 of cumulative preferred stock dividends in
1999, by the weighted average number of shares of common stock outstanding
during each period. Diluted income per share reflects the assumed conversion or
exercise of Convertible Preferred Stock, options and warrants in periods where
they are dilutive. The effect of these securities are excluded from diluted
(loss) per share in the year ended August 30, 1997 because they are
anti-dilutive.
ADVERTISING
The Company advertises in newspapers, radio and on television.
Advertising costs are expensed as incurred and are included in selling, general
and administrative expenses. Advertising expenses for the years ended August 28,
1999, August 29, 1998 and August 30, 1997 aggregated $11,699, $10,819 and
$10,893, respectively, net of amounts charged to the Private Company and
Unconsolidated Licensees (see Note 3).
WARRANTIES
Estimated warranty costs are expensed in the same period that sales
are recognized.
CONCENTRATION OF RISKS
During fiscal 1999, the Company purchased 77% and 8%, respectively, of
its inventory from two suppliers under normal or extended trade terms.
The Company utilizes many local banks as depositories for cash
receipts received at its showrooms. Such funds are transferred weekly to a
concentration account maintained at one commercial bank. At August 28, 1999 and
August 29, 1998, amounts on deposit with this one bank totaled 89% and 82% of
total cash, respectively.
F9
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 1999, August 29, 1998 and August 30, 1997
(In thousands except for share amounts)
USE OF ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include accounts receivable, accounts payable
and customer deposits. The carrying amount of these instruments approximates
fair value due to their short-term nature.
SEGMENT INFORMATION
The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosure about Segments of an Enterprise
and Related Information." SFAS No. 131 requires publicly-held companies to
report financial and other information about key revenue-producing segments of
the entity for which such information is available and is utilized by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. SFAS No. 131 permits operating segments to be aggregated if they
have similar economic characteristics, products, type of customers and methods
of distribution. Accordingly, the Company's specialty furniture stores are
considered to be one reportable operating segment.
PRE-OPENING COSTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities" which requires costs of start-up activities to be expensed
as incurred. SOP 98-5 is effective for the year ending August 26, 2000. As of
August 28, 1999, there are no unamortized pre-opening costs.
F10
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 1999, August 29, 1998 and August 30, 1997
(In thousands except for share amounts)
(3) RELATED PARTY TRANSACTIONS
The Private Company, pursuant to a warehouse agreement, provides
services to the Company and the LP's relating to distribution, inventory control
reporting and data processing. The Company and LP's pay a monthly warehousing
fee based on 5% of the retail sales prices and a portion of fabric protection
revenue collected from customers, excluding sales from stores opened after July
1, 1999. On February 9, 1999, the Company entered into an amendment to the
warehouse agreement which reduced the monthly warehousing fees by $150 or an
aggregate of $1,200 through August 31, 1999 when the amendment terminated. On
September 1, 1999, the period through which the warehouse fees were reduced was
extended. Additionally, the Private Company provides fabric protection, warranty
services and freight services at pre-determined rates. The Company's cost of
sales includes these charges. Revenue from customers for fabric protection
services is included in net sales. Indicated below are the amounts charged by
the Private Company:
Year Ended
--------------------------
8/28/99 8/29/98 8/30/97
------- ------- -------
INCLUDED IN COST OF SALES:
Freight $ 2,363 $ 2,775 $ 2,827
Fabric protection services 2,292 2,592 2,543
Warehousing fees 4,262 5,576 5,020
------- ------- -------
Total $ 8,917 $10,943 $10,390
----- ======= ======= =======
The Company has assumed the responsibility from the Private Company
for purchasing merchandise for itself, the LP's, the Unconsolidated Licensees
and the Private Company. During the years ended August 28, 1999, August 29, 1998
and August 30, 1997, approximately $11,646, $11,745, and $10,671, respectively,
of inventory at cost (before rebates) was purchased by the Private Company
through the Company and $3,988, $3,195, and $3,529, respectively, of inventory
at cost (before rebates) was purchased by the Unconsolidated Licensees through
the Company. The Company receives the benefit of any vendor discounts and
allowances in respect to merchandise purchased by the Company on behalf of the
LP's and certain other licensees. The Private Company receives the benefit of
any discounts refunded or credited by suppliers in respect of merchandise
purchased by the Private Company through the Company. For the year ended August
28, 1999, $619 was credited to the Private Company on account of discounts for
such year, $628 was credited for the year ended August 29, 1998 and $590 was
credited for the year ended August 30, 1997.
F11
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 1999, August 29, 1998 and August 30, 1997
(In thousands except for share amounts)
The Company has assumed the responsibility of advertising for itself,
the LP's, the Unconsolidated Licensees and the Private Company. Under the
arrangement, the Private Company and Unconsolidated Licensees are charged a
share of advertising costs. Such charges aggregated $2,240, $2,139, and $2,218
for the years ended August 28, 1999, August 29, 1998 and August 30, 1997,
respectively.
Two executive officers of the Company and a relative of one of the
officers, own or owned interests in certain Unconsolidated Licensee stores.
During the years ended August 28, 1999, August 29, 1998 and August 30, 1997
royalty income includes approximately $386, $391, and $371, respectively, from
these Unconsolidated Licensees stores.
The Private Company and the Company have agreed to offset, on a
monthly basis, amounts owed by the Private Company and certain Unconsolidated
Licensees to the Company for purchasing, advertising and other services against
amounts owed by the Company to the Private Company for warehousing services,
fabric protection, freight and other services. To the extent that either party
owes the other an amount in excess of $1,000 for current obligations, such
excess is to be paid in cash to either party. Since the inception of this
agreement in March 1996, the Private Company has paid current obligations in
excess of $1,000.
Due to the uncertainty of collectibility, certain amounts due from the
Private Company and Unconsolidated Licensees, which were not offset, have been
fully reserved in the consolidated financial statements, as follows:
Private Unconsolidated
Company Licensees Totals
------- -------------- -------
AT AUGUST 28, 1999:
Gross amount due $ 3,955 $ 3,883 $ 7,838
Reserves (2,771) (3,883) (6,654)
------- ------- -------
Net Amount $ 1,184 $ -0- $ 1,184
======= ======= =======
AT AUGUST 29, 1998:
Gross amount due $ 3,166 $ 4,131 $ 7,297
Reserves (2,565) (4,131) (6,696)
------- ------- -------
Net Amount $ 601 $ -0- $ 601
======= ======= =======
F12
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 1999, August 29, 1998 and August 30, 1997
(In thousands except for share amounts)
Pursuant to a proposed settlement agreement with the Private Company
that was never completed (see Note 10), the Company entered into the monthly
offset agreement, described above, which requires payments of current
obligations in excess of $1,000 by the Private Company. In addition, the Company
paid the Private Company $650 in additional warehouse fees for the two fiscal
years ended August 30, 1997 (of which $130 was charged to cost of sales in
fiscal 1997) and since January 1, 1998 has assumed certain payroll expenses
previously funded by the Private Company which totaled $1,408 in the fiscal year
ended August 28, 1999 and $948 in the fiscal year ended August 29, 1998. Such
payroll expenses are included in selling, general and administrative expenses.
The Private Company has stated that, if a settlement is not consummated, it may
assert claims of approximately $1,200 against the Company for various additional
amounts owed from prior years. The Company believes the claims are either
without merit or would be exceeded by the amount of counter-claims the Company
would make under such circumstances.
The Company has granted the Private Company a perpetual, royalty-free
license to use and to sublicense and franchise the use of trademarks in the
State of New York. The license is exclusive in such territory, subject to
certain exceptions. See note 9 with respect to certain limited partnership
interests owned by the Private Company.
A director (and stockholder) of the Company received approximately
$153, $154, and $164 in legal fees in the fiscal years ended in 1999, 1998, and
1997, respectively.
See Note 5 for transactions with Klaussner.
(4) STORE FIXTURES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
August 28, August 29,
1999 1998
-------- ---------
Automobiles $ 58 $ 58
Store fixtures and furniture 6,134 6,047
Leasehold improvements 6,762 6,325
Computer equipment 1,551 1,476
-------- ---------
14,505 13,906
Less: Accumulated depreciation
and amortization (9,128) (7,759)
-------- ---------
$ 5,377 $ 6,147
======== =========
At August 28, 1999 and August 29, 1998, computer equipment includes
$1,301 and $1,289, and accumulated depreciation and amortization includes $981
and $794, respectively, of equipment under capital leases.
F13
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 1999, August 29, 1998 and August 30, 1997
(In thousands except for share amounts)
(5) TRANSACTIONS WITH KLAUSSNER:
The Company and Klaussner have executed a Credit and Security
Agreement that provides that Klaussner effectively extend the payment terms for
merchandise shipped from 60 days to 81 days and provides Klaussner with a
security interest in all the Company's assets including accounts receivable,
inventory, store fixtures and equipment, as well as the assignment of
leaseholds, trademarks and a license agreement to operate the Company's business
in the event of default and non-payment. The Company has agreed to pay Klaussner
a late payment fee of .67% per month times the sum of all invoices outstanding
for more than 60 days at each month end. At August 28, 1999 and August 29, 1998,
the Company owed Klaussner $10,620 and $10,078, respectively, no portion of
which exceeded the 60 day payment terms.
Allowances of $1,889 (1999), $1,694 (1998) and $2,241 (1997) were
obtained from Klaussner, of which $1,889, $1,694 and $1,166, respectively,
reduced cost of goods sold and in fiscal 1997, $1,075 reduced selling, general
and administrative expenses.
On December 11, 1997, the Company sold to Klaussner 10,000 shares of
Series A Preferred Stock for $5,000. These shares are non-voting, have a
liquidation preference of $5,000, do not pay dividends (except if declared on
the common stock) and are convertible (as of September 1, 1999) into 1,424,500
shares of the Company's common stock. In addition, as long as Klaussner owns at
least 10% of the Company's outstanding common stock, assuming conversion, it has
the right of first refusal to purchase any common stock or equivalents to be
sold by the Company at less than $3.51 per share.
On December 8, 1999, Klaussner entered into an agreement with the
Company in which it agreed, subject to certain conditions, to loan $150 for each
new store approved by Klaussner. The agreement provides that the maximum
aggregate amount of the loans will be $1,500 (10 stores). Each such loan will be
evidenced by a three year note, bearing interest at the then LIBOR rate for
three month loans plus 3%. Payment of the notes may be accelerated under certain
conditions, including the closing of the store funded by the related loan or if
the Company is not purchasing at least 50% by dollar volume of their upholstered
furniture from Klaussner. As additional consideration, the Company has agreed to
pay an additional premium on furniture purchased from Klaussner to satisfy
orders originating from new stores funded by these loans. Such premium would be
3% of the customary cost of such merchandise until the note is paid in full and
would decrease to 2% for the 10 years after the note is paid. Such premium
payments would cease after such 10 year period.
F14
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 1999, August 29, 1998 and August 30, 1997
(In thousands except for share amounts)
In addition, on December 8, 1999, Klaussner granted to the Chief
Executive Officer an option to purchase 2,106 shares of preferred stock owned by
Klaussner. Such shares are convertible into 300,000 shares of the Company's
common stock. The exercise price of the option is $5.00 per share of such
underlying common stock. The option is exercisable until August 31, 2004, unless
terminated earlier by certain events, including termination of employment.
(6) INCOME TAXES
Components of income tax expense are as follows:
Year Ended
--------------------------
8/28/99 8/29/98 8/30/97
------- ------- -------
Current:
Federal $ -- $ -- $ --
State 403 120 95
Deferred:
Federal -- -- --
State -- -- --
----- ----- -----
$ 403 $ 120 $ 95
===== ===== =====
Expected tax expense (benefit) based on the statutory rate is
reconciled with actual tax expense (benefit) as follows:
Percent of Pre-Tax Earnings (Loss)
Year Ended
----------------------------------
8/28/99 8/29/98 8/30/97
------- ------- -------
"Expected" tax expense (benefit) 34.0% 34.0% (34.0)%
Increase (reduction) in taxes
resulting from:
State income tax, net of federal
income tax benefit 34.4% 36.8% 2.0%
Non-deductible items 6.8% 25.5% 1.7%
Disallowances pursuant to:
Revenue Agents Report -- 90.6% --
Other 1.1% 1.3% 2.0%
(Decrease)increase in
valuation allowance (24.2)% (131.1)% 31.3%
------ ------ ------
52.1% 57.1% 3.0%
====== ====== ======
F15
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 1999, August 29, 1998 and August 30, 1997
(In thousands except for share amounts)
The principal components of deferred tax assets, liabilities and the
valuation allowance are as follows:
August 28, 1999 August 29, 1998
--------------- ---------------
Deferred tax assets:
Federal and state net operating
loss carryforwards $ 5,753 $ 5,200
Reserve for losses on loans and
advances 2,727 2,341
Accrued partnership losses 41 997
Deferred rent expense 1,231 1,221
Inventory capitalization 253 267
Other expenses for financial
reporting, not yet deductible
for taxes 506 540
-------- --------
Total deferred tax assets, before
valuation allowance 10,511 10,566
Less: Valuation allowance (8,832) (9,019)
-------- --------
Total deferred tax assets $ 1,679 $ 1,547
======== ========
Deferred tax liabilities:
Difference in book and tax basis
of fixed assets $ 1,552 $ 1,470
Other 127 77
-------- --------
Total deferred tax liabilities 1,679 1,547
-------- --------
Net deferred tax assets $ -0- $ -0-
======== ========
A valuation allowance has been established to offset a portion of the
deferred tax asset as the Company has not determined that it is more likely than
not that the available net operating loss carryforward or deductible termporary
differences will be utilized. During the years ended August 28, 1999, August 29,
1998 and August 30, 1997, the valuation allowance (decreased) increased by
$(187), ($282), and $960, respectively.
As of August 28, 1999, the Company has a net operating loss
carryforward of approximately $14,000, expiring $4,000 in the year 2010, $7,000
in the year 2011, $1,000 in the year 2012 and $2,000 in the year 2018.
F16
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 1999, August 29, 1998 and August 30, 1997
(In thousands except for share amounts)
(7) ACQUISITION
In July, 1991, the Company entered into agreements pursuant to which a
limited partnership, Jennifer Chicago, L.P. (the "Chicago Partnership"), was
established for the purpose of operating Jennifer Convertibles stores in the
Chicago, Illinois metropolitan area. Pursuant to a 20-year License Agreement,
the Company received a royalty of 5% of sales from the Chicago Partnership's
stores and gave the Chicago Partnership the exclusive right to open Jennifer
Convertibles stores in the defined territory.
Pursuant to the Partnership Agreement, the limited partner contributed
$990 to the Partnership and agreed to make additional capital contributions of
up to $100. The Company, as general partner, made a capital contribution of $10.
Under the Partnership Agreement, allocations and distributions were, subject to
certain exceptions, made 99% to the limited partner and 1% to the General
Partner. The Company has consolidated and recorded the operating losses of the
Partnership in excess of the limited partner's capital contributions in the
Consolidated Statements of Operations (see Note 1). Under a Purchase Option
Agreement, the Company had the right to purchase all the limited partners'
interests in the Partnership for a price equal to the fair market value thereof,
as determined by one or more investment bankers selected by the Company and the
limited partners. Also, the limited partner could put its interest to the
Private Company if certain executives of the Company and the Private Company
owned less than 700,000 shares of the Company's common stock.
On August 20, 1999, the Company purchased the limited partner's
interest in the Chicago Partnership, and options, which were due to expire in
2001, to purchase 1,200,000 shares of common stock (held by a former consultant
of the Company who is related to the limited partner) at $8.00 per share. The
aggregate purchase price for the partnership interests and options was $699. The
purchase price was paid, $252 in cash on September 1, 1999 and the balance of
$447 by issuance of a note bearing interest at 3% over prime and payable in two
installments of $223 on February 1, 2000 and September 1, 2000. The portion of
the purchase price ($624) allocated to the purchase of the limited partnership
interest was charged to goodwill and the portion ($75) allocated to the purchase
of the option was charged to additional paid-in capital.
F17
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 1999, August 29, 1998 and August 30, 1997
(In thousands except for share amounts)
(8) STOCK OPTION PLANS
In November 1986, the Company adopted an Incentive and Non-Qualified
Stock Option Plan (the "1986 Plan") under which 150,000 shares of Common Stock
were reserved for issuance to selected management and other key employees of the
Company. The Amended and Restated 1991 Incentive and Non-Qualified Stock Option
Plan (the "1991 Plan" and together with the 1986 Plan hereinafter referred to as
the "Plans") was adopted by the Company in September 1991 and amended in April
1992. Under the 1991 Plan, 700,000 shares of Common Stock were reserved for
issuance to selected management and other key employees of the Company. The
terms of both Plans are substantially similar. The exercise price with respect
to qualified incentive options may not be less than 100% of the fair market
value of the Common Stock at the date of grant.
From time to time, the Company grants additional stock options outside
of the Plans to individuals or entities in recognition of contributions made to
the Company.
Additional information with respect to the Company's stock options
under and outside the Plans is as follows:
Options Exercisable Options
----------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Number of Price Number of Price
Shares Per Share Shares Per Share
--------- ----------- ----------- ---------
Outstanding at 8/31/96 811,547 $ 6.80 706,883 $ 7.07
=========== =========
Granted 732,000 $ 2.00
Canceled (264,500) $ 8.00
Expired (50,000) $ 2.75
--------- -----------
Outstanding at 8/30/97 1,229,047 $ 3.99 480,381 $ 7.07
=========== =========
Granted 143,000 $ 2.31
Canceled (13,667) $ 2.00
--------- -----------
Outstanding at 8/29/98 1,358,380 $ 3.84 738,670 $ 5.33
=========== =========
Exercised (3,333) $ 2.00
Canceled (1,000) $ 2.00
Expired (50,000) $ 5.00
--------- -----------
Outstanding at 8/28/99 1,304,047 $ 3.80 970,661 $ 4.39
========= =========== =========== =========
The number of shares of Common Stock reserved for options available
for grant under the Plans was 26,953 at August 28, 1999. The weighted average
remaining contractual life of the outstanding options is 6.7 years.
F18
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 1999, August 29, 1998 and August 30, 1997
(In thousands except for share amounts)
In May 1997, the Company adopted the 1997 Stock Option Plan (the "1997
Plan") under which 500,000 shares of common stock were reserved for issuance.
The Company applies APB No. 25 in accounting for its stock option
plan, which requires the recognition of compensation expense for the difference
between the fair value of the underlying common stock and the grant price of the
option at the grant date. Had compensation expense been determined based upon
the fair value of the options at the grant date, as prescribed under SFAS No.
123, the Company's net income (loss) would have been as follows:
1999 1998 1997
----- ----- -------
Net Income (Loss):
As reported $ 370 $ 90 $(3,061)
Pro forma under SFAS 123 $ 81 $(181) $(3,141)
Basic income (loss) per share:
As reported $0.06 $ 0.02 $ (0.54)
Pro forma under SFAS 123 $0.01 $(0.03) $ (0.55)
Diluted income (loss) per share:
As reported $0.05 $ 0.01 $ (0.54)
Pro forma under SFAS 123 $0.01 $(0.03) $ (0.55)
The weighted average fair value on the date of grant of options
granted is estimated at $1.03 in 1998 and $1.22 in 1997 using the Black-Scholes
option-pricing model with the following weighted average assumptions:
1998 1997
----- -------
Risk-free interest rate 5.76% 6.95%
Expected life of options 5 5
Expected stock price volatility 44% 69%
Expected dividend yield 0% 0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options.
F19
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 1999, August 29, 1998 and August 30, 1997
(In thousands except for share amounts)
(9) COMMITMENTS AND OTHER
LEASES
The Company and LP's lease retail store locations under operating
leases for varying periods through 2013 which generally are renewable at the
option of the lessee. Certain leases contain provisions for additional rental
payments based on increases in certain indexes. Future minimum lease payments
for all non-cancelable leases with initial terms of one year or more consisted
of the following at August 28, 1999:
Year Ending August
------------------------------------
2000.........................$12,290
2001......................... 11,716
2002......................... 11,122
2003......................... 9,249
2004............. ........... 6,922
Thereafter................... 9,729
-------
$61,028
=======
Rental expense for all operating leases amounted to approximately
$13,661, $13,559, and $13,657 net of sublease income of $184, $222, and $166 for
the years ended August 28, 1999, August 29, 1998 and August 30, 1997,
respectively.
The Company and LP's have long-term capital leases for certain
equipment. The leases are for periods of three to five years with an option to
purchase at the end of the lease periods for a nominal price.
CERTAIN LIMITED PARTNERSHIP AGREEMENTS
In 1992, the Company entered into three additional Limited Partnership
Agreements (the "Agreements") establishing LP's III, IV and V which required the
limited partners to invest $1,000 in each partnership. The Agreements called for
the opening of 25 Jennifer Convertible stores in each partnership. Under the
terms of the Agreements, the Company was to receive a fee of $10 per store, plus
a royalty of 5% of the partnership's sales. The Company has recorded the
operating losses of the LP's in excess of the limited partners capital
contributions in the Consolidated Statements of Operations (see Note 1). As part
of the Agreements, the Company received options to purchase the limited
partners' interest commencing January 1999 at a price of five times the
partnership's earnings before income taxes for the prior year, as defined. Also,
pursuant to the agreement, the limited partners can put their interest to the
Company for either 100,000 shares of stock of the Company or $1,000 compounded
at 25% if there is a change in management, as defined, through the year 2002.
F20
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 1999, August 29, 1998 and August 30, 1997
(In thousands except for share amounts)
On December 31, 1996, the Private Company acquired the limited
partners' interests in these partnerships.
LETTERS OF CREDIT
In May 1999, a $200 standby letter of credit was issued on behalf of
the Company to an institution that provides a new private label credit card
program. Such letter of credit is secured by $200 in an interest bearing money
market account. The new private label credit card program requires the Company
to issue an additional $1,000 in standby letters of credit on various dates to
May 29, 2000. The Private Company is participating in this program and has
provided $50 of the $200 referred to above and has agreed to provide 25% of all
cash needed to fund future standby letters of credit. Such letters of credit
will be terminated when the Company achieves certain specified levels of
profitability.
EMPLOYMENT AGREEMENTS
On August 15, 1999, the Chief Executive Officer of the Company entered
into a five-year employment agreement with a base salary of $400 per annum. The
agreement provides for bonuses based on earnings and revenues.
On August 15, 1999, the President and Chief Operating Officer of the
Company entered into a five year employment agreement with a base salary of $400
per annum for the first three years and $500 per annum thereafter. The agreement
provides for bonuses based on earnings and revenues and also provides for a
grant of options to acquire 300,000 shares of common stock at an exercise price
of $3.51 per share (which exceeded the fair market value at date of grant)
vesting over three years. Such options were granted during fiscal 2000.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The components of accrued expenses and other current liabilities are:
8/28/99 8/29/98
------- -------
Advertising $ 1,182 $ 1,334
Payroll 887 859
Legal 184 93
Accounting 178 260
Store closings 70 279
Litigation settlement costs 279 500
Sales tax 505 542
Warranty 404 304
Other 758 1,021
------- -------
$ 4,447 $ 5,192
======= =======
F21
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 1999, August 29, 1998 and August 30, 1997
(In thousands except for share amounts)
(10) CLAIMS AND LITIGATION
CONCLUSIONS OF THE INDEPENDENT COMMITTEE
A draft complaint ("Complaint") on behalf of an unnamed plaintiff was
delivered to the Company in March 1994. The Complaint raised certain issues and
potential causes of action that may exist in favor of the Company against the
Private Company and others. The Company's President advised the Board of
Directors that, in his view, the Complaint was without merit. The Board
appointed an independent committee (the "Committee") consisting of one director
to investigate the allegations in the Complaint and certain other matters.
On November 22, 1994, the same director who was on the Committee
submitted a letter to the President of the Company which contained information
relevant to the (1) funding of Southeastern Florida Holding Corporation
(S.F.H.C.) which is an Unconsolidated Licensee and (2) the funding of Limited
Partnerships (LP's) III through V. The letter essentially detailed the flow of
funds from the Private Company, certain Unconsolidated Licensees and the Company
to S.F.H.C. and its subsidiary ("Summit"). Additionally, it disclosed that as of
August 27, 1994, S.F.H.C. had a receivable from officers of $1,861. It asserted
that neither (a) the payment to fund S.F.H.C.'s purchase of the stock of Summit
nor (b) the capital contributions to LP's III through V were obtained from
sources outside the Company or the Private Company.
On December 2, 1994, the Board of Directors of the Company received
the Summary Report of Counsel to the Independent Committee which, among other
matters, concluded that it "has reviewed many significant related party
transactions and recommends to the Board that the Company assert claims to
recover damages for harm caused the Company". On January 26, 1995, the Board of
Directors received the "Final Report of Counsel to the Independent Committee of
the Board of Directors" which reached the same conclusions and recommendations.
On March 10, 1995, the Board of Directors received the "Response of
Harley Greenfield (Chief Executive Officer of the Company and one of the
co-founders of the Private Company) to the January 26, 1995 Final Report of
Counsel to the Independent Committee" that asserted that there were no valid
claims. On April 3, 1995, it received a similar response from a financial
consultant to the Company to the letter dated November 22, 1994, referred to
above, that asserted that there was nothing improper.
The Company is negotiating a settlement of these claims together with
a settlement of the derivative litigation referred to below, however, the
ultimate outcome of these matters is not presently determinable (see Note 3 for
potential asserted claims by the Private Company).
F22
CLASS ACTION AND DERIVATIVE ACTION LAWSUITS
Between December 6, 1994 and January 5, 1995, the Company was served
with eleven class action complaints and six derivative action lawsuits which
deal with losses suffered as a result of the decline in market value of the
Company's stock as well as the Company having "issued false and misleading
statements regarding future growth prospects, sales, revenues and net income".
On November 30, 1998, the court approved the settlement of the class
action litigation. The settlement provided for the payment to certain members of
the class and their attorneys of an aggregate maximum amount of $7,000 in cash
and Preferred Stock having a value of $370. The cash portion of the settlement
was funded entirely by insurance company proceeds. The Company issued 26,664
shares of Series B Preferred Stock, convertible into 18,664 shares of the
Company's common stock, based on valid proofs of claims actually filed. These
shares are non-voting, have a liquidation preference of $5.00 per share ($133)
and accrue dividends at the rate of $.35 per share per annum (cumulative unpaid
dividends of $7 at August 28, 1999). The preferred stock is convertible at the
option of the Company at anytime after the common stock trades at a price of at
least $7.00 per share. Estimated settlement costs had been accrued in a prior
year and, accordingly, $110 of the excess of the accrual relating to both the
class and the derivative actions has been credited to other income, net in the
year ended August 28, 1999 and the $279 balance of the accrual is included in
accrued expenses for estimated remaining legal fees in connection with the
derivative litigation.
The Company had entered into settlement agreements as to the
derivative litigation, subject, in the case of certain of such agreements, to
court approval of such settlement by a certain date. Such court approval was not
obtained by such date. The Company and the Private Company are negotiating with
respect to a new settlement. There can be no assurance that a settlement will be
reached or as to the terms of such settlement.
A group of shareholders claiming to own approximately 8.5% of the
outstanding shares of the Company have filed (as a group) objections to the
fairness of the previously proposed settlement agreements. The group has
requested deposition and document discovery in advance of any hearing on the
fairness of any settlement, and the Company has provided some document and
deposition discovery voluntarily. However, the group of objectors has made a
motion for additional discovery which the Company has opposed. The motion is
still pending. The ultimate outcome of the derivative litigation is not
presently determinable.
F23
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
On December 9, 1994, the Company was advised that the Securities and
Exchange Commission (SEC) was conducting an inquiry of the Company's affairs "to
determine whether there have been violations of the federal securities laws". On
May 3, 1995 the SEC commenced a formal investigation into the affairs of the
Company. On September 23, 1998, the Company was advised by the SEC that the
formal investigation had been terminated and that no enforcement action had been
recommended.
F24