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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 25, 2001
JENNIFER CONVERTIBLES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2824646
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization)
419 Crossways Park Drive 5712
Woodbury, New York 11797 (Primary Standard
(Address of principal Industrial
executive office) 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 13, 2001: $9,696,899.
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 13, 2001:
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
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 25, 2001, our stores include 171
Jennifer Convertibles stores and 17 Jennifer Leather stores. Of
these 188 stores, we owned 112 and licensed 76, including 28 owned
or operated by a related private company.
Jennifer Convertibles stores specialize in the retail sale of a
complete line of sofabeds. Additionally, we sell 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. 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.
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.
A related 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 private
company 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 and we are currently managing certain
aspects of such stores. The private company is owned by Fred Love
(Jerry Silverman, as Trustee), 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.
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. 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.
2
In fiscal 2001, we opened 12 new stores. We did not close any
stores in fiscal 2001 although we will selectively close stores
where the economics so dictate. We plan to open additional stores
when attractive opportunities present themselves. We anticipate
opening approximately 7 to 10 additional stores and not closing any
stores during the fiscal year 2002.
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 25, 2001, we purchased
approximately 71% of our merchandise from Klaussner. Leather
furniture is purchased primarily from Klaussner, Nicoletti, 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 1999, 2000, and 2001,
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,
2001, 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". If the
proposed settlement of our derivative litigation becomes effective,
we will, as part of the settlement, acquire the limited partnership
interests in the LPs and they will become our wholly-owned
subsidiaries. For a description of the proposed settlement see
"Certain Relationships and Related Transactions". 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 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. We purchase merchandise for the
licensees and provide other services to them.
Warehousing and Related Services
We currently utilize the warehousing and distribution facilities
leased by the private company, consisting of a warehouse facility in
North Carolina, and satellite warehouse facilities in New Jersey and
California. These
3
warehouse facilities service our owned and licensed stores and the
private company's stores. Pursuant to the proposed settlement
agreement with the private company, we will acquire the warehouse
assets and provide purchasing services to the private company.
Pursuant to an Interim Operating Agreement, we are operating in many
respects, including warehousing, as if the settlement agreements
were in effect.
Prior to the execution of the Interim Operating Agreement, we
paid 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 included 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 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.
Also prior to July 2001, the private company provided to us a
number of other services, including fabric protection and warranty
services. In addition to the fee for warehousing, we paid 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 retained 100%.
In July 2001, the private company and we entered into a series of
agreements designed to settle the derivative action among the
private company, certain of our current and former officers and
directors and former accounting firms and us. Effectiveness of the
agreements is subject to certain conditions, including court
approval and receipt by us of a fairness opinion or appraisal. We
also entered into an Interim Operating Agreement designed to
implement certain of the provisions of the settlement agreement
prior to court approval.
The material terms of the settlement agreements as it relates to
warehousing and related services are as follows:
Pursuant to a Warehouse Transition Agreement, the private company
will transfer the assets related to the warehouse system currently
operated by the private company to us and we will become responsible
for the leases and other costs of operating the warehouse. Pursuant
to computer hardware and software agreements, we will also assume
control of, and responsibility for, the computer system used in the
operations of the warehouse systems and stores while permitting the
private company access to necessary services. Pursuant to a
Warehousing Agreement, we will be obligated to provide warehouse
services to the private company of substantially the type and
quality it provided to us. During the first five years of the
agreement, we will receive a fee of 2.5% on the net sales price of
goods sold by the private company up to $27,640,000 of sales and 5%
on net sales over $27,640,000. After five years, we will receive a
fee of 7.5% of all net sales by the private company. In addition,
during the full term of the agreement, we will receive a fee for
fabric protection and warranty services at the rate we were being
charged, subject to increase for documented cost increases. We are
also obligated to pay the private company specified amounts based on
decreases in its sales levels. Pursuant to the Interim Operating
Agreement, the parties are operating as if the above mentioned
settlement agreements were in effect as of May 27, 2001. See
"Certain Relationships and Related Transactions" for a more complete
description of the proposed settlement and the Interim Operating
Agreement.
Trademarks
The trademarks Jennifer Convertibles , Jennifer Leather ,
Jennifer House , With a Jennifer Sofabed, There's Always a Place to
Stay , Jenni-Pedic , Elegant Living , Jennifer's Worryfree Guarantee
, Jennifer Living Rooms , Bellissimo Collection , Jennifer Sofas ,
and Jennifer Leather (and Design) 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 agreed
we may open on a royalty-free basis. Pursuant to the Interim
Operating Agreement, we now have the right to open an unlimited
number of stores in New York for a royalty of $400,000 per year.
See "Certain Relationships and Related Transactions."
4
Employees
As of August 25, 2001, we employed 458 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 25, 2001, the LP's and we lease all of our store
locations pursuant to leases which expire between 2001 and 2016.
During fiscal 2002, 21 leases will expire, although we, as the
lessee, have the option to renew 14 of such leases. We anticipate
remaining in most, if not all at these locations, subject, in the
case of the seven leases that expire, to negotiating acceptable
renewals with the landlord. 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.
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.
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.
As described under the heading "Certain Relationships and Related
Transactions", on July 6, 2001, the private company and we entered
into a series of agreements designed to settle the derivative action
among the private
5
company, certain of our current and former officers and directors
and former accounting firms and us. Effectiveness of the agreements
is subject to certain conditions, including court approval and
receipt by us of a fairness opinion or appraisal. We also entered
into an Interim Operating Agreement designed to implement certain of
the provisions of the settlement agreement prior to court approval.
However, there can be no assurance that the court will approve the
settlement or that a settlement will occur on the terms described
under such heading.
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 25, 2001 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 2000:
1st Quarter $2.19 $1.50
2nd Quarter 2.56 2.00
3rd Quarter 2.50 2.00
4th Quarter 2.50 2.00
High Low
Fiscal Year 2001:
1st Quarter $2.50 $2.13
2nd Quarter 3.00 1.88
3rd Quarter 2.19 1.90
4th Quarter 2.20 1.80
As of November 13, 2001, there were approximately 204 holders of
record and approximately 1,510 beneficial owners of our common
stock. On November 13, 2001, the closing bid and asked prices of
the common stock as reported on the NASDAQ Bulletin Board were $1.70
and $1.70, 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.
6
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
8/25/2001 8/26/2000 8/28/1999 8/29/1998 8/30/1997
Net sales $129,065 $123,713 $109,284 $111,541 $97,789
Cost of sales, including store occupancy,
warehousing, delivery and fabric 83,289 78,323 71,607 74,054 67,114
protection
Selling, general and administrative 39,850 38,645 35,890 35,984 32,904
expenses
Depreciation and amortization 1,854 1,691 1,668 1,727 1,840
(Recovery) provision for losses on amounts
due from Private Company 0 107 (42) (196) (426)
Loss (income) from store closings (80) 10 (9) 355 55
124,913 118,776 109,114 111,924 101,487
Operating income (loss) 4,152 4,937 170 (383) (3,698)
Other income (expense):
Royalty income (expense), net (166) 259 388 386 374
Interest income 466 358 171 108 67
Interest expense (83) (82) (106) (172) (28)
Other income, net 8 112 150 271 319
225 647 603 593 732
Income (loss) before income taxes 4,377 5,584 773 210 (2,966)
Income taxes 291 804 403 120 95
Net income (loss) $4,086 $4,780 $370 $90 ($3,061)
Basic income (loss) per share $0.72 $0.84 $0.06 $0.02 ($0.54)
Diluted income (loss) per share $0.57 $0.66 $0.05 $0.01 ($0.54)
Weighted average common shares outstanding
Basic income (loss) per share 5,704,058 5,704,058 5,701,559 5,700,725 5,700,725
Effect of potential common shares
issuances:
Stock options 51,378 63,300 22,077 32,641 -
Convertible preferred stock 1,443,164 1,443,164 1,430,722 1,068,375 -
Weighted average common shares outstanding
diluted income (loss) per share 7,198,600 7,210,522 7,154,358 6,801,741 5,700,725
Cash Dividends - - - - -
Store data: 8/25/2001 8/26/2000 8/28/1999 8/29/1998 8/30/1997
Company-owned stores open
at the end of period 112 102 84 82 84
Consolidated licensed stores open
at the end of period 48 46 62 62 63
Licensed stores not consolidated
open at end of period 3 3 9 11 11
Total stores open at end of period 163 151 155 155 158
Balance Sheet Date: 8/25/2001 8/26/2000 8/28/1999 8/29/1998 8/30/1997
Working capital (deficiency) ($2,130) ($6,445) ($10,581) ($11,110) ($17,258)
Total assets 36,650 30,992 26,145 24,099 22,998
Long-term obligations 0 0 63 49 421
Total liabilities 35,820 34,248 34,181 32,547 36,365
Retained earnings (Capital deficiency) 830 (3,256) (8,036) (8,448) (13,367)
Retained earnings (Capital deficiency) per $0.15 ($0.57) ($1.41) ($1.48) ($2.34)
share
7
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.
In July 2001, we entered into proposed settlement
agreements and an Interim Operating Agreement with the
private company which significantly affects the way we
operate with the private company. The results discussed
below include approximately three months of operations under
such Agreement.
Results of Operations
Fiscal year ended August 25, 2001 compared to fiscal year
ended August 26, 2000:
Net sales increased by 4.3% to $129,065,000 for the
fiscal year ended August 25, 2001 as compared to
$123,713,000 for the fiscal year ended August 26, 2000.
Comparable store sales (sales at those stores open for the
full year in the current and prior fiscal year) decreased by
4.3%. We opened 12 stores during the fiscal year ended
August 25, 2001 whose total sales were $4,757,000. Sales
have been adversely effected by a slowdown in consumer
spending and a decrease in consumer confidence in the U.S.
economy.
Cost of sales increased to $83,289,000 for the fiscal
year ended August 25, 2001 from $78,323,000 for the fiscal
year ended August 26, 2000. Cost of sales as a percentage
of sales was 64.5% in fiscal 2001, which increased 1.2% from
63.3% in the prior year. The increase is primarily
attributable to occupancy costs increasing as a percentage
of sales.
Included in cost of sales are charges from the private
company for warehouse expenses of $3,338,000, fabric
protection services of $1,638,000 and freight of $0. This
compared with $4,112,000, $2,300,000 and $1,282,000,
respectively, in the previous year. We had been paying the
private company for freight charges based quoted freight
rates for arranging delivery of our merchandise up until
April 2000 at which time we assumed responsibility for
freight. Under the Interim Operating Agreement which went
into effect May 27, 2001, we are no longer charged for
warehousing fees and fabric protection by the private
company, but instead provide such service to the private
company and charge it fees. We also bear the expenses of
operating the warehouse system.
Selling, general and administrative expenses were
$39,850,000 (30.9% as a percentage of sales) for the fiscal
year ended August 25, 2001 as compared to $38,645,000 (31.2%
as a percentage of sales) for the fiscal year ended August
26, 2000, a decrease of 0.3% 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 ($8,036,000)
increased in the aggregate by $1,716,000 as of August 25,
2001 compared to the prior year end. 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
8
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 $4,811,000 at August 25, 2001 and 4,826,000 at
August 26, 2000.
Interest income increased by $108,000 to $466,000 for the
fiscal year ended August 25, 2001 as compared to the prior
year. The increase is due to more available cash to invest
and higher returns on investments.
We incurred tax expense of $291,000 and $804,000 in
fiscal years ended August 25, 2001 and August 26, 2000,
respectively. The tax expense in 2001 is net of a $500,000
reduction in the valuation allowance on our deferred tax
asset. We had previously fully reserved the deferred tax
asset, which is comprised principally of net operating loss
carryforwards and expenses deducted for financial reporting
purposes which are not yet deductible for tax purposes.
Based on operating profits during fiscal 2001 and an
anticipation of future taxable income, we reduced the
valuation allowance in 2001 by $500,000.
Net income in the fiscal years ended August 25, 2001 and
August 26, 2000 was $4,086,000 and $4,780,000, respectively,
a decrease of income of $694,000 in fiscal 2001.
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
one 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 twelve 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 fees income increases of .4%
as a percentage of sales.
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 ($6,320,000)
decreased in the aggregate by $1,518,000 as of August 26,
2000 compared to the prior year end. 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 these entities the private company prior to
the issuance of our financial statements. We believe the
9
private company has losses and/or capital deficiencies and,
accordingly, we have fully reserved uncollected amounts
which totaled $4,826,000 at August 26, 2000 and $6,654,000
at August 28, 1999.
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 was 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.
Liquidity and Capital Resources
As of August 25, 2001, we had an aggregate working
capital deficiency of $2,130,000 compared to a deficiency of
$6,445,000 at August 26, 2000 and had available cash and
cash equivalents of $11,155,000 compared to cash and cash
equivalents and commercial paper of $9,409,000 at August 26,
2000. The increase in working capital cash and cash
equivalents is primarily due to $3,326,000 of net cash
provided from operating activities, partially offset by
$1,362,000 of capital expenditures. Unless the U.S. economy
continues to worsen, we anticipate continued positive
operating cash flow through the end of fiscal 2002.
We continue to fund the operations of certain of our
limited partnership licensees whose results are included in
our consolidated financial statements, some of which
continue to generate operating losses. Any such losses have
been consolidated in our consolidated financial statements.
It is our intention to continue to fund these operations in
the future and, if the new settlement agreements referred to
below are approved, we will acquire 100% of such limited
partnerships. Our receivables from the private company and
the unconsolidated licensees had been substantially reserved
for in prior years. There can be no assurance that the
total reserved amount of receivables of $4,811,000 as of
August 25, 2001 will be collected.
Starting in 1995, the private company and we entered into
offset agreements that permit us to offset our current
monthly obligations to each other up to $1,000,000. Amounts
in excess of $1,000,000 are paid in cash. Based on the
payment terms of these offset agreements, current
obligations of the private company and the unconsolidated
licensees as of August 25, 2001 have been paid.
Additionally, as part of such agreements, the private
company in November 1995 agreed to assume certain
liabilities owed to us by the unconsolidated licensees.
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 81 day payment terms. As of August 25, 2001, 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 license agreement to operate
our business in the event of default.
In fiscal 2001, we opened 12 new stores. We have not
closed a store in the last three fiscal years.
For the fiscal years ended August 25, 2001 and August 26,
2000, we spent $1,362,000 and $1,130,000, respectively, for
capital expenditures. We currently anticipate capital
expenditures approximating $1,000,000 during fiscal 2002 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 LIBOR 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.
The proposed settlement agreements and the Interim
Operating Agreement we entered into with the private company
impacts our liquidity, capital resources and operations in a
number of ways, including:
10
In return for providing warehousing services to the
stores owned by the private company, the private
company will pay us (i) during the next five years, a
fee for all fabric protection and warranty services
sold in their stores plus 2.5% of their yearly net
sales for net sales up to an aggregate of $27,640,000
and 5.0% of their yearly net sales for net sales in
excess of $27,640,000 and (ii) during each 12 month
period after the first five years until we either buy
the private company or until December 31, 2049, a fee
for all fabric protection and warranty services sold
in their stores plus 7.5% of their yearly net sales.
We will obtain the right to open an unlimited number
of stores in the state of New York for a royalty of
$400,000 per year (which includes stores already
opened).
The private company is obligated to pay us $125,750
per month for advertising. This represents a decrease
from the $150,000 per month that we were entitled to
previously. In addition, if private company sales are
less than $27,640,000, we must reimburse the private
company $0.50 for every dollar of sales under
$27,640,000, subject to the $2,700,000 cap described
in the paragraph below.
Because we may negatively impact the private company's
sales by opening additional stores of our own within
the state of New York and because we will be managing
the private company's stores, we will agree to pay the
private company 10% of the amount by which their
yearly net sales for any 12 month period are below
$27,640,000, provided that if their yearly net sales
fall below $26,000,000, we will pay the private
company 15% of such shortfall amount, provided further
that such amounts together with amounts we may pay for
advertising if the private company's sales drop below
$27,640,000 shall not, in the aggregate, exceed
$2,700,000 in any 12 month period. Messrs. Greenfield
and Seidner, officers, directors and principal
stockholders, have agreed to be responsible for up to
an aggregate of $300,000 of amounts due under these
provisions in each year. We anticipate making
"shortfall payments" of approximately $1,400,000 to
the private company for fiscal year 2002.
In settlement of certain disputes as to amounts due us
from the private company, the private company will
execute several notes to us in the aggregate principal
amount of $1,600,000 plus amounts owed at the closing
date for purchasing and other services ($1,992,403 as
of May 26, 2001).
We expect the effect of the new agreements with the
private company, including our assumption of the
warehousing responsibilities, will improve our
operations by an estimated $700,000 each year. There
is no assurance that the agreement will improve our
operating results to the extent we estimate or at all.
The private company now has 85 days to pay for
merchandise purchased by us for the private company's
account. These extended payment terms will slow our
cash flow from the private company and, based on
estimated purchases by the private company, over the
first 12 months, the adverse impact on cash flow is
estimated at approximately $1,500,000 when compared to
the current 30 days from invoice.
Inflation
There was no significant impact on our operations as a
result of inflation during the three fiscal years ended
August 25, 2001.
11
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.
There is no assurance we will continue to operate profitably
and we currently have a low net worth
We achieved net income of $4,086,000 and $4,780,000 in
the fiscal years ended August 25, 2001 and August 26, 2000,
respectively. We achieved net income of $370,000 in the
fiscal year ended August 28, 1999. 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. Our profit
decreased in fiscal 2001 due to the worsening U.S. economy
and such trend is expected to continue until the economy
rebounds. We had a net worth of $830,000 as of August 25,
2001. Such a low 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. Although we have entered
into proposed settlement agreements, effectiveness of such
agreements is subject to court approval and other conditions
and there can be no assurance such conditions will be met.
We may be liable for up to $2,700,000 per year of "short-
fall" payments to the private company.
As part of our proposed settlement with the private
company, we obtained the right to open an unlimited number
of stores in New York for a royalty of $400,000 per year.
Because we will be managing the private company's stores and
because we may negatively impact the private company's sales
by opening stores in its territory, we agreed to pay the
private company up to $2,700,000 per year if its sales drop
below specified levels. The provisions of the proposed
settlement are currently in effect due to the Interim
Operating Agreement.
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 (Jerry Silverman, as Trustee), the owner
of the private company, is Mr. Greenfield's brother-in-law.
Circumstances may arise in which the interest of the private
company stores, of the private company or of Mr. Greenfield
and Mr. Seidner will conflict with our interests, including
the negotiations to settle the litigation described above.
There are also numerous relationships, and have been
numerous transactions, between us and the private company,
including an agreement under which we warehouse and purchase
merchandise for the private company, manage its stores and
provide it other services. 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 25,
2001, we purchased approximately 71% of our merchandise from
Klaussner. Since a large portion of our revenues have been
derived from sales of Klaussner
12
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. 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 limited 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 are currently being
negatively affected by the economic downturn and 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 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 low 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 13, 2001, Harley J. Greenfield, our
Chairman of the Board and Chief Executive Officer and
principal stockholder, beneficially owns approximately 16.4%
of our outstanding shares of common stock. Approximately
40.4% 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 two executives
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 as well as Rami Abada, our President, Chief
Operating Officer and Chief Financial Officer. The loss of
Mr. Greenfield's and/or Mr. Abada's services could
materially adversely affect our business and our prospects
for the future.
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
13
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.
PART III
Item 10. Our Directors and Executive Officers.
The names and ages of our directors and our executive
officers as of November 13, 2001 are as follows:
Name Age Position(s) with the
Company
Harley J. 57 Director, Chairman of the Board and
Greenfield Chief Executive Officer
Edward G. Bohn 56 Director
Kevin J. Coyle 56 Director
Edward B. Seidner 49 Director and Executive Vice President
Bernard Wincig 70 Director
Rami Abada 42 Director, President, Chief Operating
Officer and Chief Financial Officer
Leslie Falchook 41 Senior Vice President - Administration
Kevin Mattler 43 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 five meetings during the 2001
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 25, 2001, consisted of Messrs.
Greenfield and Seidner. The Stock Option Committee had one
meeting during the 2001 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 25,
2001, 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.
Set forth below is a biographical description of each of
our directors and executive officers as of November 13,
2001.
14
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. Mr. Bohn was appointed Chief Financial
Officer in March 2001, of Nova.Corp which constructs and
manages the construction of data centers serving the
telecommunications (Internet) industry both domestically and
internationally, after having been a Director and Consultant
since December, 1999. He has been a Director of Nuwave
Technology, Inc., which owns and markets video enhancement
technology, since July 1995. Since September 1994, he has
operated as an independent consultant in financial and
operational matters. From January 1983 to March 1994, Mr.
Bohn was employed in various capacities by Emerson Radio,
including from March 1993 to March 1994, as Senior Vice
President-Special Projects; and from March 1991 to March
1993, as Chief Financial Officer and Treasurer/Vice
President of Finance. Prior to March 1991, he was Vice
President of Finance and Treasurer.
Prior to Emerson he held positions as an Officer and
Assistant Controller of Jersey Central Power and Light, was
Coordinator of Internal Auditing for the GPU System,
controller of a multi million dollar food manufacturing
company, and held various positions in a public accounting
firm. Mr. Bohn also has a B.S. at Fairleigh Dickinson
University and is a member of New Jersey State Society of
C.P.A.'s.
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 has been 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.
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 Chief
Financial Officer on September 10, 1999. 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.
15
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 25, 2001, August 26, 2000 and
August 28, 1999, 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 25, 2001 or (b) one of
our four other most highly compensated executive officers at
August 25, 2001 whose total annual salary and other
compensation exceeded $100,000 (collectively with the Chief
Executive Officer, the "Named Executive Officers").
Annual Compensation Long-term compensation
Awards Payouts
Name and Year Salary Bonus Other Securities
principal position annual Restricted underlying
compens Stock options/ LTIP All other
ation Awards SARs pay-outs compensation
($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Harley J. 2001 414,400(1) - 169,815(1)(2) - 300,000(4) - 0(1)
Greenfield, 2000 385,000 50,000 200,714 - 297,047 - 0
Chairman of the 1999 320,000 63,675 - - - - 0
Board and Chief
Executive Officer
Rami Abada, 2001 414,400(3) - 169,815(4)(2) - 150,000 - 0(3)
President, Chief 2000 254,000 50,000 200,714 - 300,000 - 0
Operating Officer 1999 120,000 63,675 - - - - 0
and Interim Chief
Financial Officer
Edward B. Seidner, 2001 298,685 - - - 100,000(6) - 0
Executive Vice 2000 240,000 - - - - - 0
President 1999 240,000 - - - - - 0
Kevin Mattler, 2001 131,000 - 15,000 - - - 0
Senior Vice 2000 131,000 - - - - - 0
President-Store 1999 131,000 - - - - - 0
Operations
Leslie Falchook 2001 116,000 - - - - - 0
Senior Vice 2000 116,000 - - - - - 0
President- 1999 116,000 - - - - - 0
Administration
(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 premium
was $111,000 for the fiscal year ended August 25, 2001. 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
16
our contributions. Mr. Greenfield is entitled to, and
we will pay him for, amounts due to him under the
agreement from and including the date of his agreement.
(2)Such amount was accrued with respect to fiscal 2001,
but not yet paid.
(3)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 August 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 premium was $32,000 for
the fiscal year ended August 25, 2001. 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.
(4)On January 12, 2001, Mr. Greenfield was granted
options to purchase 300,000 shares of our common stock at
$3.52 per share.
(5)On January 12, 2001, Mr. Abada was granted options
to purchase 150,000 shares of our common stock at $3.52
per share.
(6)On January 12, 2001, Mr. Seidner was granted options
to purchase 100,000 shares of our common stock at $3.52
per share.
Director Compensation
Non-employee directors currently receive a fee of $10,000
per year, plus $500 per meeting attended which fees amounted
to an aggregate of $70,000 in fiscal 2001. Directors are
reimbursed for out-of-pocket expenses incurred in connection
with their services as such.
Stock Option Plans
We have Incentive and Non-Qualified Stock Option Plans,
pursuant to which, as of August 25, 2001, options to
purchase an aggregate of 830,047 shares of our common stock
were outstanding and under which options to purchase an
aggregate of 19,953 shares of common stock were available
for grant. In addition, options granted outside of these
plans to purchase an additional 1,361,730 shares of common
stock were outstanding as of August 25, 2001. 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 25, 2001, 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 January 2001, Harley J. Greenfield was awarded stock
options to purchase 300,000 shares of our common stock at
$3.52 per share, which exceeds the market value of the
common stock on the date of the grant.
17
In January 2001, Rami Abada was awarded stock options to
purchase 150,000 shares of our common stock at $3.52 per
share, which exceeds the market value of the common stock on
the date of the grant.
In January 2001, Edward B. Seidner was awarded stock
options to purchase 100,000 shares of our common stock at
$3.52 per share, which exceeds the market value of the
common stock on the date of the grant.
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year End Option Values
Number of Value of
Securities Unexercised
Underlying In-the-Money
nexercised Options at
Options at August 25,
ugust 25, 2001 2001(1)
Name Shares Value Exercis Unexer- Exercis- Unexer-
Acquired Realized able cisable able cisable
on
Exercise (#)
Harley J. N/A N/A 99,016 498,031 $0 $0
Greenfield(2)
(3)(9)
Rami N/A N/A 400,000 250,000 1,000 0
Abada(3)(5)(6)
(7)(10)
Edward B. N/A N/A 0 100,000 0 0
Seidner(3)(11)
Leslie N/A N/A 50,000 0 500 0
Falchook(3)(4)
Kevin N/A N/A 50,000 0 500 0
Mattler(3)(8)
(1) Amount reflects the market value of the underlying
shares of our common stock as reported on the Bulletin
Board on August 25, 2001, a bid price of $ 2.01, 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 at
least 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 on August 15, 1999
to Mr. Abada at an exercise price of $3.51 per share.
(8) Includes 50,000 options granted on May 6, 1997 to
Mr. Mattler at an exercise price of $2.00 per share.
(9) Includes 300,000 options granted on January 12, 2001
to Mr. Greenfield at an exercise price of $3.52 per
share.
(10)Includes 150,000 options granted on January 12, 2001
to Mr. Abada at an exercise price of $3.52 per share.
(11)Includes 100,000 options granted on January 12, 2001
to Mr. Seidner at an exercise price of $3.52 per share.
18
GRAPH
JENNIFER CONVERTIBLES INC.
19
Beginning
Transaction Closing No. Of Dividend Shares Ending Cum. Tot.
Date* Type Price** Shares*** Per Share Reinvested Shares Return
31-Aug-96 Begin 2.500 40.00 40.000 100.00
31-Aug-97 Year End 2.500 40.00 40.000 100.00
31-Aug-98 Year End 1.813 40.00 40.000 72.50
31-Aug-99 Year End 2.109 40.00 40.000 84.38
31-Aug-00 Year End 2.375 40.00 40.000 95.00
31-Aug-01 End 1.985 40.00 40.000 79.40
* 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.
JENNIFER CONVERTIBLES INC.
20
Cumulative Total Return
8/96 8/97 8/98 8/99 8/00 8/01
JENNIFER 100.00 100.00 72.50 84.38 95.00 79.40
CONVERTIBLES, INC.
NASDAQ STOCK MARKET 100.00 139.49 131.81 244.89 374.16 160.03
(U.S.)
S & P HOUSEHOLD 100.00 127.07 147.26 216.20 127.70 167.31
FURNISHINGS &
APPLIANCES
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The following table sets forth, as of November 13, 2001,
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 2001 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:
Name and Address of Amounts and Percent of
Beneficial Owner Nature of Class
Beneficial
Ownership (1)
Harley J. Greenfield(2) 937,305(2)(3) 16.4%
Edward B. Seidner(2) 555,914(2)(4) 9.7
Fred J. Love(2) 585,662(2)(5)(6) 10.3
Jara Enterprises, Inc. (the 293,579(6) 5.1
private company)(2)
David A. Belford(7) 394,000(7) 6.9
Pacchia, Grossman, Shaked,
Wexford Group (8) 482,100(8) 8.5
Bernard Wincig(9) 156,906(9) 2.8
Edward G. Bohn(10) 33,333(10) 0.6
Kevin J. Coyle(10) 39,583(10) 0.7
Leslie Falchook(11) 77,600(11) 1.4
Rami Abada(2)(12) 453,001(12) 7.9
Kevin Mattler(13) 50,000(13) 0.9
Hans J. Klaussner and Klaussner 1,424,500(14) 20.0
Furniture Industries, Inc.(14)
All directors and executive 2,303,642(2)(3)(4) 40.4
officers as a group (eight (8)
persons) (9)(10)(11)(12)(13)
(1)All of such shares are owned directly with sole voting and
investment power, unless otherwise noted below.
(2)The address of Messrs. Greenfield, Abada 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, and (c) 99,016 shares of our common stock underlying
options which are currently exercisable options, but does not
include 498,031 shares of our common stock underlying options
which are not currently exercisable. 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. Does
not include 100,000 shares of our common stock underlying options
which are not currently exercisable.
(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.
21
(6)All of such shares are beneficially owned by Mr. Love, the sole
stockholder of the private company. Includes shares of our
common stock owned by three of the private company's wholly-
owned subsidiaries. Mr. Love has sole voting and shared
dispositive power over such shares, as such shares are subject
to the options granted by him to Mr. Greenfield and Mr. Seidner
and may not be disposed of without the consent of the relevant
optionee. The private company's address is One Ames Court,
Plainview, New York 11803.
(7)The address of David A. Belford is 2097 S. Hamilton Road,
Suite 200, Columbus, Ohio 43232.
(8)Represents the shares of our common stock owned by a group
which was formed to object to the prior proposed settlement of
the derivative litigation referred to in "Legal Proceedings." The
group consists of the following persons and entities, each of
which has the sole and shared power to vote and dispose, and
total beneficial ownership, of the shares of common stock set
forth opposite such persons' or entity's name: (1) Anthony J.
Pacchia - sole 11,000, shared 20,700, total 31,700; (2) F&Co.,
Inc. as Custodian for Pacchia under IRA Account - sole 16,000,
shared 15,700, total 31,700; (3) Anthony J. Pacchia, P.C., (Money
Purchase) fbo Pacchia - sole 2,500, shared 29,200, total 31,700;
(4) Sandra Pacchia Custodian for Lee Pacchia - sole 1,100, shared
30,600, total 31,700; (5) Sandra Pacchia Custodian for Tom
Pacchia - sole 1,100, shared 30,600, total 31,700; (6) Anthony T.
Pacchia and Gloria Pacchia - sole 1,000, shared 15,000, total
16,000; (7) Anthony T. Pacchia, IRA Rollover - sole 15,000,
shared 1,000, total 16,000; (8) Kenneth S. Grossman, Trustee,
Profit Sharing Plan DLJSC - Custodian fbo Kenneth S. Grossman -
sole 96,400, shared 3,500, total 99,900; (9) Kenneth S. Grossman
- 3,500 sole, 96,400 shared, total 99,900; (10) IRA fbo Patricia
Berger, DLJSC as custodian - sole 3,500, shared 0, total 3,500,
(11) Ellen Grossman, Custodian for Andrew Grossman UGMA/ NY -
sole 5,000, shared 0, total 5,000; (12) IRA fbo Howard Berger,
DLJSC as custodian - sole 3,500, shared 0, total 3,500; (13) IRA
fbo Jill Berger, DLJSC as custodian, Rollover Account - sole
3,500, shared 0, total 3,500; (14) IRA fbo Herbert Berger, DLJSC
as custodian - sole 5,000, shared 0, total 5,000; (15) Marilyn
Levy - sole 5,000, shared 0, total 5,000; (16) Ellen Grossman,
Custodian for Joshua Grossman UGMA/NY - sole 5,000, shared 0,
total 5,000; (17) Amir Shaked - sole 37,700, shared 1,300, total
39,000; (18) IRA fbo Amir Shaked - sole 1,300, shared 37,700,
total 39,000; (19) Wexford Special Situations 1996, L.P. - sole
0, shared 142,783, total 142,783; (20) Wexford Special Situations
1996 Institutional L.P. - sole 0, shared 25,764, total 25,764;
(21) Wexford Special Situations 1996 Limited - sole 0, shared
7,859, total 7,859; (22) Wexford-Euris Special Situations 1996,
L.P. - sole 0, shared 36,094, total 36,094; (23) Wexford
Management LLC - sole 0, shared 212,500, total 212,500; (24) IRA
fbo Zachery Goldwyn - sole 52,500, shared 0, total 52,500. The
address for group members (a) 1-5 is 602 Orchard Street,
Cranford, New Jersey 07106, (b) 6 and 7 is 31 Center Board Drive,
Bayville, New Jersey 08721, (c) 8-9, 11, 16, 17 and 18 is 620
Fifth Avenue, 7th Floor, New York, New York 10020, (d) 10 and 14
is 31 Wisconsin Avenue, N. Massapequa, New York 11578, (e) 12 and
13 is 58 Alpine Way, Dix Hills, New York 11746, (f) 15 is 155
East 76th Street, New York, New York 10022, (g) 19-21 and 23-24
is 411 West Putnam Avenue, Greenwich, Connecticut 06830, and (h)
22 is c/o Hemisphere Fund Managers Ltd., Harbour Centre,
Georgetown, Grand Cayman Islands, B.W.I.
(9)Includes 8,800 shares of our common stock owned by
Mr. Wincig's wife and 37,333 shares of our common stock
underlying exercisable options. Does not include 16,667 shares
of our common stock underlying options which have not yet vested.
(10)Includes, as to each individual, 33,333 shares of our common
stock underlying exercisable options, but does not include 16,667
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 400,000 shares of our common stock underlying
options which are currently exercisable options, but does not
include 250,000 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.
Does not include 18,730 shares of our common stock underlying
options which are not currently exercisable. The principal
address of Klaussner is 405 Lewallen Street, Asheboro, North
Carolina 27203. Hans J. Klaussner's address is 7614 Gegenbach,
Germany.
Based on our review of reports filed by our directors, executive
officers and 10% shareholders on Forms 3, 4 and 5 pursuant to
Section 16 of the Securities Exchange Act of 1934, all of which
reports were filed on a timely basis during fiscal year 2001.
22
Item 13. Certain Relationships and Related Transactions.
The Private Company
Until November 1994, Harley J. Greenfield, Fred J. Love and
Edward B. Seidner, each owned 33- 1/3% of the private company,
which, together with its subsidiaries, owns or licenses the private
company stores. In November of 1994, Messrs. Greenfield and Seidner
sold their interests in the private company for long-term notes and
options to purchase the shares of our common stock which are owned
by Mr. Love and the private company. As a result of such sale,
Mr. Love now beneficially owns 100% of the private company. The
private company is responsible for the warehousing for our owned
stores, our licensed stores and the private company stores and
leases and operates the warehouse facilities for such stores. Until
December 31, 1993, the private company was also responsible for the
purchasing and for certain advertising and promotional activities
for our owned stores, our licensed stores and the private company
stores. Effective January 1, 1994, we assumed the responsibility
for purchasing and advertising for ourselves, our licensees, and the
private company stores. The private company is responsible for a
share of all advertising production costs and costs of publication
of promotional material within the New York area. Until October 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 25, 2001, 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.
In July 2001, the private company and we entered into a series of
agreements designed to settle the derivative action among the
private company, certain of our current and former officers and
directors and former accounting firms and us. Effectiveness of the
agreements is subject to certain conditions, including court
approval and receipt by us of a fairness opinion or appraisal. We
also entered into an Interim Operating Agreement designed to
implement certain of the provisions of the settlement agreement
prior to court approval.
The material terms of the settlement agreements are as follows:
Pursuant to a Warehouse Transition Agreement, the private company
will transfer the assets related to the warehouse system currently
operated by the private company to us and we will become responsible
for the leases and other costs of operating the warehouse. Pursuant
to computer hardware and software agreements, we will also assume
control of, and responsibility for, the computer system used in the
operations of the warehouse systems and stores while permitting the
private company access to necessary services. Pursuant to a
Warehousing Agreement, we will be obligated to provide warehouse
services to the private company of substantially the type and
quality it provided to us. During the first five years of the
agreement, we will receive a fee of 2.5% on the net sales price of
goods sold by the private company up to $27,640,000 of sales and 5%
on net sales over $27,640,000. After five years, we will receive a
fee of 7.5% of all net sales by the private company. In addition,
during the full term of the agreement, we will receive a fee for
fabric protection and warranty services at the rate we were being
charged, subject to increase for documented cost increases.
23
Pursuant to a Purchasing Agreement, we will continue to purchase
merchandise for ourselves and the private company on substantially
the same terms as currently, except that the private company will
have 85 days to pay amounts due.
We will also receive, for no cost, the limited partnership
interests in limited partnerships currently operating 48 stores. We
currently own the general partnership interest in such limited
partnerships. The operations of these stores are currently included
in our consolidated financial statements. Accordingly, this will
not materially impact our financial statements. However, after the
settlement, we will wholly own the partnerships operating the
stores.
Under a Management Agreement and License, we will be responsible
for managing the sales of the private company's stores so that the
stores will be substantially the same as our own stores, provided
the private company is not obligated to spend more than $25,000 per
store or $100,000 in any 12-month period on maintenance and
improvements to its stores. If the private company's sales exceed
$27,640,000 in a year, we will receive a management fee of 48% of
the excess in the first two years, and thereafter, 10% of such
excess up to $29,640,000 and 48% of any excess over $29,640,000. We
will also have the right to open an unlimited number of stores in
New York and will pay a royalty of $400,000 per year, which will
also cover the stores recently opened in New York. We intend to
open stores aggressively in New York.
Because we may negatively impact the private company's sales by
opening additional stores of our own within the state of New York
and because we will be managing the private company's stores, we
will agree to pay the private company 10% of the amount by which
their yearly net sales for any 12 month period are below
$27,640,000, provided that if their yearly net sales fall below
$26,000,000, we will pay the private company 15% of such shortfall
amount, provided further that such amounts together with amounts we
may pay for advertising if the private company's sales drop below
$27,640,000 shall not, in the aggregate, exceed $2,700,000 in any 12
month period. Messrs. Greenfield and Seidner, officers, directors
and principal stockholders, have agreed to be responsible for up to
an aggregate of $300,000 of amounts due under these provisions in
each year.
The private company has the right to close stores and, if it
does, we have the right to purchase them for the cost of the related
inventory (typically, approximately $50,000) and, subject to
obtaining any necessary landlord's consent, continue the operations
of the stores for our own account. The closing of stores by the
private company does not affect our obligation to pay the private
company for shortfalls in its sales.
The private company is to contribute $125,750 per month to
advertising, provided that such amount is to be reduced by the
lesser of $80,000 or 1% of our sales in New York (other than sales
of leather furniture and sales from six stores in New York which we
have owned for many years). In addition, subject to certain
exceptions, if the private company's sales in any 12 month period
commencing January 1, 2002, are less than $27,640,000 we will pay
the private company (or reduce the advertising payment they owe us)
by an amount equal to 50% of the amount by which their sales are
below $27,640,000 provided that the amount of such reduction in any
12-month period, plus any payments of the 10-15% with respect to
sales shortfalls as described above, will not exceed $2,700,000 in
the aggregate.
The Management Agreement and License expire in 2049 and may be
terminated by an arbitrator for material breach. The Management
Agreement also terminates upon purchase by us of the private
company's stores pursuant to the Option Agreement described below.
If terminated for a reason other than a purchase, we would be
obligated not to sell furniture other than leather furniture in New
York, except certain counties and, accordingly, would have to either
sell our Jennifer Convertibles stores to the private company, close
them or convert them to Jennifer Leather stores. In addition in
case of such termination we would have to make up certain
shortfalls, if any, in the private company sales in cash or by
delivery of stores in New York meeting certain sales volume
requirements.
In settlement of certain disputes as to amounts due us from the
private company, the private company will execute three notes to us
in the aggregate principal amount of $1,600,000 plus amounts owed at
the closing date for purchasing and other services ($1,992,403 as of
May 26, 2001), including a note in the principal amount of $200,000
due over three years and bearing interest at 6% per annum, a note in
the principal amount of $1,400,000 due over five years and bearing
interest at 6% per annum and a note in the remaining principal
amount due, as to the amount, if any, in excess of $1 million within
90 days, and due, as to the balance, if any, over five years without
interest.
24
Pursuant to an Option Agreement, we will receive the option to
purchase the assets relating to private company's stores for a
period of 10 years beginning on the tenth anniversary of entering
into the Definitive Agreements at a purchase price starting at
$8,125,000, plus the assumption of approximately $5,000,000
principal amount of notes due to Messrs. Greenfield and Seidner, and
declining over the term of the option. If we exercise the Option
Agreement, the private company will enter into an Asset Purchase
Agreement in the form attached to the Option Agreement.
Under an Interim Operating Agreement, we will operate in most
respects as if a closing under the agreements summarized above had
occurred, except that the private company will not transfer the
warehouse assets, computer system or limited partnership interests.
However, we will operate the warehouse system and manage the private
company stores as if the closing had occurred and we will be able to
continue open stores in New York as if such closing had occurred.
If, for any reason, the court fails to approve the settlement and
there is no appeal, the Interim Operating Agreement would terminate.
In such case, everything would go back to the way it was before such
agreement was signed except that we would have a license to continue
to operate the stores we open in New York for a royalty of $400,000
per year plus 5% of net sales in New York, except for sales of
leather furniture and from certain of the older New York stores
owned by us.
Under the Interim Operating Agreement, we paid $200,000 as a one-
time royalty fee for opening four additional stores in New York
which was expensed in fiscal year 2001.
The main impact of the Interim Operating Agreement is that we
will be receiving the benefits of operating the warehouse system,
net of the related costs. We will no longer have to pay the private
company amounts for warehousing and fabric protection. We will also
generate additional revenues from services to the private company.
However, offset against this is that we bear the expenses of
operating the warehouse, including estimated annual rent of
$1,000,000, as well as other operating expenses, including
personnel. Based on our current estimates of the other expenses of
operating the warehouse and the estimated payable amounts by us to
the private company pursuant to the settlement agreement, we expect
that the agreement will improve our operating results by an
estimated $700,000 each year. There is no assurance that the
agreement will improve our operating results to the extent we
estimate or at all.
In addition, we will be able to open additional stores in New
York, will manage the private company's stores and will be subject
to the possibility of having to make payments, for periods
commencing after January 2002, in respect of any shortfall in the
private company's sales.
One other consequence of operating under the Interim Operating
Agreement is that the private company will have 85 days to pay for
merchandise purchased by us for the private company's account. The
extended payment terms will slow our cash flow from the private
company and, based on our estimates of these purchases by the
private company, over the first 12 months, the adverse impact on
cash flow is estimated at approximately $1.5 million when compared
to the current 30 days system under which the private company is
expected to pay from invoice.
A monitoring committee will be set up to review, on an on-going
basis, the relationships between the private company and us in order
to avoid potential conflicts of interest between us. The monitoring
committee will consist of two persons, Kenneth Grossman, one of the
parties objecting to the original settlement between the private
company and us, and Edward Bohn, a current member of our board, each
of whom will be paid $50,000 per year. The monitoring committee
will remain in effect for five years after the approval of the
settlement by the court.
As of August 25, 2001, the private company owed to us $3,225,000
for current charges for fiscal 2001 which have since been fully
paid. Amounts owed by the private company to us as of August 25,
2001 which consist of unpaid amounts from fiscal 1996 and prior
years totaling $4,811,000, 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."
25
Prior to the agreements signed in July 2001, the following
agreements were in effect:
Pursuant to a license agreement between the private company and
us, the private company had 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.
As set forth in "Business-Warehousing and Related Services," the
private company provided certain warehouse facilities and related
services, including arranging for goods to be delivered to such
facilities and to customers pursuant to a warehousing agreement
between the private company and us. The private company also
provided fabric protection services, including a life-time warranty,
to our customers and our licensees.
We retained approximately 2/3 of the revenues from fabric
protection and the warranty. During the thirty-nine weeks ended May
26, 2001, the LP's and we paid warehouse fees under an Offset
Agreement dated March 1, 1996 to the private company aggregating
approximately $3,338,000. During the fiscal year ended August 25,
2001, the LP's and we also paid 1,638,000 under the Offset Agreement
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
$3,900,000 through August 25, 2001. 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 were obligated to purchase
merchandise for the private company on the same terms as we purchase
merchandise for ourselves. During the thirty-nine weeks ended May
26, 2001, the private company purchased from us approximately
$9,200,000 of merchandise, net of discounts and allowances, which
was paid under 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.
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. For
the thirty-nine week period ended May 26, 2001, the charges for such
costs totaled $1,350,000.
Additional Matters
Rami Abada, our President, Chief Operating Officer and Chief
Financial Officer, owned two corporations which each own a licensed
Jennifer Convertibles store. On March 23, 2000, Mr. Abada sold
these two stores to the private company for the sum of $300,000. As
of August 25, 2001, he has received $142,000 and is owed $158,000
from the private company.
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 $166,814 of legal fees from us and the LP's
and an aggregate of approximately $19,203 from the private company
during the fiscal year ended August 25, 2001.
26
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 20.0% of the outstanding common stock as of
August 25, 2001, after giving effect to such conversion. The
preferred stock has a liquidation preference of $5,000,000. No cash
dividends are to be paid on the common stock unless the holders of
the preferred stock receive the same dividend on the preferred stock
on an "as-converted" basis. If we sell our common stock or
equivalents of our stock such as options or convertible securities
at a price, or an effective price in the case of equivalents, of
less than $3.51 per share, then, in connection with its $5,000,000
investment, Klaussner has the right of first refusal to purchase
such stock or stock equivalents at that price. As a result of
75,000 stock options granted to Messrs. Wincig, Coyle and Bohn in
June 2000 at an exercise price of $2.00 per share, on January 18,
2001, we granted Klaussner 18,730 options of our common stock at an
exercise price of $2.00 per share. 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 2001, Klaussner gave us $1,611,000 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
27
(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.
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.
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.
28
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 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.
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.
29
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.
10.30 Interim Operating Agreement dated as of July 6, 2001 by
and between Jennifer Convertibles, Inc., a Delaware
corporation ("JCI") and Jara Enterprises, Inc. ("Jara")
incorporated herein by reference to our Quarterly Report
on Form 10-Q for the quarterly period ended May 26, 2001.
10.31 Omnibus Agreement dated as of July 6, 2001 by and between
JCI and Jara incorporated herein by reference to our
Quarterly Report on Form 10-Q for the quarterly period
ended May 26, 2001.
10.32 Clarkstown Term Note in the amount of $54,525 made as of
May 26, 2001 by Jara in favor of JCI incorporated herein
by reference to our Quarterly Report on Form 10-Q for the
quarterly period ended May 26, 2001.
10.33 Rudzin-Bronx Term Note in the amount of $43,496 made as of
May 26, 2001 by Jara in favor of JCI incorporated herein
by reference to our Quarterly Report on Form 10-Q for the
quarterly period ended May 26, 2001.
10.34 Elmhurst Term Note in the amount of $5,234 made as of May
26, 2001 by Jara in favor of JCI incorporated herein by
reference to our Quarterly Report on Form 10-Q for the
quarterly period ended May 26, 2001.
10.35 Warehousing Transition Agreement dated as of July 6, 2001
by and among JCI, Jennifer Warehousing, Inc., a New York
corporation ("JWI"), Jennifer Convertibles, Inc., a New
York corporation ("JCI-NY") and Jennifer-CA Warehouse,
Inc. ("JCA") incorporated herein by reference to our
Quarterly Report on Form 10-Q for the quarterly period
ended May 26, 2001.
10.36 Warehousing Agreement dated as of July 6, 2001 by and
among JCI, Jennifer Warehousing, Inc., a Delaware
corporation and a wholly owned subsidiary of JCI ("New
Warehousing") and Jara incorporated herein by reference to
our Quarterly Report on Form 10-Q for the quarterly period
ended May 26, 2001.
10.37 Hardware Lease dated as of July 6, 2001 by and between JCI
and Jara incorporated herein by reference to our Quarterly
Report on Form 10-Q for the quarterly period ended May 26,
2001.
10.38 Software License Agreement dated as of July 6, 2001 by and
among JCI and Jara incorporated herein by reference to our
Quarterly Report on Form 10-Q for the quarterly period
ended May 26, 2001.
10.39 Management Agreement and License dated as of July 6, 2001
by and among Jara, JCI, Jennifer Acquisition Corp. ("JAC")
and Fred Love (with respect to Sections 3.3 and 4.2 only)
incorporated herein by reference to our Quarterly Report
on Form 10-Q for the quarterly period ended May 26, 2001.
10.40 Purchasing Agreement dated as of July 6, 2001 by and
between JCI and Jara incorporated herein by reference to
our Quarterly Report on Form 10-Q for the quarterly period
ended May 26, 2001.
10.41 Option Agreement dated as of July 6, 2001 by and among
Jara, Fred J. Love and JCI incorporated herein by
reference to our Quarterly Report on Form 10-Q for the
quarterly period ended May 26, 2001.
10.42 L.P. Purchase Agreement dated as of July 6, 2001 by and
among JCI, Jennifer Management III, Ltd., Jennifer
Management IV Corp. and Jennifer Management V Ltd., and
Jara incorporated herein by reference to our Quarterly
Report on Form 10-Q for the quarterly period ended May 26,
2001.
30
(c) Exhibits.
10.43 Indemnification Agreement dated as of July 6, 2001 by and
among JCI and, with respect to Sections 11, 12 and 14
only: JWI; JCI-NY; JCA; and Jara incorporated herein by
reference to our Quarterly Report on Form 10-Q for the
quarterly period ended May 26, 2001.
10.44 Side Letter re: Fairness Opinion dated as of July 6, 2001
by and between JCI and Jara incorporated herein by
reference to our Quarterly Report on Form 10-Q for the
quarterly period ended May 26, 2001.
10.45 Agreement dated as of July 6, 2001 by and between Harley
J. Greenfield, Edward B. Seidner and JCI incorporated
herein by reference to our Quarterly Report on Form 10-Q
for the quarterly period ended May 26, 2001.
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.
31
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
Name: Harley J. Greenfield
Title: Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated below.
NAME POSITION DATE
/s/Harley J. Greenfield Chairman of the Board November 21, 2001
Harley J. Greenfield and Chief Executive
Harley J. Greenfield Officer (Principal
Executive Officer)
/s/Edward B. Seidner Director November 21, 2001
Edward B. Seidner
/s/Bernard Wincig Director November 21, 2001
Bernard Wincig
/s/Edward Bohn Director November 21, 2001
Edward Bohn
/s/Kevin J. Coyle Director November 21, 2001
Kevin J. Coyle
/s/Rami Abada President, Director, November 21, 2001
Rami Abada Chief Operating Officer
And Chief Financial
Officer
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Index to Financial Statements
Independent Auditors'
Report .....................................F-1
Consolidated Balance Sheets at August 25, 2001
and August 26, 2000 .........................F-2
Consolidated Statements of Operations for
the years ended August 25, 2001,
August 26, 2000 and August 28,
1999........................................F-3
Consolidated Statements of Retained
Earnings (Capital Deficiency) for the
years ended August 25, 2001,
August 26, 2000, and August 28, 1999.........F-4
Consolidated Statements of Cash Flows
for the years ended August 25, 2001,
August 26, 2000 and August 28,
1999.........................................F-5
Notes to consolidated Financial Statements....F-6
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. and subsidiaries as of August 25,
2001 and August 26, 2000, and the related consolidated statements
of operations, stockholders' equity (capital deficiency) and cash
flows for each of the three years in the period ended August 25,
2001. 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 auditing standards
generally accepted in the United States of America. 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 25, 2001 and August 26, 2000, and the
consolidated results of their operations and their cash flows for
each of the three years in the period ended August 25, 2001, in
conformity with accounting principles generally accepted in the
United States of America.
Richard A. Eisner & Company, LLP
New York, New York
November 16, 2001
F-1
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except for share data)
ASSETS
(SEE NOTE 5)
August 25, August 26,
2001 2000
Current assets:
Cash and cash equivalents $ 11,155 $ 6,384
Commercial paper 0 3,025
Accounts receivable 757 328
Merchandise inventories 12,660 11,064
Due from Private Company, net
of reserves of $4,811 and $4,826 at August
25, 2001 and August 26, 2000, respectively 3,225 1,494
Deferred tax asset 500
Prepaid expenses and other current assets 557 450
Total current assets 28,854 22,745
Store fixtures, equipment and leasehold
improvements
at cost, net 5,013 5,180
Deferred lease costs and other intangibles, 329 505
net
Goodwill, at cost, net 1,796 1,970
Other assets (primarily security deposits) 658 592
$ 36,650 $ 30,992
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL
DEFICIENCY)
Current liabilities:
Accounts payable, trade $ 16,920 $ 15,036
Customer deposits 8,693 8,956
Accrued expenses and other current liabilities 5,371 4,959
Amounts payable under acquisition agreement 0 239
Total current liabilities 30,984 29,190
Deferred rent and allowances 4,836 5,058
Total liabilities 35,820 34,248
Commitments and contingencies (Notes 9 and 10)
Stockholders' Equity (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 25, 2001 and
August 26, 2000
(liquidation preference $5,000)
Series B Convertible Preferred-26,664
shares issued
and outstanding at August 25, 2001 and
August 26, 2000
(liquidation preference $133)
Common stock, par value $.01 per share
Authorized 10,000,000 shares; issued and
outstanding 5,704,058 shares at August 25,
2001 and August 26, 2000 57 57
Additional paid-in capital 27,482 27,482
Accumulated (deficit) (26,709) (30,795)
830 (3,256)
$ 36,650 $ 30,992
See Notes to Consolidated Financial Statements.
F-2
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data)
Year ended Year ended Year ended
August 25, August 26, August 28,
2001 2000 1999
(52 weeks) (52 weeks) (52 weeks)
Net sales $129,065 $123,713 $109,284
Cost of sales, including store
occupancy,
warehousing, delivery and fabric
protection
(including charges from the Private
Company of
$4,976, $7,694, and $8,917, 83,289 78,323 71,607
respectively)
Selling, general and administrative 39,850 38,645 35,890
expenses
Provision for losses (recovery) of
amounts due from Private Company 0 107 (42)
(Income) loss from store closings (80) 10 (9)
Depreciation and amortization 1,854 1,691 1,668
124,913 118,776 109,114
Operating income 4,152 4,937 170
Other income (expense):
Royalty income (expense), net (166) 259 388
(including $300
paid to the private company)
Interest income 466 358 171
Interest expense (83) (82) (106)
Other income, net 8 112 150
225 647 603
Income before income taxes 4,377 5,584 773
Income taxes 291 804 403
Net income $4,086 $4,780 $370
Basic income per common share $0.72 $0.84 $0.06
Diluted income per common share $0.57 $0.66 $0.05
Weighted average common shares
outstanding basic 5,704,058 5,704,058 5,701,559
income per share
Effect of potential common share
issuance:
Stock 51,378 63,300 22,077
options
Convertible 1,443,164 1,443,164 1,430,722
preferred stock
Weighted average common shares
outstanding diluted 7,198,600 7,210,522 7,154,358
income per share
See Notes to the Consolidated Financial
Statements.
F-3
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Capital Deficiency)
Years Ended August 25, 2001, August 26, 2000 and August 28, 1999
(In thousands, except share data)
Preferred Preferred
stock stock
Series A Series B Common Stock
Additional Notes receivable
Shares Par Shares Par Shares Par paid-in from warrant Accumulated
Value Value Value capital holders (deficit) Totals
Balances at August 29, 1998 10,000 - - - 5,700,725 57 27,710 (270) (35,945) (8,448)
Write off of notes receivable
from warrant holders - - - - - - (270) 270 - -
Exercise of stock options - - - - 3,333 0 6 - - 6
Purchase of stock options - - - - - - (75) - - (75)
Issuance of Series B Preferred
Stock - - 26,664 - - - 111 - - 111
Net income - - - - - - - - 370 370
Balances at August 28, 1999 10,000 0 26,664 0 5,704,058 57 27,482 0 (35,575) (8,036)
Net income - - 4,780 4,780
Balances at August 26, 2000 10,000 0 26,664 0 5,704,058 $ 57 $ 27,482 $ 0 $ (30,795) $(3,256)
Net income 4,086 4,086
Balances at August 25, 2001 10,000 0 26,664 0 5,704,058 $ 57 $ 27,482 $ 0 $ (26,709) $ 830
3105:
See Notes to Consolidated Financial Statements.
3102:
F-4
3104:
JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Year Ended Year Ended Year Ended
August 25, August 26, August 28,
2001 2000 1999
(52 weeks) (52 weeks) (52 weeks)
Cash flows from operating activities:
Net income $4,086 $4,780 $370
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,854 1,691 1,668
Provision for warranty costs 50 46 100
Provision for fabric protection costs 440 0 0
(Income) loss from store closings (80) 10 (9)
Deferred rent (222) (186) (313)
Deferred tax benefit (500) 0 0
(Recovery of) provision for losses on
amounts due from
Private Company (15) 107 (42)
Changes in operating assets and liabilities
(net of effect from
purchase of licensee):
Merchandise inventories (1,596) (1,224) 384
Prepaid expenses and other current assets (107) 150 (208)
Accounts receivable (429) (212) 469
Due from Private Company (1,716) (312) (541)
Other assets, net (64) 139 81
Accounts payable trade 1,884 0 113
Customer deposits (262) (171) 1,865
Accrued expenses and other payables 3 350 (428)
Net cash provided by operating activities 3,326 5,168 3,509
Cash flows from investing activities:
Capital expenditures (1,362) (1,130) (743)
Deferred leases costs and other intangibles 21 (232) 0
Payments of amounts payable under (239) (461) 0
acquisition agreement
Acquisition of Southeastern Florida Holding
Company, net of $20 cash received 0 (780) 0
Proceeds from (purchase of) commercial 3,025 (3,025) 0
paper
Net cash provided by (used in) investing 1,445 (5,628) (743)
activities
Cash flows from financing activities:
Payments of obligations under capital 0 (63) (243)
leases
Net cash (used in) financing activities 0 (63) (243)
Net increase (decrease) in cash and cash 4,771 (523) 2,523
equivalents
Cash and cash equivalents at beginning of 6,384 6,907 4,384
year
Cash and cash equivalents at end of year $11,155 $6,384 $6,907
Supplemental disclosure of cash flow
information:
Income taxes paid $1,146 $484 $418
Interest paid $83 $82 $106
Supplemental disclosure of non-cash
financing activities:
Issuance of Series B Preferred Stock-in
settlement of liability $111
Acquisition of Limited Partnership interest
and stock options through the issuance of
notes payable $699
See Notes to Consolidated Financial
Statements.
F-5
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 25, 2001, August 26, 2000 and August 28, 1999
(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 25, 2001 and
August 26, 2000, respectively, 112 and 102 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 Statements of Operations are the losses of the LP's
in excess of the limited partners' capital contributions. As of
August 25, 2001 and August 26, 2000, respectively, the LP's
operated 48 and 46 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 25, 2001 and August
26, 2000, respectively, 3 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 25, 2001, 3 stores from which the Company
is entitled to royalties, are owned or operated by the Private
Company (see below).
Also not included in the consolidated financial statements are
the results of operations of 25 owned stores and three 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 his personal guarantee of the notes. In connection with
such transaction, Fred Love, the remaining principal stockholder,
granted Messrs. Greenfield and Seidner options expiring in
November 2004 to purchase the 585,662 shares of the Company's
Common Stock owned by him and the Private Company for $15.00 per
share.
As more fully discussed in Note 3, the Company, the LP's, the
Private Company and the Unconsolidated Licensees have had
numerous transactions with each other. Further, the Company had
made advances to the Private Company which have been
substantially reserved for. In July 2001, the Company and the
Private Company entered into a series of agreements which change
significantly the way they operate with each other and, subject
to certain conditions being satisfied, will result, among other
things, in the LPs becoming wholly-owned by the Company. 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.
(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.
F-6
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 25, 2001, August 26, 2000 and August 28, 1999
(In thousands except for share amounts)
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.
Commerical Paper
Commercial paper is carried at amortized cost, which
approximates market.
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:
8/25/01 8/26/00
Showrooms $6,077 $5,364
Warehouses 6,583 5,700
$12,660 $11,064
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 undiscounted
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 25, 2001 and August 26, 2000 amounted to $476 and $302,
respectively.
In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accountants Standard (SFAS) No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires that upon adoption,
amortization of goodwill will cease and instead, the carrying
value of goodwill will be evaluated for impairment on at least an
annual basis. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001; however, the Company has
elected to adopt this standard as of the beginning of its fiscal
year ending August 24, 2002. Application of the non amortization
provision is expected to result in an increase in net income of
$174 ($0.02 per share) per year. During fiscal 2002, the Company
will perform the first required impairment tests of Goodwill as
of August 25, 2001 and has not yet determined what effect of this
test would be on
F-7
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 25, 2001, August 26, 2000 and August 28, 1999
(In thousands except for share amounts)
the earnings and financial position of the Company. Should
management determine that goodwill is impaired, the impairment
charge will be reflected as a cumulative effect of a change in
accounting principle.
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 $4,836 and $5,058 at
August 25, 2001 and August 26, 2000, 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 preferred stock dividends of $9, 9 and
$7 in 2001, 2000 and 1999, respectively, by the weighted average
number of shares of common stock outstanding during each period.
Diluted income per share reflects, the dilutive effect of the
assumed conversion of Convertible Preferred Stock and exercise of
options. For fiscal year ended August 25, 2001, options of
549,016 shares, which are not dilutive, are not included in the
calculation of diluted income per share.
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 25, 2001, August
26, 2000 and August 28, 1999 aggregated $14,084, $13,163 and
$11,699, respectively, net of amounts charged to the Private
Company and Unconsolidated Licensees (see Note 3).
Warranties
Estimated warranty costs are expensed in the same period that
sales are recognized.
Concentration of Risks
The Company purchased inventory from two suppliers under
normal or extended trade terms amounting to 71% and 18% of
inventory purchases during fiscal 2001, 77% and 8% of inventory
purchases during fiscal 2000 and 77% and 8% of inventory
purchases during fiscal 1999, respectively.
F-8
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 25, 2001, August 26, 2000 and August 28, 1999
(In thousands except for share amounts)
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 25, 2001 and August 26, 2000, amounts on deposit
with this one bank totaled 95% and 88% 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
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, 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 25, 2001
and August 26, 2000.
(3) Related Party Transactions
(a) New proposed agreements and Interim Operating Agreement
In July 2001, the Private Company and the Company entered into
a series of agreements designed to settle the derivative
litigation among the Private Company, certain of the Company's
current and former officers and directors and former accounting
firms and the Company (see Note 10). Effectiveness of the
agreements is subject to certain conditions, including court
approval and receipt by the Company of a fairness opinion or
appraisal. The Company also entered into an Interim Operating
Agreement effective as of May 27, 2001 designed to implement
certain of the provisions of the settlement agreements prior to
court approval. If for any reason the court fails to approve the
settlement and there is no appeal, the Interim Operating
Agreement would terminate. In such case, everything would go
back to the way it was before such agreement was signed except
that the Company would have a license to continue to operate the
stores it opens in New York for a royalty of $400 per year plus
5% of net sales in New York, except for sales of leather
furniture and from certain of the older New York stores owned by
the Company.
The material terms of the settlement agreements are as
follows:
F-9
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 25, 2001, August 26, 2000 and August 28, 1999
(In thousands except for share amounts)
Pursuant to a Warehouse Transition Agreement, the Private
Company will transfer the assets related to the warehouse system
currently operated by the Private Company to the Company and the
Company will become responsible for the leases and other costs of
operating the warehouses. Pursuant to computer hardware and
software agreements, the Company will also assume control of, and
responsibility for, the computer system used in the operations of
the warehouse systems and stores while permitting the Private
Company access to necessary services. Pursuant to a Warehousing
Agreement, the Company will be obligated to provide warehouse
services to the Private Company of substantially the type and
quality it provided to the Company. During the first five years
of the agreement, the Company will receive a warehousing fee of
2.5% on the net sales price of goods sold by the Private Company
up to $27,640 of sales and 5% on net sales over $27,640. After
five years, the Company will receive a warehousing fee of 7.5% of
all net sales by the Private Company. In addition, during the
full term of the agreement, the Company will receive a fee for
fabric protection and warranty services at the rate the Company
was being charged, subject to increase for documented cost
increases. For the fiscal year ended August 25, 2001 charges
(reducing cost of sales) to the Private Company for fabric
protection services amounted to $585 and warehousing fees
amounted to $148.
Pursuant to a Purchasing Agreement, the Company will continue
to purchase merchandise for the Company and the Private Company
on substantially the same terms as currently, except that the
Private Company will have 85 days to pay amounts due.
The Company will also receive, for no cost, the limited
partnership interests in LPs currently operating 48 stores. The
Company currently owns the general partnership interest in such
LPs. As described in Note 2, the operations of these stores are
currently included in the consolidated financial statements.
The Company has previously 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. Under a Management Agreement and License, the
Company will be responsible for managing the sales of the Private
Company's stores so that the stores will be substantially the
same as the Company's own stores, provided the Private Company is
not obligated to spend more than $25 per store or $100 in any 12-
month period on maintenance and improvements to its stores. If
the Private Company's sales exceed $27,640 in a year, the Company
will receive a management fee of 48% of the excess in the first
two years, and thereafter, 10% of such excess up to $29,640 and
48% of any excess over $29,640. The Company will also have the
right to open an unlimited number of stores in New York in
exchange for a royalty to the Private company of $400 per year,
which will also cover the stores recently opened in New York.
For the fiscal year ended August 25, 2001, the Company paid the
Private Company a royalty of $100.
Because the Company may negatively impact the Private
Company's sales by opening additional stores within the state of
New York and because the Company will be managing the Private
Company's stores, the Company agreed to pay the Private Company
10% of the amount by which their yearly net sales for any 12
month period commencing January 1, 2002 are below $27,640,
provided that if their yearly net sales fall below $26,000, the
Company will pay the Private Company 15% of such shortfall
amount, provided further that such amounts together with amounts
the Company may pay for advertising if the Private Company's
sales drop below $27,640 shall not, in the aggregate, exceed
$2,700 in any 12 month period. Messrs. Greenfield and Seidner,
officers, directors and principal stockholders of the Company,
have agreed to be responsible for up to an aggregate of $300 of
amounts due under these provisions in each year.
The Private Company has the right to close stores and, if it
does, the Company has the right to purchase them for the cost of
the related inventory (typically, approximately $50) and, subject
to obtaining any necessary landlord's consent, continue the
operations of the stores for the Company's own account. The
closing of stores by the Private Company does not affect the
Company's obligation to pay the Private Company for shortfalls in
its sales.
F-10
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 25, 2001, August 26, 2000 and August 28, 1999
(In thousands except for share amounts)
The Private Company is to contribute $126 per month to
advertising, provided that such amount is to be reduced by the
lesser of $80 or 1% of the Company's sales in New York (other
than sales of leather furniture and sales from six stores in New
York which the Company has owned for many years). In addition,
subject to certain exceptions, if the Private Company's sales in
any 12 month period commencing January 1, 2002, are less than
$27,640 the Company will pay the Private Company (or reduce the
advertising payment it owes the Company) by an amount equal to
50% of the amount by which its sales are below $27,640 provided
that the amount of such reduction in any 12-month period, plus
any payments of the 10-15% with respect to sales shortfalls as
described above, will not exceed $2,700 in the aggregate. For
the fiscal year ended August 25, 2001 charges (reducing selling,
general and administrative expenses) to the Private Company for
advertising amounted to $368.
The Management Agreement and License expires in 2049 and may
be terminated by an arbitrator for material breach. The
Management Agreement also terminates upon purchase by the Company
of the Private Company's stores pursuant to the Option Agreement
described below. If terminated for a reason other than a
purchase, the Company would be obligated not to sell furniture
other than leather furniture in New York, except certain counties
and, accordingly, would have to either sell the Company's
Jennifer Convertibles stores to the Private Company, close them
or convert them to Jennifer Leather stores. In addition, in case
of such termination the Company would have to make up certain
shortfalls, if any, in the Private Company sales in cash or by
delivery of stores in New York meeting certain sales volume
requirements.
In settlement of certain disputes as to amounts due from the
Private Company, all of which have been fully reserved, the
Private Company will execute three notes to the Company in the
aggregate principal amount of $2,600, including a note in the
principal amount of $200 due over three years and bearing
interest at 6% per annum, a note in the principal amount of
$1,400 due over five years and bearing interest at 6% per annum
and a note in the principal amount of $1,000 due over five years
without interest.
Pursuant to an Option Agreement, the Company will receive the
option to purchase the assets relating to Private Company's
stores for a period of 10 years beginning on the tenth
anniversary of entering into the Definitive Agreements at a
purchase price starting at $8,125, plus the assumption of
approximately $5,000 principal amount of notes due to Messrs.
Greenfield and Seidner, and declining over the term of the
option.
A monitoring committee will be set up to review, on an on-
going basis, the relationships between the Private company and
the Company in order to avoid potential conflicts of interest
between the parties. The monitoring committee will remain in
effect for five years after the approval of the settlement by the
court.
As of August 25, 2001, the Private Company owed the Company
$3,225 for current charges for fiscal 2001, which have since been
fully paid. Amounts owed by the Private Company as of August 25,
2001, which consist of unpaid amounts from fiscal 1996 and prior
years totaling $4,811, are reserved against in the accompanying
consolidated financial statements due to uncertain
collectibility.
(b) Previous Agreements
Prior to the Interim Operating Agreement, the following
agreements were in effect through May 26, 2001:
F-11
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 25, 2001, August 26, 2000 and August 28, 1999
(In thousands except for share amounts)
The Private Company provided services to the Company and the
LP's relating to distribution, inventory control reporting and
data processing pursuant to a warehouse agreement which expired
on May 26, 2001,. The Company and LP's, which utilized warehouse
and distribution facilities leased and operated by the Private
Company, paid 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 February 26, 2001. In connection therewith,
the Company assumed certain payroll costs previously paid by the
Private Company. Additionally, the Private Company provided
fabric protection and warranty services at pre-determined rates.
The Company's cost of sales includes these charges. Revenue from
customers for fabric protection services is included in net
sales. Indicated below are the amounts charged by the Private
Company:
Years Ended
8/25/01 8/26/00 8/28/99
Included in Cost
of Sales:
Freight $0 $1,282 $2,363
Fabric protection 1,638 2,300 2,292
services
Warehousing fees 3,338 4,112 4,262
Total $4,976 $7,694 $8,917
The Company had been paying the Private Company for freight
charges based on quoted freight rates for arranging delivery of
the Company's merchandise up until April 2000 at which time the
Company assumed responsibility for freight.
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 25, 2001, August 26, 2000 and August 28, 1999,
approximately $12,027, $10,537, and $11,646, respectively, of
inventory at cost (before rebates) was purchased by the Private
Company and the Unconsolidated Licensees through the Company.
The Company receives the benefit of any vendor discounts and
allowances in respect of 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 $380, $444 and $619
for the fiscal years ended August 25, 2001, August 26, 2000 and
August 28, 1999, 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 $1,700, $1,800, and $2,240 for
the years ended August 25, 2001, August 26, 2000 and August 28,
1999, respectively.
Two executive officers of the Company and a relative of one of
the officers, own or owned interests in 5 Unconsolidated Licensee
stores. In March 2000, 3 of the stores were acquired by the
Private Company. Royalty income from the 3 stores amounted to
$134, $259 and $388 for the fiscal years ended 2001, 2000, and
1999, respectively.
A director (and stockholder) of the Company received
approximately $166, $158, and $153 in legal fees in the fiscal
years ended in 2001, 2000, and 1999, respectively.
See Note 5 for transactions with Klaussner.
F-12
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 25, 2001, August 26, 2000 and August 28, 1999
(In thousands except for share amounts)
(4) Store Fixtures, Equipment and Leasehold Improvements
8/25/01 8/26/00
Automobiles $ 0 $ 68
Store fixtures and 5,581 5,529
furniture
Leasehold improvements 7,427 6,402
Computer equipment and 1,455 1,262
software
14,463 13,261
Less: Accumulated (9,450) (8,081)
depreciation and
amortization
$5,013 $5,180
(5) Transactions with Klaussner:
The Company and Klaussner Furniture Industries Inc.
("Klaussner"), the Company's largest supplier and the owner of
the outstanding shares of the Series A convertible preferred
stock, have executed a Credit and Security Agreement that
effectively extends 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 25, 2001 and
August 26, 2000, the Company owed Klaussner $8,180 and $9,427,
respectively, no portion of which exceeded the 60 day payment
terms. The Company purchased approximately 71% (2001), 77%
(2000) and 77% in 1999 of its inventory from Klaussner.
Purchase allowances of $1,611 (2001), $2,101 (2000) and $1,889
(1999) 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 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. In connection therewith and as a result of the Company
granting options to employees to purchase shares of common stock
at $2.00 per share, on January18, 2001, the Company granted
Klaussner options to purchase 18,730 shares of common stock at
an exercise price of $2.00 per share. The options expire in
January of 2011.
On December 8, 1999, Klaussner entered into an agreement with
the Company in which it agreed, subject to certain conditions, to
loan $150 for each new store approved by Klaussner. The
agreement provides that the maximum aggregate amount of the loans
will be $1,500 (10 stores). Each such loan will be evidenced by
a three year note, bearing interest at the then LIBOR rate for
three month loans plus 3%. Payment of the notes may be
accelerated under certain conditions, including the closing of
the store funded by the related loan or if the Company is not
purchasing at least 50% by dollar volume of their upholstered
furniture from Klaussner. As additional consideration, the
Company has agreed to pay an additional premium on furniture
purchased from Klaussner to satisfy orders originating from new
stores funded by these loans. Such premium would be 3% of the
customary cost of such merchandise until the note is paid in full
and would decrease to 2% for the 10 years after the note is paid.
Such premium payments would cease after such 10 year period. As
of August 25, 2001, no amounts have been borrowed by the Company
under the agreement.
F-13
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 25, 2001, August 26, 2000 and August 28, 1999
(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
8/25/01 8/26/00 8/28/99
Current:
Federal $102 $100 $-0-
State 689 704 403
Deferred
Federal (a)(425) -0- -0-
State (a) (75) -0- -0-
$291 $804 $403
(a) Represents reduction of beginning of the year balance
of the valuation allowance for the deferred tax asset.
Expected tax expense based on the statutory rate is reconciled
with actual tax expense as follows:
Years Ended
8/25/01 8/26/00 8/28/99
"Expected" tax expense 34.0% 34.0% 34.0%
Increase (reduction) in
taxes resulting from:
State and other income tax, 16.5% 8.4% 34.4%
net of federal income tax
benefit
Non-deductible items 1.7% 2.1% 6.8%
Other 4.1% 0.9% 1.1%
Reduction of valuation
allowance to recognize
estimated future year (11.5)%
benefit of carryforward and
deductible temporary
differences
Utilization of net (38.1)% (31.0)% (24.2)%
operating loss
carryforwards
6.7% 14.4% 52.1%
F-14
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 25, 2001, August 26, 2000 and August 28, 1999
(In thousands except for share amounts)
The principal components of deferred tax assets, liabilities
and the valuation allowance are as follows:
8/25/01 8/26/00 8/28/99
Deferred tax assets: (a)
Federal and state net operating $5,328 $6,754 $5,753
loss carryforwards
Reserve for losses on loans and 1,485 2,158 2,727
advances
Accrued partnership losses - - 41
Deferred rent expense 1,934 2,023 1,231
Inventory capitalization 283 253 253
Other expenses for financial 660 557 506
reporting, not yet deductible
for taxes
Total deferred tax assets, 9,690 11,746 10,511
before valuation allowance
Less: Valuation allowance (7,912 ) (10,082) (8,832)
Total deferred tax assets $1,778 $1,665 $1,679
Deferred tax liabilities:
Excess of book over tax basis of $1,278 $1,601 $1,552
store fixtures, equipment and
leasehold improvements
Other
Total deferred tax liabilities
Net deferred tax assets $500 $-0- $-0-
(a) Restated from amounts previously reported.
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 25, 2001, August 26,
2000 and August 28, 1999, the valuation allowance
(decreased)/increased by $(2,170), 1,250, and ($187). The
reduction of the valuation allowance in fiscal year 2001 includes
a $500 reduction of the beginning of the year balance resulted
from a change in judgment about the utilization of the net
operating loss carryforwards and deductible temporary differences
in future years due to the Company's operating profits during
fiscal 2001 and its anticipation of future taxable income.
As of August 25, 2001, the Company has a net operating loss
carryforward for federal income tax purposes of approximately
$13,000, expiring $6,000 in the year 2011, $6,000 in the year
2012 and $1,000 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.
F-15
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 25, 2001, August 26, 2000 and August 28, 1999
(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 to 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
(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. In
May 1997, the Company adopted the 1997 Stock Option Plan, under
which 500,000 shares of Common Stock were reserved for issuance.
As of August 25, 2001 no options have been granted under the
plan. The 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.
F-16
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 25, 2001, August 26, 2000 and August 28, 1999
(In thousands except for share amounts)
Additional information with respect to the Company's stock
options under and outside the Plans is as follows:
Options Exercisable Options
Number of Weighted Number of Weighted
Shares Average Shares Average
Exercise Exercise
Price Price Per
Per Share Share
Outstanding at 1,358,380 $3.84 738,670 $5.33
8/29/98
Exercised (3,333) $2.00
Canceled (1,000) $2.00
Expired
Outstanding at 1,304,047 $3.80 970,661 $4.39
8/28/99
Granted 697,047 $2.76
Canceled
Outstanding at 1,605,047 $2.80 998,656 $2.91
8/26/00
Granted 601,730 $3.47
Canceled
Outstanding at 2,191,777 $2.99 1,225,349 $2.89
8/25/01
As of August 25, 2001, the number of shares of Common Stock
reserved for options available for grant under the Plans was
19,953 and the weighted average remaining contractual life of the
outstanding options is 7.4 years.
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:
2001 2000 1999
Net Income:
As reported $4,086 $4,780 $370
Pro forma under SFAS 123 $3,942 $4,406 $ 17
Basic income per share:
As reported $0.72 $0.84 $0.06
Pro forma under SFAS 123 $0.69 $0.77 $0.00
Diluted income per share:
As reported $0.57 $0.66 $0.05
Pro forma under SFAS 123 $0.55 $0.61 $0.00
The weighted average fair value on the date of grant of
options granted is estimated at $0.39 and $0.59 in 2001 and 2000,
respectively, using the Black-Scholes option-pricing model with
the following weighted average assumptions:
2001 2000
Risk-free interest rate 4.42-5.86% 5.10%
Expected life of options 5 5
Expected stock price volatility 24-31% 40%
Expected dividend yield 0% 0%
F-17
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 25, 2001, August 26, 2000 and August 28, 1999
(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) Commitment and other
Leases
The Company and LP's lease retail store locations under
operating leases for varying periods through 2016 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 25, 2001:
Year Ending August
2002 $15,315
2003 13,603
2004 11,661
2005 7,579
2006 5,231
Thereafter
$70,016
Rental expense for all operating leases amounted to
approximately $17,268, $15,101, and $13,661, net of sublease
income of $221, $196, and $184, for the years ended August 25,
2001, August 26, 2000 and August 28, 1999, respectively.
Certain Limited Partnership Agreements
In 1992, the Company entered into three additional Limited
Partnership Agreements (the "Agreements") 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. Subject to court
approval of the settlement agreements described in Note 3, the
Company will acquire such interests from the Private Company at
no cost and the LPs will be wholly-owned by the Company.
Letters of Credit
The Company's private label credit card program initially
required the Company to issue $1,200 in standby letters of
credit. The Private Company participated in this program and
provided 25% of the cash needed to fund standby letters of
credit. Such letters of credit were terminated in November 2000,
when the Company achieved certain specified levels of
profitability.
F-18
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 25, 2001, August 26, 2000 and August 28, 1999
(In thousands except for share amounts)
Employment Agreements
On August 15, 1999, the Chief Executive Officer of the
Company entered into a five-year employment agreement with a base
salary of $400 per annum. The agreement provides for bonuses
based on earnings and revenues.
On August 15, 1999, the President, Chief Financial Officer 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:
8/25/01 8/26/00
Advertising $929 $722
Payroll 1,210 1,325
Legal 101 43
Accounting 190 199
Store closings 0 80
Litigation settlement costs 279 279
Sales tax 1,057 712
Warranty 500 450
Fabric protection 440 0
Income tax 66 420
Freight 75 96
Other
$5,371 $4,959
(10) Litigation
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". In
addition, the complaints in these actions assert various acts of
wrongdoing by the defendants, including the Private company and
current and former officers and directors of the Company as well
as claims of breach of fiduciary duty by such individuals.
On November 30, 1998, the court approved the settlement of
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
F-19
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 25, 2001, August 26, 2000 and August 28, 1999
(In thousands except for share amounts)
per annum (cumulative unpaid dividends of $26 at August 25, 2001.
The preferred stock is convertible at the option of the Company
at any time 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.
As described in Note 3, on July 6, 2001 the Company entered
into settlement agreements as to the derivative litigation,
subject to court approval of such settlement and certain other
conditions.
F-20