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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission File number 1-9681
August 26, 2000
JENNIFER CONVERTIBLES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2824646
(State or other jurisdiction (I.R.S.Employer
of incorporation or organization) Identification No.)
419 Crossways Park Drive
Woodbury, New York 11797 5712
(Address of principal executive office) (Primary Standard Industrial
classification Code Number)
Registrant's telephone number, including area code (516) 496-1900
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01
(Title of class)
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant=s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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, 16 2000: $ 13,547,138
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 16, 2000:
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
identification purposes (e.g., annual report to security
holders for fiscal year ended December 24, 1980).
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
2
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
stores located throughout the Eastern seaboard, in the
Midwest, on the West Coast and in the Southwest. As of August
26, 2000, our stores include 160 Jennifer Convertibles stores
and 16 Jennifer Leather stores. Of these 176 stores, we
owned 102 and licensed 74, including 25 owned or operated by
a related private company.
Jennifer Convertibles stores specialize in the retail
sale of a complete line of sofabeds. Additionally, the
Company sells sofas and companion pieces, such as loveseats,
chairs and recliners, in both fabric and leather, 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 sofabeds in the United States. Each of our stores has a
kiosk devoted to mattresses. The private label Jennifer
Leather stores specialize in the retail sale of leather
living room furniture. 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 at each Jennifer Convertibles retail
location with cocktail tables and other accessories. In
contrast to certain of our competitors that primarily target
particular segments of the market, we attempt to attract
customers covering the broadest 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 private label "Bellissimo
Collection" brand name for leather merchandise.
3
Although each style of sofabed, loveseat, sofa, chair and
recliner is generally displayed at Jennifer Convertibles
stores in one color of fabric, samples of the other available
colors and fabrics or leathers 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 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 28 Jennifer Convertibles stores, 25 of
which it owns and three of which it licenses or manages.
We do not own or collect any royalties from the 25 owned
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 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
salespeople, 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 official, upon delivery
of the merchandise. The balance of the purchase price is
collected by the independent trucker making the delivery.
4
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
Obtaining attractive, high-traffic favorable store
locations is 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
broker 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.
5
In fiscal 2000, we closed no stores, we opened 12 new stores
and in 16 locations where a Jennifer Convertible and a
Jennifer Leather store were adjacent, we combined the stores
to eliminate certain duplicative expenses. We will continue
to selectively close and merge stores where the economics so
dictate and we plan to aggressively open additional stores
when 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 brand name. Sealy brand name
sofabeds are our largest selling brand name item and we
believe Sealy 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 sofabed dealer in the United States.
During the fiscal year ended August 26, 2000, we
purchased approximately 77% of our merchandise from
Klaussner. Leather furniture is purchased primarily from
Klaussner, Italdesign, Natale, 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 1998, 1999, and 2000, Klaussner gave us
certain vendor credits for repairs. In addition, in December
1999, Klaussner agreed to loan us $150,000 per store to fund
the addition of up to 10 new stores, which as of November 15,
2000, we have not drawn on. 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". 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. 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 and may include options on
the
6
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.
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 had
been paying the private company for freight charges based on
quoted freight rates for arranging delivery of our
merchandise up until April 2000 at which time we assumed
responsibility for freight. See "Certain Relationships and
Related Transactions."
Trademarks
The trademarks Jennifer Convertibles, Jennifer Leather,
Jennifer House, With a Jennifer Sofabed, There's Always
a Place to Stay,
7
Jenni-Pedic, Elegant Living, Jennifer's Worryfree Guarantee,
Jennifer Living Rooms and Bellissimo Collection 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 26, 2000, we employed 429 people, including
five 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 26, 2000, the LP's and we lease all of our
store locations pursuant to leases which expire between 2000
and 2013. During fiscal 2001, five leases will expire,
although we, as the lessee, have the 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.
8
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 26, 2000 totaled
$16,332. The preferred stock is convertible at our option at
any time after the common stock trades at a price of at least
$7.00 per share.
The Derivative Litigation
Beginning in December 1994, a series of six actions were
commenced as derivative actions on our behalf, against
Harley J. Greenfield, Fred J. Love, Edward B. Seidner,
Bernard Wincig, Michael J. Colnes, Michael Rosen, Al Ferarra,
William M. Apfelbaum, Glenn S. Meyers, Lawrence R. Haut, the
private company, Jerome I. Silverman, Jerome I. Silverman
Company, Selig Zises and BDO Seidman & Co.1 in: (a) the United
States District Court for the Eastern District of New York,
entitled Philip E. Orbanes V. Harley J. Greenfield, et al.,
Case No. CV 94-5694 (DRH) and Meyer Okun and David Semel V. Al
Ferrara, et al., Case No. CV 95-0080 (DRH); Meyer Okun
Defined Benefit Pension Plan, et al. V. Bdo Seidman & Co.,
Case No. CV 95-1407 (DRH); and Meyer Okun Defined Benefit
Pension Plan V. Jerome I. Silverman Company, et. al., Case
No. CV 95-3162 (DRH); (b) the Court of Chancery for the
County of New Castle in the State of Delaware, entitled
Massini V. Harley Greenfield, et. al., Civil Action No. 13936
(WBC); and (c) the Supreme Court of the State of New York,
County of New York, entitled Meyer Okun Defined Benefit
Pension Plan V. Harley J. Greenfield, et. al., Index No.
95-110290.
1 Each of these individuals and entities is named as a
defendant in at least one action.
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.
9
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 26, 2000 and August 28, 1999
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 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
High Low
Fiscal Year 2000:
1st Quarter..................... $2 3/16 $1 1/2
2nd Quarter..................... 2 9/16 2
3rd Quarter..................... 2 1/2 2
4th Quarter..................... 2 1/2 2
As of November 16, 2000, there were approximately 229
holders of record and approximately 1,510 beneficial owners
of our common stock. On
10
November 15, 2000, the closing bid and asked prices of the
common stock as reported on the NASDAQ Bulletin Board were
$2.19 and $2.31, 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.
11
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 Year Year Year Year
Ended Ended Ended Ended Ended
8/26/00 8/28/99 8/29/98 8/30/97 8/31/96
Net sales $123,713 $109,284 $111,541 $97,789 $106,041
Cost of sales, including
store occupancy,
warehousing, delivery
and fabric protection 78,323 71,607 74,054 67,114 72,708
Selling, general and 38,645 35,890 35,984 32,904 37,618
administrative expenses
Depreciation and amortization 1,691 1,668 1,727 1,840 1,852
(Recovery) provision for
losses on amounts due from
Private Company 107 (42) (196) (426) 952
Loss from store closings 10 (9) 355 55 191
118,776 109,114 111,924 101,487 113,321
Operating income (loss) 4,937 170 (383) (3,698) (7,280)
Other income (expense):
Royalty income 259 388 386 374 375
Interest income 358 171 108 67 195
Interest expense (82) (106) (172) (28) (47)
Other income, net 112 150 271 319 880
647 603 593 732 1,403
Income (loss) before income 5,584 773 210 (2,966) (5,877)
taxes
Income taxes 804 403 120 95 146
Net income (loss) $4,780 $370 $90 ($3,061) ($6,023)
Basic income (loss) per share $0.84 $0.06 $0.02 ($0.54) ($1.06)
Diluted income (loss) per
share $0.66 $0.05 $0.01 ($0.54) ($1.06)
Weighted average common
shares outstanding
basic income (loss) per
share 5,704,058 5,701,559 5,700,725 5,700,725 5,700,725
Effect of potential common
shares issuances:
Stock options 63,300 22,077 32,641 - -
Convertible preferred
stock 1,443,165 1,430,722 1,068,375 - -
Weighted average common
shares outstanding
diluted income (loss)
per share 7,210,523 7,154,358 6,801,741 5,700,715 5,700,715
Cash Dividends - - - - -
Store 8/26/00 8/28/99 8/29/98 8/30/97 8/31/96
data:
Company-owned stores open
at the end of period 102 84 82 84 86
Consolidated licensed stores
open at the end of period 46 62 62 63 64
Licensed stores not
consolidated open at
end of period 3 9 11 11 11
Total stores open at end of 151 155 155 158 161
period
Balance Sheet Date: 8/26/00 8/28/99 8/29/98 8/30/97 8/31/96
Working capital (deficiency) ($6,445) ($10,581) ($11,110) ($17,258) ($15,757)
Total assets 30,992 26,145 24,099 22,998 25,435
Long-term obligations 0 63 49 421 230
Total liabilities 34,248 34,181 32,547 36,365 35,741
(Capital deficiency) ( 3,256) (8,036) (8,448) (13,367) (10,306)
(Capital deficiency) per
share ($0.57) ($1.41) ($1.48) ($2.34) ( $1.81)
share
12
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, including those under the caption "Risk Factors"
herein, 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. We also have specialty retail stores that
specialize in the sale of leather furniture. In addition, we
have stores that sell both fabric and leather furniture.
Results of Operations
Fiscal year ended August 26, 2000 compared to fiscal year
ended August 28, 1999:
Net sales increased by 13.2% to $123,713,000 for the
fiscal year ended August 26, 2000 as compared to $109,284,000
for the fiscal year ended August 28, 1999. Comparable store
sales (sales at those stores open for the full year in the
current and prior fiscal year) increased by 9.1%. On March
23, 2000, we purchased the stock of the previously
unconsolidated licensee known as Southeastern Florida Holding
Company. The acquisition added six owned stores in Florida
with sales, from March 24, 2000 through August 26, 2000, of
$2,804,000. We opened 12 stores during the fiscal year ended
August 26, 2000 whose total sales were $1,750,000.
Cost of sales decreased by 2.2% as a percentage of
sales to $78,323,000 for the fiscal year ended August 26,
2000 from $71,607,000 for the fiscal year ended August 28,
1999. Cost of sales as a percentage of sales was 63.3% in
fiscal 2000, which declined from 65.5% in the prior year.
The percentage decrease of 2.2% is primarily attributable
to:
* Merchandise purchase cost reductions of .9% as a
percentage of sales.
* Occupancy costs decreases of .3% as a percentage of
sales, due to higher sales volume.
* Guarantee and redelivery fee income increases .4% as a
percentage of sales.
13
In addition, cost of sales was favorably impacted by an
agreement with the private company that stores opened
subsequent to June 1, 1999 would not be charged with the 5%
warehousing fee and from a full years benefit of an amendment
to the warehousing agreement entered into in February 1999.
Included in cost of sales are charges from the private
company for warehouse expenses of $4,112,000, fabric
protection services of $2,300,000 and freight of $1,282,000.
This compared with $4,262,000, 2,292,000 and $2,363,000,
respectively, in the previous year.
Selling, general and administrative expenses were $
38,645,000 (31.2% as a percentage of sales) for the fiscal
year ended August 26, 2000 as compared to $35,890,000 (32.8%
as a percentage of sales) for the fiscal year ended August
28, 1999, a decrease of 1.6% as a percentage of sales. The
most significant reason for the decrease in selling, general
and administrative expenses, as a percentage of sales, was the
ability to spread fixed cost dollars in corporate office
expenses and base salaries over the higher sales volumes.
Our receivables from the private company
($7,924,000) increased in the aggregate by $86,000 in the
fiscal year ended August 26, 2000. In connection with
the uncertainty of collectibility and the relationship
between the private company and us, we account monthly for
transactions 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 the private company prior to the issuance of
our financial statements. We believe the private company has
losses and/or capital deficiencies and, accordingly, we have
fully reserved uncollected amounts which totaled
$6,430,000 at August 26, 2000.
Interest income increased by $187,000 to $358,000 for
the fiscal year ended August 26, 2000 as compared to the
prior year. The increase is due to more available cash to
invest and higher returns on investments.
Net income in the fiscal years ended August 26, 2000
and August 28, 1999 was $ 4,780,000 and $370,000,
respectively, an increase of income of $4,410,000. The primary
reason for the significant improvement is better
management of expenses, higher sales volume and lower cost of
sales.
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%.
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 the fiscal year
14
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 and the
unconsolidated licensees increased in the aggregate by
$399,000 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, the Private Licenses, 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 $6,654,000 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.
Liquidity and Capital Resources
As of August 26, 2000, we had an aggregate working
capital deficiency of $6,445,000 compared to a deficiency
of $10,581,000 at August 28, 1999 and had available cash and
cash equivalents and commercial paper of $9,409,000 compared
to $6,907,000 at August 28, 1999. The decrease in working
capital deficiency is primarily due to $5,168,000 of net cash
provided from operating activities, partially offset by
$1,130,000 of capital expenditures and $780,000 used in the
acquisition of Southeastern Florida Holding Company. 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.
15
We are continuing to fund the operations of the LP's, some of
which continue to generate operating losses. All such
losses have been consolidated in our consolidated
financial statements. It is our intention to continue to fund
these operations in the future. Our receivables from the
private company have been substantially reserved. There can
be no assurance that the total reserved amount of
receivables of $6,430,000 as of August 26, 2000 will be
collected. Starting in 1995, the private company and we
entered into offset agreements that permit the two
companies to offset their current monthly obligations
amounts in excess of $1,000,000 are paid in cash .
Additionally, as part of such agreements, the private
company in November 1995 agreed to assume certain liabilities
owed to us by the unconsolidated licensees. Current
obligations of the private company as of August 26, 2000 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 February 1999, we have not exceeded
these 80 day payment terms . As of August 26, 2000, 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.
In fiscal 1999 and 1998, the LP's and we closed an
aggregate of four stores. In fiscal 2000, we closed no
stores, we opened 12 new stores and in 16 locations where a
Jennifer Convertible and Jennifer Leather store were adjacent,
we combined stores. The primary benefit of combining both
operations into one store was an elimination of certain
operating 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 26, 2000 and August
28, 1999, we together spent $1,130,000 and $743,000, for
such years, for capital expenditures. We currently anticipate
capital expenditures approximating $1,500,000 during fiscal
2001 to support the opening of new stores during the next
fiscal year. A portion of our store openings may be funded
by Klaussner pursuant to an agreement, entered into in
December 1999, pursuant to which Klaussner agreed, subject
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 or if we
are not 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.
16
Inflation
There was no significant impact on the Company's
operations as a result of inflation during the three fiscal
years ended August 26, 2000.
17
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 $4,780,000 and $370,000 in the
fiscal years ended August 26, 2000 and August 28, 1999,
respectively. We achieved a net profit of $90,000 in the
fiscal year ended August 29, 1998. 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
$3,256,000 as of August 26, 2000. 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 conflict 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
18
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 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_ brand name. During the fiscal year ended August 26,
2000, 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 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 resources.
We may have difficulty obtaining additional financing
Our ability to expand and support our business may
depend upon
19
our ability to obtain additional financing. We may have
difficulty
obtaining debt 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 16, 2000, Harley J. Greenfield, our
Chairman of the Board and Chief Executive Officer and
principal stockholder, beneficially owns approximately 9.4%
of our outstanding shares of common stock. Approximately 28.5%
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.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
20
PART III
Item 10. Our Directors and Executive Officers.
The names and ages of our directors and our executive
officers as of November 16, 2000 are as follows:
Position(s) with the
Name Age Company
Harley J.
Greenfield 56 Director, Chairman of the Board and
Chief Executive Officer
Edward G. Bohn 55 Director
Kevin J. Coyle 55 Director
Edward B.
Seidner 48 Director and Executive Vice President
Bernard Wincig 69 Director
Rami Abada 41 Director, President, Chief Operating
Officer and Interim Chief Financial
Officer
Leslie Falchook 40 Senior Vice President - Administration
Kevin Mattler 42 Senior 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
2000 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 26, 2000, consisted of Messrs.
Greenfield and Seidner. The Stock Option Committee had four
meeting during the 2000 fiscal year. The Stock Option
Committee is authorized to administer our stock option plans.
The Board of Directors has an Audit and Monitoring
Committee, which, during the fiscal year ended August 26,
2000, consisted of Bernard Wincig, Edward Bohn and Kevin
Coyle. During such fiscal year, the Audit and Monitoring
Committee held two 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.
21
Set forth below is a biographical description of each of
our directors and executive officers as of November 15, 2000.
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 Sales 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 has been a certified
public accountant specializing in litigation support since
1972. Also, since January 2000, Mr. Coyle is 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. Mr. 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.
22
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.
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.
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 26, 2000, August 28, 1999 and
August 29, 1998, 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 26, 2000 or (b) one
of our four other most highly compensated executive officers
at August 26, 2000 whose total annual salary and other
compensation exceeded $100,000.
23
Annual Compensation Long-term compensation
Awards Payouts
Restricted Securities
Other annual Stock underlying LTIP All other
Name and principal Salary Bonus compensation Awards options pay-outs compensation
Position Year ($) ($) ($) ($) /SARs(#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Harley J.
Greenfield, 2000 $385,000(1) $50,000(3) $192,500(1)(2) - $297,047 - $0(1)(2)(3)
Chairman of the
Board 1999 320,000 63,675 - - - - 0
And Chief
Exec. Officer 1998 320,000 - - - - -
Rami Abada, 2000 254,000(4) 50,000(6) 192,500(4)(2) - 300,000(4) - 0(2)(4)(6)
President, 1999 120,000 63,675 - - - - 0
Chief Operating1998 120,000 - - - 100,000(5) - 0
Officer & Interim
Chief Financial
Officer
Edward B.
Seidner, 2000 240,000 - - - - - 0
Executive Vice 1999 240,000 - - - - - 0
President 1998 240,000 - - - - - 0
Kevin Mattler, 2000 131,000 - - - - - 0
Senior Vice 1999 131,000 - - - - - 0
President- 1998 120,000 - - - - - 0
Store Operations
Ronald E. Rudzin,2000 120,000(8) - - - - - 0(8)
Senior Vice 1999 120,000 - - - - - 0
President 1998 120,000 - - - - - 0
Leslie Falhook 2000 116,000 - - - - - 0
Senior Vice 1999 116,000 - - - - - 0
President 1998 116,000 - - - - - 0
24
George J. Nadel 2000 0(7) - - - - - 0
Executive Vice 1999 225,000 - - - - - 0
President and 1998 225,000 - - - - - 0
Chief Operating
Officer
(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. We are providing Mr. Greenfield, at our own
expense, a split-dollar life insurance policy for his benefit
with a face amount equal to $6,000,000. The first yearly
premium is $111,000. We are entitled upon death or
termination of the policies to the lesser of cash value of the
policies or the sum of the cash value equal to the sum of our
contributions. Mr. Greenfield voluntarily reduced his annual
salary from March 2000 to March 2001 by $36,000 to defer part
of the costs for the split-dollar life insurance policy.
(2) Such amount was accrued with respect to fiscal 2000, but
not yet paid.
(3) On March 16, 2000, the Board of Directors approved a bonus
of $50,000 to Mr. Greenfield.
(4) 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. We are providing
Mr. Abada, at our own expense, a split-dollar life insurance
policy for his benefit with a face amount equal to $3,000,000.
The first yearly premium is $31,000. We are entitled upon
death or termination of the policies to the lesser of cash
value of the policies or the sum of the cash value equal to
the sum of our contributions. 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.
(5) 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.
(6) On March 16, 2000, the Board of Directors approved a bonus
of $50,000 to Mr. Abada.
(7) In September 1999, George J. Nadel, Executive Vice
President and Chief Financial Officer resigned his position
with the Company.
(8) In May 2000, Ronald E. Rudzin, Senior Vice President
resigned his position with the Company. He entered into a one
year consulting agreement for $120,000.
Non-employee directors currently receive a fee of
$10,000 per year, plus $500 per meeting attended which fees
amounted to an aggregate of $57,000 in fiscal 2000. Directors
are reimbursed for out-of-pocket
25
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 26, 2000, options to
purchase an aggregate of 830,047 shares of our common stock
were outstanding and under which options to purchase an
aggregate of 16,620 shares of common stock were
available for grant. In addition, options granted
outside of these plans to purchase an additional 775,000
shares of common stock were outstanding as of August 26,
2000. These plans are administered by a Stock Option
Committee consisting of two persons appointed by the Board
of Directors. Options outside of the Plans are administered
by the full Board of Directors. As of August 26, 2000, 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 of our common stock at
$3.51 per share, which exceeds the market value of the
common stock on the date of the grant.
In June 2000, Ed Bohn was awarded stock options to
purchase 25,000 shares of our common stock at $2.00 per share,
which was the market value of the common stock on the date of
the grant.
In June 2000, Kevin Coyle was awarded stock options to
purchase 25,000 shares of our common stock at $2.00 per share,
which was the market value of the common stock on the date of
the grant.
26
In June 2000 Bernard Wincig was awarded stock options to
purchase 25,000 shares of our common stock at $2.00 per share,
which was 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
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
August 26, 2000 August 26, 2000 (1)
Shares
Acquired on Value
Name Exercise(#) Realized Exercisable Unexercisable Exercisable Unexercisable
Harley J. Greenfield(2)(3) N/A N/A 0 297,047 $ 0 $56,439
Rami Abada (5) (6) (7) N/A N/A 200,000 300,000 44,000 0
Edward B. Seidner N/A N/A 0 0 0 0
Leslie Falchook (3) (4) N/A N/A 50,000 0 22,000 0
Kevin Mattler (3) (8) N/A N/A 50,000 0 22,000 0
(1) Amount reflects the market value of the underlying
shares of our common stock as reported on the
Bulletin Board on August 26, 2000, a bid price of $
2.44, less the exercise price of each option.
(2) Includes 297,047 options granted on August 10, 2000
at an exercise price of $ 2.25 per share.
(3) All options were granted at an exercise price equal to
the market value of the underlying common stock on
the date of grant.
(4) 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.
(5) Includes 100,000 options granted on May 6, 1997 to
Mr. Abada at an exercise price of $2.00 per share.
(6) Includes 100,000 options granted on December 3, 1997
to Mr. Abada at an exercise price of $2.44 per
share.
(7) Includes 300,000 options granted in November 2000 to
Mr. Abada at an exercise price of $3.51 per share,
which exceeds the market value of the common
stock on the date of the grant.
27
(8) Includes 50,000 options granted on May 6, 1997
to Mr. Mattler at an exercise price of $2.00 per
share.
28
GRAPH
29
JENNIFER CONVERTIBLES INC.
Beginning
Transaction Closing No. Of Dividend Dividend Shares Ending Cum. Tot.
Date* Type Price** Shares*** Per Share Paid Reinvested Shares Return
31-Aug-95 Begin 3.063 32.65 32.653 100.00
31-Aug-96 YearEnd 2.500 32.65 32.653 81.63
31-Aug-97 YearEnd 2.500 32.65 32.653 81.63
31-Aug-98 YearEnd 1.813 32.65 32.653 59.18
31-Aug-99 YearEnd 2.109 32.65 32.653 68.88
31-Aug-00 End 2.375 32.65 32.653 77.55
* 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.
30
JENNIFER CONVERTIBLES INC.
Cumulative Total Return
8/95 8/96 8/97 8/98 8/99 8/00
JENNIFER CONVERTIBLES, INC. 100 82 82 59 69 78
NASDAQ STOCK MARKET (U.S.) 100 113 157 149 276 422
S & P HOUSEHOLD FURNISHINGS &
APPLIANCES 100 102 130 151 221 131
31
Item 12. Security Ownership of Certain Beneficial Owners
and Management.
The following table sets forth, as of November 16,
2000, 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 2000 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:
Amounts and Nature of
Name and Address of Beneficial
Beneficial Owner Ownership (1) Percent of Class
Harley J. Greenfield (2) 438,289 (2)(3) 9.4%
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) 148,573 (9) 2.6
Edward G. Bohn (10) 25,000 (10) 0.4
Kevin J. Coyle (10) 31,250 (10) 0.5
Leslie Falchook (11) 77,600 (11) 1.4
Rami Abada (12) 253,000 (12) 4.4
Kevin Mattler (13) 50,000 (13) 0.9
Hans J. Klaussner and
Klaussner Furniture 1,424,500 (14) 19.9
Industries, Inc. (14)
All directors and executive
officers as a group 1,677,626 (2)(3)(4) 28.5
(eight (8) persons) (9)(10)(11)(12)(13)
32
(1) All of such shares are owned directly with sole voting
and investment power, unless otherwise noted below.
(2) The address of Messrs. Greenfield and Seidner is
c/o Jennifer Convertibles, 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) 300,000 shares of common stock
underlying options to acquire convertible preferred stock
granted to Mr. Greenfield by Klaussner. 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
33
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.
(9) Includes 8,800 shares of our common stock owned by
Mr. Wincig's wife and 29,000 shares of our common
stock underlying exercisable options. Does not
include 25,000 shares of our common stock
underlying options which have not yet vested.
34
(10) Includes, as to each individual, 25,000 shares
of our common stock underlying exercisable
options, but does not include 25,000 shares of
our common stock underlying options which are not
currently exercisable.
(11) Includes 50,000 shares of our common stock
underlying options which are currently
exercisable options.
(12) Includes 200,000 shares of our common stock
underlying options which are currently
exercisable options, but does not include 300,000
shares of our common stock underlying options
which are not currently exercisable.
(13) Includes 50,000 shares of our common stock
underlying exercisable options.
(14) 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 and10% 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 2000.
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
35
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
28, 1993, a corporation of which Messrs. Greenfield, Seidner
and Love each owned 33-1/3%, owned the trademarks "Jennifer
Convertibles" and "With a Jennifer Sofabed, There's Always
a Place to Stay." 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 26, 2000, 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 significant
amounts to the private company.
The License
Pursuant to a license agreement between the private
company and us, the private company has the perpetual,
royalty-free right to use, sublicense and franchise the use
of the trademarks "Jennifer Convertibles," with "Jennifer
Sofabeds, There's Always a Place to Stay" 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
36
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 was reimbursed by us and its licensees for the
freight charges on such deliveries at predetermined freight
rates up until April 2000, at which time the we assumed the
responsibility of arranging for delivery of all our freight.
The private company also provides fabric protection services,
including a life-time warranty, to our customers and our
licensees.
We retain approximately 2/3 of the revenues from
fabric protection and the warranty. During the fiscal year
ended August 26, 2000, the LP's and we paid warehouse fees
under an Offset Agreement dated March 1, 1996 to the
private company aggregating approximately $4,112,000.
During the fiscal year ended August 26, 2000, the LP's and
we also paid $1,282,000 under the Offset Agreement for freight
charges and $2,300,000 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
$3,000,000 through August 26, 2000. In December 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 26, 2000, the private
company purchased from us approximately $10,537,000 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.
As of August 26, 2000, the private company owed to us
$1,494,000 for current charges for fiscal 2000 under the
Offset Agreement which have since been fully paid. The
private company paid for all current charges under the
Offset Agreement during fiscal 2000. Amounts owed by the
private company to us as of August 26, 2000 which consist
of unpaid amounts from fiscal 1996 and prior years totaling
$6,430,000, 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."
37
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 26, 2000, the charges for such costs totaled
$1,800,000.
Additional Matters
Rami Abada, our President, Chief Operating Officer and
Interim Chief Financial Officer, owned two corporations which
each own a licensed Jennifer Convertibles store. During the
year ended August 26, 2000, such corporations purchased
$445,000 of merchandise and incurred royalties of $41,000, all
of which were paid in full under the Offset Agreement. During
the year Mr. Abada received $165,000 of salary, severance pay,
distributions and other payments from such licensees and the
private company. On March 23, 2000, Mr. Abada sold these two
stores to the private company for the sum of $300,000. As of
August 26, 2000, he has received $42,000 and is owed $258,000
from the private company.
Ronald Rudzin, a Senior Vice President who resigned May
2000, owned one licensed Jennifer Convertible. Mr. Rudzin's
mother currently owns two licensed Jennifer Convertible
stores. As of May 2000, all amounts owed to us by this one
corporation 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 26, 2000, this
corporation purchased approximately $250,000 of merchandise
from us.
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
$157,641 of legal fees from us and the LP's and an aggregate
of approximately $14,780 from the private company during the
fiscal year ended August 26, 2000.
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 26, 2000, 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
38
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 2000, Klaussner gave us $2,101,000 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 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.
None
39
(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.
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.
40
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.
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.
41
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.
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
42
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 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. incorporated herein by reference to
our Annual Report on Form 10-K for
the fiscal year ended August 28, 1999.
10.24 - Employment Agreement, dated as of August 15, 1999,
between Rami Abada and Jennifer Convertibles, Inc.,
as amended incorporated herein by reference to our
Annual Report on Form 10-K for the fiscal
year ended August 28, 1999.
43
10.25 - Agreement, dated as of September 1, 1999, between
Jennifer Convertibles, Inc. and Jara Enterprises,
Inc. incorporated herein by reference to our Annual Report
on Form 10-K for the fiscal year ended August 28, 1999.
10.26 - Agreement, dated as of September 1, 1999 between
Jennifer Convertibles, Inc. and Jara Enterprises,
Inc. incorporated herein by reference to our Annual Report
on Form 10-K for the fiscal year ended August 28, 1999.
10.27 - Loan Agreement dated as of December 8, 1999, between
Jennifer Convertibles, Inc. and Klaussner Furniture
Industries, Inc. incorporated herein by reference
to our Annual Report on Form 10-K for the fiscal year
ended August 28, 1999.
10.28 - Stock Option Agreement dated as of December 8, 1999,
between Harley J. Greenfield and Klaussner Furniture
Industries, Inc. incorporated herein by reference
to our Annual Report on Form 10-K for the fiscal year
ended August 28, 1999.
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 incorporated
herein by reference to our Annual Report on Form 10-K
for the fiscal year ended August 28, 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.
44
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 November 22, 2000
Harley J. Greenfield Board and Chief
Executive Officer
(Principal Executive
Officer)
/s/ Edward B. Seidner Director November 22, 2000
Edward B. Seidner
/s/ Bernard Wincig Director November 22, 2000
Bernard Wincig
/s/ Edward Bohn Director November 22, 2000
Edward Bohn
/s/ Kevin J. Coyle Director November 22, 2000
Kevin J. Coyle
/s/ Rami Abada President, November 22, 2000
Rami Abada Director, Chief
Operating Officer
And Interim Chief
Financial Officer
45
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Index to Financial Statements
Independent Auditors'
Report..................................................................F1
Consolidated Balance Sheets at August 26, 2000 and
August 28, 1999...... ................................................F2
Consolidated Statements of Operations for the years ended
August 26, 2000, August 28, 1999 and August 29, 1998..................F3
Consolidated Statements of (Capital Deficiency) for the years
ended August 26, 2000, August 28, 1999, and August 29, 1998.............F4
Consolidated Statements of Cash Flows for the years ended
August 26, 2000, August 28, 1999 and August 29, 1998..................F5
Notes to Consolidated Financial Statements..............................F6
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Jennifer Convertibles, Inc.
Woodbury, New York
We have audited the accompanying consolidated balance sheets of Jennifer
Convertibles, Inc. (the "Company") and subsidiaries as of August 26, 2000
and August 28, 1999, and the related consolidated statements of operations,
capital deficiency and cash flows for each of the three years in the period
ended August 26, 2000. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As described in Note 3, the Company has significant transactions with
related parties.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Jennifer Convertibles, Inc. and subsidiaries as of August 26,
2000 and August 28, 1999, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended
August 26, 2000, in conformity with generally accepted accounting
principles.
Richard A. Eisner & Company, LLP
New York, New York
November 10, 2000
F1
JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except for share data)
ASSETS
(SEE NOTE 5)
August August
26, 2000 28, 1999
Current assets:
Cash and cash equivalents $ 6,384 $ 6,907
Commercial paper 3,025 0
Accounts receivable 328 31
Merchandise inventories 11,064 9,634
Due from Private Company, net
of reserves of $6,430 and
$6,654 at August 26, 2000
and August 28, 1999, 1,494 1,184
respectively
Prepaid expenses and other 450 596
current assets
Total current assets 22,745 18,352
Store fixtures, equipment and
leasehold improvements
at cost, net 5,180 5,377
Deferred lease costs and other 505 611
intangibles, net
Goodwill, at cost, net 1,970 1,142
Other assets (primarily security 592 663
deposits)
$ 30,992 $ 26,145
LIABILITIES AND (CAPITAL
DEFICIENCY)
Current liabilities:
Accounts payable, trade $ 15,036 $ 15,030
Customer deposits 8,956 8,757
Accrued expenses and other 4,959 4,447
current liabilities
Amounts payable under 239 699
acquisition agreement
Total current liabilities 29,190 28,933
Deferred rent and allowances 5,058 5,185
Long-term obligations under 0 63
capital leases
Total liabilities 34,248 34,181
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
26, 2000 and August 28, 1999
(liquidation preference
$5,000)
Series B Convertible
Preferred-26,664 shares issued
and outstanding at August
26, 2000 and August 28, 1999
(liquidation preference
$133)
Common stock, par value $.01 per
share
Authorized 10,000,000
shares; issued and
outstanding 5,704,058 shares
at August 26, 2000
and August 28, 1999 57 57
Additional paid-in capital 27,482 27,482
Accumulated (deficit) (30,795) (35,575)
(3,256) (8,036)
$ 30,992 $ 26,145
See Notes to Consolidated Financial Statements.
F2
JENNIFER CONVERTIBLES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data)
Year Year Year
ended ended ended
August August August
26, 2000 28, 1999 29, 1998
(52 weeks) (52 weeks) (52 weeks)
Net sales $123,713 $109,284 $111,541
Cost of sales, including
store occupancy,
warehousing, delivery and
fabric protection
(including charges from the
Private Company
of $7,694, $8,917, and 78,323 71,607 74,054
$10,943, respectively)
Selling, general and 38,645 35,890 35,984
administrative expenses
Provision for losses
(recovery) of amounts
due from Private Company 107 (42) (196)
(Income) loss from store 10 (9) 355
closings
Depreciation and 1,691 1,668 1,727
amortization
118,776 109,114 111,924
Operating income (loss) 4,937 170 (383)
Other income (expense):
Royalty income 259 388 386
Interest income 358 171 108
Interest expense (82) (106) (172)
Other income, net 112 150 271
647 603 593
Income before income taxes 5,584 773 210
Income taxes 804 403 120
Net income $4,780 $370 $90
Basic income per common $0.84 $0.06 $0.02
share
Diluted income per common $0.66 $0.05 $0.01
share
Weighted average common
shares outstanding 5,704,058 5,701,559 5,700,725
basic income per share
Effect of potential common
share issuance:
Stock options 63,300 22,077 32,641
Convertible preferred
stock 1,443,164 1,430,722 1,068,375
Weighted average common
shares outstanding
diluted income per
share 7,210,522 7,154,358 6,801,741
See Notes to the Consolidated Financial Statements.
F3
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of (Capital Deficiency)
Years Ended August 26, 2000, August 28, 1999 and August 29, 1998
(In thousands, except share data)
Preferred stock Preferred stock Additional Notes receivable
Series A Series B Common Stock paid-in from warrant Accumulated
Shares Par Value Shares Par Value Shares Par Value capital holders (deficit) Total
Balances at August - - - - 5,700,725 57 22,911 (300) (36,035) (13,367)
30, 1997
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 - - - - 3,333 0 6 - - 6
options
Purchase of stock - - - - - - (75) - - (75)
options
Issuance of Series - - 26,664 - - - 111 - - 111
B Preferred Stock
Net income - - - - - - - - 370 370
Balances at August 10,000 0 26,664 0 5,704,058 57 27,482 0 (35,575) (8,036)
28, 1999
Net income - - - - - - - - 4,780 4,780
Balances at August 10,000 0 26,664 0 5,704,058 $ 57 $27,482 $ 0 $(30,795) $(3,256)
26, 2000
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 26, August 28, August 29,
2000 1999 1998
(52 weeks) (52 weeks) (52 weeks)
Cash flows from operating
activities:
Net income $4,780 $370 $90
Adjustments to reconcile net
income to net cash provided by
(used in) operating Activities:
Depreciation and 1,691 1,668 1,727
amortization
Provision for warranty 46 100 100
costs
(Income) loss from store 10 (9) 355
closings
Deferred rent (186) (313) (183)
(Recovery) provision for
losses on amounts due from
Private Company 107 (42) (196)
Changes in operating assets
and liabilities (net of
effect from purchases of
licensee):
Merchandise inventories (1,224) 384 (2,075)
Prepaid expenses and other 150 (208) 89
current assets
Accounts receivable (212) 469 649
Due from Private Company (312) (541) (405)
Other assets, net 139 81 9
Accounts payable trade 113 (1,697)
Customer deposits (171) 1,865 (1,949)
Accrued expenses and other 350 (428) (121)
payables
Net cash provided by (used 5,168 3,509 (3,607)
in) operating activities
Cash flows from investing
activities:
Capital expenditures (1,130) (743) (141)
Deferred lease costs and (232) 16
other intangibles
Payments of amounts payable (461)
under acquisition
agreement
Acquisition of Southeastern
Florida Holding Company,
net of $20 cash
received (780)
Purchase of commerical paper (3,025)
Net cash (used in) investing (5,628) (743) (125)
activities
Cash flows from financing
activities:
Payments of obligations (63) (243) (118)
under capital leases
Sale of Series A Preferred - - 4,829
Stock
Net cash provided by (used (63) (243) 4,711
in) financing activities
Net increase (decrease) in (523) 2,523 979
cash and cash equivalents
Cash and cash equivalents at 6,907 4,384 3,405
beginning of year
Cash and cash equivalents at $6,384 $6,907 $4,384
end of year
Supplemental disclosure of
cash flow information:
Income taxes paid $484 $418 $102
Interest paid $82 $106 $172
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 $699
notes payable
See Notes to Consolidated Financial Statements.
F5
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2000, August 28, 1999 and August 29, 1998
(In thousands except for share amounts)
(1) Business
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 sell a complete line of sofabeds and companion pieces
such as loveseats, chairs and recliners, and specialty retail
stores that sell leather living room furniture. As of August 26,
2000 and August 28, 1999, respectively, 102 and 84 Company-owned
stores operated under the Jennifer Convertibles and Jennifer
Leather 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 cumulative 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 of August 26, 2000 and August 28, 1999,
respectively, the LP's operated 46 and 62 stores under the
Jennifer Convertibles name.
The Company had 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 of August 26, 2000 and August 28,
1999, respectively, 3 and 9 stores were operated by such
Unconsolidated Licensees and the results of their operations
are not included in the consolidated financial statements. In
addition, as of August 26, 2000, 4 stores from which the Company
is entitled to royalties, are owned by the Private Company (see
below) which acquired such stores during the year then ended.
Also not included in the consolidated financial statements
are the results of operations of 21 owned stores and 4 licensed
stores referred to above operated by a company (the "Private
Company") which is owned by a principal stockholder who is also
the brother-in-law of the Company=s Chairman of the Board and
Chief Executive Officer. Until November 1994, the Private Company
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 which are due in 2023 and are
collateralized by the assets of the Private Company and a pledge
of the remaining stockholder=s stock in the Private Company to
secure Fred Loves' personal guarantee of the notes. In
connection with such transaction, Fred Love, the remaining
principal stockholder, granted Messrs. Greenfield and Seidner
options
F6
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2000, August 28, 1999 and August 29, 1998
(In thousands except for share amounts)
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 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
At August 26, 2000, the Company has both a working capital
deficiency of $6,445 and a capital deficiency of $3,256. 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 2000 accounted for approximately 77% of the
Company's purchases of merchandise) which effectively extended
the payment terms for merchandise shipped. As of August 26,
2000, accounts payable includes $9,427 due to Klaussner
($10,620 at August 28, 1999).
(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 26, 2000, August 28, 1999 and August 29, 1998
(In thousands except for share amounts)
Commercial Paper
Commercial paper is carried at amortized cost, which
approximates market, and matures on January 8, 2001.
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:
8/26/00 8/28/99
Showrooms $ 5,364 $ 4,203
Warehouses 5,700 5,431
$11,064 $ 9,634
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 are carried at cost less
accumulated depreciation and amortization which is computed using
the straight-line method over estimated useful lives or, when
applicable, the life of the lease, whichever 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 26, 2000 and
August 28, 1999 amounted to $302 and $185, respectively.
F8
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2000, August 28, 1999 and August 29, 1998
(In thousands except for share amounts)
Deferred Lease and Other Intangible Costs
Deferred lease costs, consisting primarily of lease
commissions and payments made to assume existing leases, are
deferred and amortized over the term of the lease.
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 $5,058 and $5,185
at August 26, 2000 and August 28, 1999, respectively.
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.
Income Per Share
Basic income per common share is computed by dividing the
net income after reduction for cumulative preferred stock
dividends of $9 and $7 in 2000 and 1999, respectively, by the
weighted average number of shares of common stock outstanding
during each period. Diluted income per share reflects the assumed
conversion of Convertible Preferred Stockand exercise of options
and warrants.
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 26, 2000, August
28, 1999 and August 29, 1998 aggregated $13,163, $11,699 and
$10,819, respectively, net of amounts charged to the Private
Company and Unconsolidated Licensees (see Note 3).
F9
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2000, August 28, 1999 and August 29, 1998
(In thousands except for share amounts)
Warranties
Estimated warranty costs are expensed in the same period
that sales are recognized.
Concentration of Risks
During fiscal 2000, 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 daily to a concentration account maintained at one
commercial bank. At August 26, 2000 and August 28, 1999, amounts
on deposit with this one bank totaled 88% and 89% of total cash,
respectively.
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
Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosure about Segments of an Enterprise and Related
Information" 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,
F10
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2000, August 28, 1999 and August 29, 1998
(In thousands except for share amounts)
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
became effective for the year ended August 26, 2000. The
adoption of SOP 98-5 did not have a material effect on the
Company=s financial statements for the year ended August 26, 2000.
(3) Related Party Transactions
The Private Company, pursuant to a warehouse agreement
which expires in 2001, provides services to the Company and the
LP's relating to distribution, inventory control reporting and
data processing. The Company and LP's, which utilize warehouse
and distribution facilities leased and operated by the Private
Company, 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 through December 31, 2000. In
connection therewith, the Company assumed certain payroll costs
previously paid by the Private Company. Additionally, the Private
Company provides fabric protection and warranty services at pre-
determined rates. Freight services were provided at pre-
determined rates until April 2000 when the Company began arranging
freight services independently. 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:
Years Ended
8/26/00 8/28/99 8/29/98
Included in Cost of Sales:
Freight $ 1,282 $2,363 $ 2,775
Fabric protection services 2,300 2,292 2,592
Warehousing fees 4,112 4,262 5,576
Total $ 7,694 $ 8,917 $10,943
F11
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2000, August 28, 1999 and August 29, 1998
(In thousands except for share amounts)
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 26, 2000, August 28, 1999 and August 29, 1998,
approximately $10,537, $11,646, and $11,745, respectively, of
inventory at cost (before rebates) was purchased by the
Private Company through the Company and $1,983, $3,988, and
$3,195, 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. Benefits to the Private
Company on account of discounts aggregated $444, $619 and $628
for the fiscal years ended August 26, 2000, August 28, 1999 and
August 29, 1998, respectively.
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 $1,800, $2,240, and $2,139 for
the years ended August 26, 2000, August 28, 1999 and August
29, 1998, respectively.
Two executive officers of the Company and a relative of one
of the officers, own or owned interests in five Unconsolidated
Licensee stores. In March 2000, three of the stores were acquired
by the Private Company. Royalty income from the five stores
amounted to $259, $388 and $386 for the fiscal years ended 2000,
1999, and 1998 respectively.
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 which principally
relate to the years prior to the Offset Agreement have been fully
reserved in the consolidated financial statements.
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. The Private Company has
F12
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2000, August 28, 1999 and August 29, 1998
(In thousands except for share amounts)
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 $158, $153, and $154 in legal fees in the fiscal
years ended in 2000, 1999, and 1998, respectively.
See Note 5 for transactions with Klaussner.
(4) Store Fixtures, Equipment and Leasehold Improvements
08/26/00 08/28/99
Automobiles $ 68 $ 58
Store fixtures and furniture 5,529 6,134
Leasehold improvements 6,402 6,762
Computer equipment 1,262 1,551
13,261 14,505
Less: Accumulated depreciation
and amortization (8,081) (9,128)
$ 5,180 $5,377
F13
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2000, August 28, 1999 and August 29, 1998
(In thousands except for share amounts)
(5) Transactions with Klausnner:
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 26, 2000 and
August 28, 1999, the Company owed Klaussner $9,427 and $10,620,
respectively, no portion of which exceeded the 60 day payment
terms.
Purchase allowances of $2,101 (2000), $1,889 (1999) and
$1,694 (1998) were obtained from Klaussner which reduced cost of
goods sold.
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 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 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. As of August 26, 2000, no amounts have been
borrowed by the Company under the agreement.
F14
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2000, August 28, 1999 and August 29, 1998
(In thousands except for share amounts)
In addition, on December 8, 1999, Klaussner granted to
the Company's 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:
Years Ended
8/26/00 8/28/99 8/29/98
Current:
Federal $100 $ -0- $ -0-
State 704 403 120
Deferred
Federal -0- -0- -0-
State -0- -0- -0-
$804 $403 $120
Expected tax expense based on the statutory rate
is reconciled with actual tax expense as follows:
F15
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2000, August 28, 1999 and August 29, 1998
(In thousands except for share amounts)
Percent of Pre-Tax Earnings
Years Ended
8/26/00 8/28/99 8/29/98
"Expected" tax expense 34.0% 34.0% 34.0%
Increase (reduction) in taxes
resulting from:
State income tax, net of
federal income tax benefit 8.4% 34.4% 36.8%
Non-deductible items 2.1% 6.8% 25.5%
Disallowances pursuant to:
Revenue Agents Report -- -- 90.6%
Other 0.9% 1.1% 1.3%
Utilization of net operating
Loss carryforwards (31.0)% (24.2)% (131.1)%
14.4% 52.1% 57.1%
The principal components of deferred tax assets,
liabilities and the valuation allowance are as follows:
August 26, 2000 August 28, 1999
Deferred tax assets:
Federal and state net operating
loss carryforwards $ 3,696 $ 5,753
Reserve for losses on loans and
advances 2,598 2,727
Accrued partnership losses 32 41
Deferred rent expense 1,885 1,231
Inventory capitalization 345 253
Other expenses for financial
reporting, not yet deductible
for taxes 242 506
F16
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2000, August 28, 1999 and August 29, 1998
(In thousands except for share amounts)
Total deferred tax assets, before
valuation allowance 8,798 10,511
Less: Valuation allowance (7,133) (8,832)
Total deferred tax assets $1,665 $ 1,679
Deferred tax liabilities:
Excess of book over tax basis of
store fixtures,equipment and
leasehold improvements $1,601 $ 1,552
Other 64 127
Total deferred tax liabilities 1,665 1,679
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 temporary differences
will be utilized. During the years ended August 26, 2000, August
28, 1999 and August 29, 1998, the valuation allowance
decreased by $(1,699), ($187), and ($282), respectively.
As of August 26, 2000, the Company has a net
operating loss carryforward for federal income tax purposes of
approximately $10,000, expiring $7,000 in the year 2011, $1,000
in the year 2012 and $2,000 in the year 2018.
(7) Acquisitions
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.
F17
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2000, August 28, 1999 and August 29, 1998
(In thousands except for share amounts)
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. As of September
1, 2000, the note has been paid in full. 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.
On March 23, 2000 the Company purchased the stock of the
previously unconsolidated licensee known as Southeastern Florida
Holding Company, which owned six stores in Florida, for the sum of
$800. The purchase price was allocated to the net liabilities
assumed, and the balance ($870) has been charged to goodwill. Had
the acquisition taken place as of August 29, 1999, the pro-forma
effect on revenues, net income and net income per share
(unaudited) for fiscal 2000 and 1999 is as follows:
2000 1999
Revenue $125,950 $113,078
Net income 4,564 44
Basic income per share 0.80 0.01
Diluted income per share 0.63 0.01
F18
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2000, August 28, 1999 and August 29, 1998
(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
Share
Outstanding at
8/31/97 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
Granted 697,047 $2.76
Canceled (396,047) $6.00
Outstanding at
8/26/00 1,605,047 $2.80 998,656 $2.91
F19
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2000, August 28, 1999 and August 29, 1998
(In thousands except for share amounts)
As of August 26, 2000, the number of shares of Common
Stock reserved for options available for grant under the
Plans was 16,620, and the weighted average remaining
contractual life of the outstanding options is 7.7 years.
In May 1997, the Company adopted the 1997 Stock Option
Plan (the "1997 Plan") under which 500,000 shares of common
stock were reserved for issuance.
The 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 would have been as follows:
2000 1999 1998
Net Income (Loss):
As reported $4,780 $ 370 $ 90
Pro forma under SFAS 123 $4,406 $ 17 $ (181)
Basic income (loss) per share:
As reported $0.84 $0.06 $ 0.02
Pro forma under SFAS
123 $0.77 $0.00 $(0.03)
Diluted income (loss) per share:
As reported $0.66 $0.05 $ 0.01
Pro forma under SFAS 123 $0.61 $0.00 $(0.03)
The weighted average fair value on the date of
grant of options granted is estimated at $0.59 and $1.03 in
2000 and 1998, respectively, using the Black-Scholes option-
pricing model with the following weighted average
assumptions:
2000 1998
Risk-free interest rate 5.10% 5.76%
Expected life of options 5 5
Expected stock price volatility 40% 44%
Expected dividend yield 0% 0%
F20
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2000, August 28, 1999 and August 29, 1998
(In thousands except for share amounts)
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.
(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 26, 2000:
Year Ending August
2001 $13,858
2002 13,193
2003 11,329
2004 9,325
2005 5,231
Thereafter 11,846
$64,782
Rental expense for all operating leases amounted to
approximately $15,101, $13,661, and $13,559 net of sublease
income of $196, $184, and $222 for the years ended August
26, 2000, August 28, 1999 and August 29, 1998,
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.
F21
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2000, August 28, 1999 and August 29, 1998
(In thousands except for share amounts)
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 Agreements,
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.
On December 31, 1996, the Private Company
acquired the limited partners' interests in these
partnerships.
Letters of Credit
The private label credit card program requires the
Company to issue $1,200 in standby letters of credit on
various dates to January 2001. The Private Company is
participating in this program and has provided 25% of the
cash needed to fund standby letters of credit. Such
letters of credit will be terminated when the Company
achieves certain specified levels of profitability.
Since the Company met all the financial criteria
required by the private label credit card program, in
November 2000, the private label credit card program released
the Company of the requirement to maintain $1,200 standby
letter of credit.
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.
F22
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2000, August 28, 1999 and August 29, 1998
(In thousands except for share amounts)
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:
8/26/00 8/28/99
Advertising $ 722 $ 1,182
Payroll 1,091 887
Legal 43 184
Accounting 199 178
Store closings 80 70
Litigation settlement costs 279 279
Sales tax 712 505
Warranty 450 404
Income Tax 420 100
Freight 96 -0-
Other 867 658
$ 4,959 $ 4,447
(10) Claims and Litigation
Conclusion 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
F23
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2000, August 28, 1999 and August 29, 1998
(In thousands except for share amounts)
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 was 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).
F24
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2000, August 28, 1999 and August 29, 1998
(In thousands except for share amounts)
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 $16 at August 26, 2000).
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 (see Note 3).
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.
F25