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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
OR
Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
for the Transition Period from ______ to ______
For the fiscal year ended Commission File number 1-9681
August 28, 2004
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
Woodbury, New York 11797
(Address of principal executive office)
Registrant's telephone number, including area code (516) 496-1900
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $0.01
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: NONE
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 The aggregate market value of the common stock held by non-
affiliates as of November 22, 2004 was $15,203,145.
The number of shares outstanding of common stock, as of November
22, 2004 was 5,763,058.
The Registrant's proxy or information statement relating to its
Annual Meeting of Stockholders to be held on February 8, 2005 is
incorporated by reference into Part III of this Annual Report on Form 10-K.
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 and leather 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 28,
2004, our stores included 203 Jennifer Convertibles stores and 16
Jennifer Leather stores. Of these 219 stores, we owned 141 and
licensed 78, including 27 owned or operated by a related private
company and three owned by other third parties operated by the 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.
Jennifer Leather stores specialize in the retail sale of leather
living room furniture. 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 an attractive setting designed
to show the merchandise, as it would appear in a customer's home. All
of our stores have 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
and 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 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 lifetime fabric protection.
A related private company, "the private company", operates 30
Jennifer Convertibles stores, 27 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 store 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. Fred Love, who passed away in October 2004,
co-founded the private company. Mr. Love was one of our principal
stockholders and also the brother-in-law of Harley J. Greenfield, our
Chairman of the Board, Chief Executive Officer, director and principal
stockholder. Jane Love, Mr. Greenfield's sister, is currently acting
as the interim President of the private company. Jonathan Warner has
been appointed as the trustee of Mr. Love's estate. See "Notes to
Consolidated Financial Statements Footnote Related Party Transactions"
and "Certain Relationships and Related Transactions" in our Proxy
Statement to be furnished in connection with our Annual Meeting of
Stockholders to be held February 8, 2005, which is hereby incorporated
by reference.
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 leather merchandise which may take
up to 20 weeks. We believe that our ability to offer quick delivery
of merchandise represents a competitive advantage.
2
Operations
Generally, our stores are open seven days per week. They are
typically staffed by a manager, one full-time salesperson and in some
cases, one or more part-time salespersons, as dictated by the sales
volume and customer traffic of each particular store. In some cases,
where sales volume and customer traffic so warrant, stores may be
staffed with one to three additional full-time salespersons. Our
licensed stores are substantially similar in appearance and operation
to 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 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 check, upon
delivery of the merchandise. The independent trucker making the
delivery collects the balance of the purchase price.
Marketing
We advertise in newspapers, radio and on television in an attempt
to capitalize on our marketplaces. Our approach to advertising
requires us to establish a number of stores in each area in which 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 our licensees and us. We also have
the right to approve the content of all licensee advertising. See
"Certain Relationships and Related Transactions" in our Proxy
Statement to be furnished in connection with our Annual Meeting of
Stockholders to be held February 8, 2005, which is hereby incorporated
by reference.
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 store locations is critical to
the success of our stores. We also 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 choose the specific locations
within such territory. Although a real estate broker typically
screens sites within a territory and engages in preliminary lease
negotiations, we are responsible for selection 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 generally
range in size from approximately 1,800 square feet to a little over
10,000 square feet. We anticipate that stores opened in the future
will range from approximately 2,000 square feet to 4,000 square feet.
Stores may be freestanding or part of a strip shopping center.
3
In fiscal 2004, we opened five new stores and closed two stores.
We plan to open additional stores when attractive opportunities
present themselves and we will selectively close stores where
economics so dictate. We anticipate opening approximately one
additional store and closing 14 stores during fiscal 2005. As of
November 24, 2004, we have closed four of the 14 stores we anticipate
closing during fiscal 2005.
Sources of Supply
We currently purchase merchandise for our stores, and the stores of
our licensees and the private company, from a variety of domestic
manufacturers generally on 60 to 75 day terms. We also purchase from
overseas manufacturers on similar 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
exclusively market certain products, fabrics and styles. See "Certain
Relationships and Related Transactions" in our Proxy Statement to be
furnished in connection with our Annual Meeting of Stockholders to be
held February 8, 2005, which is hereby incorporated by reference.
Our principal suppliers of sofabeds are Klaussner Furniture
Industries, Inc. and Caye Upholstery LLC. Klaussner 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 one of 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. Klaussner operates retail stores, which compete with Jennifer
Convertibles stores. Leather furniture is purchased primarily from
Klaussner, Caye, Natale, DeCoro and Ashley.
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
pursuant to a credit and security agreement with Klaussner. In May
2003, we executed a Termination Agreement and Release whereby
Klaussner released the liens on our assets. In connection with the
release, a $1.5 million credit line which Klaussner had made available
to us in 1999 was also terminated. The credit line had never been
drawn upon. In addition, in December 1997, Klaussner purchased
$5,000,000 of our convertible preferred stock. In fiscal 2002, 2003,
and 2004, Klaussner gave us certain vendor credits for repairs. See
"Certain Relationships and Related Transactions" in our Proxy
Statement to be furnished in connection with our Annual Meeting of
Stockholders to be held February 8, 2005, which is hereby incorporated
by reference 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 LP's and they will become our wholly owned subsidiaries. For a
description of the proposed settlement, see "Certain Relationships and
Related Transactions" in our Proxy Statement to be furnished in
connection with our Annual Meeting of Stockholders to be held February
8, 2005, which is hereby incorporated by reference. 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 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 warehousing services to the private
company. Pursuant to an Interim Operating Agreement effective as of
May 27, 2001, we are operating in many respects, including
warehousing, as if the settlement agreements were in effect.
4
In July 2001, the private company entered into a series of
agreements with us designed to settle the derivative action among the
private company, certain of our current and former officers, directors
and former accounting firms and us. Effectiveness of the agreements
is subject to certain conditions, including court approval. 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 to us the assets related to the warehouse system
currently operated by the private company 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" in our Proxy Statement to be furnished in connection
with our Annual Meeting of Stockholders to be held February 8, 2005,
which is hereby incorporated by reference 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, and Jennifer Sofas, 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, provided however, that
on November 18, 2004, the Management Agreement and License pursuant to
which we are required to make such royalty payments to the private
company was amended such that the private company has agreed to waive
its rights to receive from us such annual royalty payment during the
period commencing January 1, 2005 through the date on which court
approval is granted. See "Certain Relationships and Related
Transactions" in our Proxy Statement to be furnished in connection
with our Annual Meeting of Stockholders to be held February 8, 2005,
which is hereby incorporated by reference.
Employees
As of August 28, 2004, we employed 443 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 and leather upholstery than most of our
competitors and, as a result of volume purchasing, we are able to
offer our merchandise at attractive prices. We advertise more
extensively than many of our competitors and also offer fast 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 2008.
5
As of August 28, 2004, the LP's and we lease all of our store
locations pursuant to leases, which expire between 2004 and 2017.
During fiscal 2005, 18 leases will expire, although we, as lessee,
have the option to renew nine of those leases. We anticipate
remaining in most of these locations, subject, in the case of the nine
leases that expire, to negotiating acceptable renewals with the
landlords. 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.
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 in connection with the derivative litigation, and in the
case of certain of such agreements, we agreed 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" in our Proxy Statement to be furnished in connection
with our Annual Meeting of Stockholders to be held February 8, 2005,
which is hereby incorporated by reference, on July 6, 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, 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. While we presented the proposed
settlement to the court in May 2004, 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.
In connection with the class action litigation, on November 7,
2003, we issued an additional 30,717 shares of Series B Preferred
Stock, convertible into 21,501 shares of the Company's Common Stock
based on valid proofs of claims. The Series B Preferred Stock shares
are non-voting, have a liquidation value of $5.00 per share and accrue
dividends at a rate of $.35 per share per annum. Accumulated unpaid
dividends for the period from May 1, 2003 through August 28, 2004 on
the 57,381 Series B Preferred Stock outstanding equaled $27,000. The
preferred stock is convertible at our option at any time after the
Common Stock trades at a price of at least $7.00 per share.
1 Each of these individuals and entities is named as a defendant in
at least one action.
Other Matters
On June 11, 2003, Lauren Bisk filed a lawsuit against us in the
Supreme Court of the State of New York in New York county alleging
assault and battery, conversion of identity, defamation, consumer
fraud and infliction of emotional distress. The plaintiff has demanded
monetary damages in the amount of $10 million. Certain of our former
and present employees who are also defendants in the lawsuit and who
were involved in the alleged incident have denied committing any
wrongdoing against the plaintiff. The action is being defended by
counsel appointed by the claims representative of our insurance
carrier. The insurance carrier has agreed to defend the plaintiff's
claims with full reservation of rights. We believe this suit is
without merit, deny liability and are vigorously defending against the
claims.
6
On April 5, 2004, the Attorney General of the State of New York
filed a motion for contempt under New York law in the Supreme Court of
the State of New York, County of Albany, alleging non-compliance with
an order of the Attorney General's Office obtained in 1998 which
enjoined us from engaging in certain alleged deceptive business
practices. In the motion, the Attorney General sought a court order
holding us in civil and criminal contempt for violations of the 1998
order and a fine in the amount of $5,000 per day for each day we have
allegedly disobeyed the 1998 order and certain other fees, as well as
an unspecified amount of monetary damages to the petitioners. On July
8, 2004, we settled with the State of New York for a total of
$277,000, which covers fines, penalties, legal and administrative
costs. As of August 28, 2004, we had paid $36,500 and had accrued an
additional $102,000 in expenses in connection with the litigation,
which represents our half of the settlement, with the other half [to
be] paid by the private company.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Our Executive Officers
Our executive officers are as follows:
Harley J. Greenfield
Mr. Greenfield, age 60, 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 B. Seidner
Mr. Seidner, age 52, became a member of our Board of Directors in
August 1986 and served until November 9, 2004. He has been our
Executive Vice President since 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.
Rami Abada
Mr. Abada, age 45, 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 our 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.
Leslie Falchook
Mr. Falchook, age 44, 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, age 46, became our Vice President of 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.
The officers serve at the discretion of the Board of Directors
and there are no family relationships among the officers listed and
any of our directors.
7
PART II
Item 5. Market For Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.
The principal market for our common stock, which was traded under
the symbol JENN, through June 9, 2003 was the Over the Counter
Bulletin Board. On June 10, 2003, during the fourth quarter of fiscal
2003, trading for our common stock began on the American Stock
Exchange under the symbol JEN. The following table sets forth, for the
fiscal periods indicated, the high and low bid quotations of our
common stock on the Bulletin Board and the high and low sales prices
of our common stock on the American Stock Exchange, as applicable.
The bid quotations reflected prior to June 10, 2003 represent the high
and low bid quotations of our common stock on the Bulletin Board.
Such quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not necessarily represent actual
transactions. The prices reflected on and after June 10, 2003
represent high and low sales prices of our common stock on the
American Stock Exchange.
High Low
Fiscal Year 2003:
1st Quarter $5.50 $3.50
2nd Quarter 5.80 4.12
3rd Quarter 4.25 3.38
4th Quarter 4.85 3.60
High Low
Fiscal Year 2004:
1st Quarter $4.15 $2.95
2nd Quarter 4.00 3.00
3rd Quarter 4.15 3.00
4th Quarter 3.40 2.90
As of November 22, 2004, there were approximately 202 holders of
record and approximately 1,000 beneficial owners of our common stock.
On November 22, 2004, the closing sales price of our common stock as
reported on the American Stock Exchange was $3.14.
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.
Equity Compensation Plan Information
The following table provides information about shares of our
common stock that may be issued upon the exercise of options under all
of our existing compensation plans as of August 28, 2004.
8
Plan category Number of Weighted- Number of
securities to average securities
be issued upon exercise remaining
exercise of price of available for
outstanding outstanding future issuance
options, options, under equity
warrants and warrants and compensation
rights rights plans (excluding
(a) (b) securities
reflected in
column (a))
(c)
Equity compensation 780,047 $ 2.21 700,000
plans approved by
security holders
(1)
Equity compensation 2,158,730 $ 3.37 --
plans not approved
by security holders
(2)
Total 2,938,777 $ 3.06 700,000
(1) Reflects aggregate options outstanding under our 1986, 1991 and
2003 Incentive and Non-Qualified Stock Option Plans. Although the
1986 and 1991 plans have expired, there are issued and unexercised
stock options that remain outstanding pursuant to those plans.
There are options to purchase 700,000 shares of common stock
authorized under our 2003 plan, of which 233,333 shares were issued
to one of our directors on November 11, 2004. Accordingly, 466,667
shares of common stock remain available under such plan.
(2) Reflects aggregate options outstanding outside our Incentive and
Non-Qualified Stock Option Plans that were issued pursuant to
individual stock option agreements.
On February 7, 1995, we issued options to purchase an aggregate of
25,000 shares of our common stock at an exercise price of $2.94 per
share to one of our directors.
On May 6, 1997, we issued options to purchase an aggregate of 252,500
shares of our common stock at an exercise price of $2.00 per share to
certain of our consultants and employees.
On June 25, 1998, we issued options to purchase an aggregate of 38,000
shares of our common stock at an exercise price of $2.00 per share to
certain of our employees.
On August 15, 1999, we issued options to purchase an aggregate of
300,000 shares of our common stock at an exercise price of $3.52 per
share to one of our officers.
On January 10, 2000, we issued options to purchase an aggregate of
5,000 shares of our common stock at an exercise price of $2.00 per
share to a consultant.
On June 14, 2000, we issued options to purchase an aggregate of 95,000
shares of our common stock at an exercise price of $2.00 per share to
certain of our directors and employees.
On January 12, 2001, we issued options to purchase an aggregate of
550,000 shares of our common stock at an exercise price of $3.52 per
share to certain of our officers.
On January 18, 2001, we issued options to purchase an aggregate of
18,730 shares of our common stock at an exercise price of $2.00 per
share to one of our consultants.
On June 14, 2001, we issued options to purchase an aggregate of 30,000
shares of our common stock at an exercise price of $3.52 per share to
one of our employees.
On November 25, 2002, we issued options to purchase an aggregate of
819,500 shares of our common stock at an exercise price of $3.90 per
share to certain of our directors, officers, employees and
consultants.
On May 8, 2003, we issued options to purchase an aggregate of 25,000
shares of our common stock at an exercise price of $3.60 per share to
one of our directors.
9
Item 6. SELECTED FINANCIAL DATA.
The following table presents certain selected data for Jennifer Convertibles,
Inc. and subsidiaries.
(In thousands, except for share data)
Operations Data: Year Year Year Year Year
Ended Ended Ended Ended Ended
8/28/2004 8/30/2003 8/31/2002 8/25/2001 8/26/2000
Revenue $134,170 $126,577 $151,183 $136,642 $133,701
Cost of sales, including
store occupancy, warehousing,
delivery and service costs 95,365 87,061 96,459 92,686 88,087
Selling, general and
administrative expenses 40,727 41,846 42,962 39,963 38,615
Depreciation and amortization 1,575 1,738 1,660 1,854 1,691
137,667 130,645 141,081 134,503 128,393
Operating (loss) income (3,497) (4,068) 10,102 2,139 5,308
Gain on sale of lease 220 0 0 0 0
Interest income 111 136 210 466 358
Interest expense (3) (11) (14) (84) (82)
(Loss) income before income
taxes (3,169) (3,943) 10,298 2,521 5,584
Income tax expense (benefit) 973 (566) (693) (227) 709
Net (loss) income ($4,142) ($3,377) $10,991 $2,748 $4,875
Basic (loss) income per share ($0.73) ($0.60) $1.54(a) $0.39(a) $0.68(a)
Diluted (loss) income per
share ($0.73) ($0.60) $1.50 $0.38 $0.68
Weighted average common
shares outstanding 5,713,058 5,709,900 5,704,058 5,704,058 5,704,058
Common shares issuable on
conversion of Series A
participating preferred
stock - - 1,424,500 1,424,500 1,424,500
Total weighted average
common shares outstanding
basic (loss) income per
share 5,713,058 5,709,900 7,128,558 7,128,558 7,128,558
Effect of potential common
shares issuances:
Stock options - - 177,868 51,378 63,300
Series B convertible
preferred stock - - 18,664 18,664 18,664
Weighted average common
shares outstanding
diluted (loss) income per
share 5,713,058 5,709,900 7,325,090 7,198,600 7,210,522
Cash dividends on Series B
convertible preferred stock - 88 - - -
Store data: 8/28/2004 8/30/2003 8/31/2002 8/25/2001 8/26/2000
Company-owned stores open
at the end of period 141 138 120 112 102
Consolidated licensed stores
open at the end of period 48 48 48 48 46
Licensed stores not consolidated
open at end of period 3 3 3 3 3
Total stores open at end of
period 192 189 171 163 151
Balance Sheet Date: 8/28/2004 8/30/2003 8/31/2002 8/25/2001 8/26/2000
Working capital (deficiency) ($1,036) $3,625 $5,891 ($3,939) ($6,842)
Total assets 31,522 39,707 43,625 36,774 30,992
Long-term obligations - - - - -
Total liabilities 28,708 32,863 33,539 37,679 34,645
Stockholders equity (Capital
deficiency) 2,814 6,844 10,086 (905) (3,653)
Stockholders equity (Capital
deficiency) per outstanding
share $0.49 $1.20 $1.77 ($0.16) ($0.64)
(a) Restated to include common shares issuable on conversion of Series A participating
preferred stock.
10
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 sofa beds 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 a related private company that
currently operates 30 Jennifer Convertibles stores, which
significantly affect the way we operate with the private company.
Results of Operations
Fiscal year ended August 28, 2004 compared to fiscal year ended August
30, 2003:
Net sales included merchandise sales and home delivery income of
$125,384,000 and $118,577,000 for the fiscal years ended August 28,
2004 and August 30, 2003, respectively. Net sales of merchandise and
home delivery increased 5.7%, or $6,807,000, for the fiscal year ended
August 28, 2004. Revenue from service contracts increased 9.8% to
$8,786,000 for the fiscal year ended August 28, 2004, as compared to
$8,000,000 for the fiscal year ended August 30, 2003. Same store sales
increased 1.3% for the fiscal year ended August 28, 2004, compared to
the fiscal year ended August 30, 2003. These increases are primarily
due to the overall softness in the economy and the poor weather
conditions in the Northeast that had affected retailers generally
during fiscal 2003.
Cost of sales increased to $95,365,000 for the fiscal year ended
August 28, 2004, from $87,061,000 for the fiscal year ended August 30,
2003. Cost of sales as a percentage of revenue was 71.1% in fiscal
2004, an increase of 2.3% over the prior year. This increase is
primarily attributable to an increase in store occupancy costs and
lower margins associated with merchandise imports.
Selling, general and administrative expenses were $40,727,000
(30.4% as a percentage of revenue) for the fiscal year ended August
28, 2004, as compared to $41,846,000 (33.1% as a percentage of
revenue) for the fiscal year ended August 30, 2003, a decrease of 2.7%
as a percentage of revenue. This decrease is primarily attributable
to a reduction of fees associated with our private label card business
along with a reduction in professional fees.
Our net receivables of $3,288,000 from the private company
increased in the aggregate by $138,000 as of August 28, 2004, compared
to the prior year end. We have fully reserved uncollected amounts,
which totaled $4,722,000 as of August 28, 2004 and August 30, 2003,
respectively. The collectibility of this amount is uncertain and
contingent upon court approval of the proposed settlement agreements
and the Interim Operating Agreement.
Interest income decreased by $25,000 to $111,000 for the fiscal
year ended August 28, 2004, as compared to $136,000 during the prior
year. The decrease is due to less funds available for investments.
We reported income tax expense of $973,000 in 2004 and income tax
benefits of $566,000 in 2003. The 2004 expense results primarily from
the increase in the valuation allowance on the deferred tax asset, net
of current tax benefits. The 2003 tax benefit resulted from the tax
effect of the loss for the year, net of an increase in the valuation
allowance on the deferred tax asset.
11
Net loss in the fiscal year ended August 28, 2004 was $4,142,000
compared to net loss of $3,377,000 in the fiscal year ended August 30,
2003. This increase is largely attributable to the effect of the
increase in the valuation allowance of the deferred tax asset.
Fiscal year ended August 30, 2003 compared to fiscal year ended August
31, 2002:
Net sales includes merchandise sales and home delivery income of
$118,577,000 and $140,440,000 for the fiscal years ended August 30,
2003 and August 31, 2002, respectively. Net sales of merchandise and
home delivery income decreased 15.6%, or $21,863,000, for the fiscal
year ended August 30, 2003 primarily due to the overall softness in
the economy and the poor weather conditions in the Northeast that had
adversely affected retailers generally. Decreased same store sales
were partially offset by revenue from the 18 new stores opened during
the year.
Revenue from service contracts decreased 25.5% to $8,000,000 for
the fiscal year ended August 30, 2003, as compared to $10,743,000 for
the fiscal year ended August 31, 2002. Beginning May 27, 2001, we
changed the method under which we recognize income from the sale of
fabric protection (and associated warranties). Before May 26, 2001,
the private company was responsible for all fabric protection warranty
claims, and all fabric protection revenue was recognized at the time
of sale to the customer. After May 26, 2001, as a result of the
execution of the Interim Operating Agreement, we became responsible
for all fabric protection claims and revenue from the sale of fabric
protection began to be recognized over the estimated service period.
The effect was that fabric protection revenue, which we would have
previously recognized as revenue, was immediately treated as deferred
income on our balance sheet and, except for the amendment to the
agreement with the private company referred to in the following
paragraph, would have been recognized in proportion to the costs
expected to be incurred in performing services under the plan.
As this accounting treatment was an unintended result of the
Interim Operating Agreement, we entered into an amendment to such
agreement with the private company pursuant to which, for a payment of
$400,000, payable in eight installments of $50,000, the private
company became responsible for fabric protection claims made after
June 23, 2002, as to previously sold merchandise and, for $50,000 per
month, subject to adjustment based on the annual volume of sales of
the fabric protection plans, the private company is responsible for
fabric protection claims made with respect to all merchandise sold
between June 23, 2002 and August 28, 2004, subject to a one-year
extension at our option. We delivered to the private company a Notice
of Extension on June 24, 2004 exercising our option through August 27,
2005. As a result of this amendment during fiscal 2002, $2,121,000 of
revenue, which had been deferred as of August 25, 2001, was recognized
in fiscal 2002. Service contract revenue for 2003 was lower than the
2002 fiscal year primarily due to the favorable impact of this
amendment on 2002 results and as a direct result of reduced
merchandise sales in fiscal 2003 compared to fiscal 2002.
Cost of sales decreased to $87,061,000 for the fiscal year ended
August 30, 2003, from $96,459,000 for the fiscal year ended August 31,
2002. However, cost of sales as a percentage of revenue was 68.8% in
fiscal 2003, an increase of 5.0% over the prior year. The increase is
attributable to several factors, including the increase of occupancy
costs as a percentage of revenue in 2003, the recognition in 2002 of
the $2,121,000 of fabric protection revenue, as a result of the
amendment described above and the decrease in revenue from service
contracts which has a very high gross margin compared to furniture
sales.
Under the Interim Operating Agreement, which went into effect May
27, 2001, we are no longer charged for warehousing fees by the private
company, but instead provide such services and charge such fees to the
private company. Warehousing fees charged to the private company
(included in net sales) amounted to $597,000 in fiscal 2003 compared
to $673,000 in fiscal 2002. We also bore the expenses of operating
the warehouse system. We reduced such expenses by $656,000 to
$3,592,000 in fiscal 2003, a 15.4% reduction compared to $4,248,000 in
fiscal 2002. Such reduction was accomplished primarily by reducing
payroll.
Selling, general and administrative expenses were $41,846,000
(33.1% as a percentage of revenue) for the fiscal year ended August
30, 2003, as compared to $42,962,000 (28.4% as a percentage of
revenue) for the fiscal year ended August 31, 2002, an increase of
4.7% as a percentage of revenue. Although costs decreased by
approximately $1,116,000, selling, general and administrative expenses
as a percentage of revenue increased due to the reduction in revenue.
The most significant reason for the decrease in overall expenses can
be attributed to a reduction in compensation to officers and sales
staff of $1,798,000 and a reduction in advertising expense of
$719,000. This was partially offset by the $1,326,000 charged to us
by the private company pursuant to the Interim Operating Agreement,
which includes a requirement that we pay the private company specified
amounts based on decreases in its sales volume. We also experienced an
increase in legal fees due to increased litigation.
12
Our net receivables from the private company of $3,150,000
decreased in the aggregate by $546,000 as of August 30, 2003, compared
to the prior year end. We have fully reserved uncollected amounts,
which totaled $4,722,000 as of August 30, 2003 and 4,754,000 as of
August 31, 2002. The collectibility of these amounts is uncertain and
contingent upon court approval of the proposed settlement agreements
and the Interim Operating Agreement.
Interest income decreased by $74,000 to $136,000 for the fiscal
year ended August 30, 2003, as compared to $210,000 during the prior
year. The decrease is due to less funds available for investing and
lower returns on investments.
We reported income tax benefits of $566,000 and $693,000 in 2003
and 2002, respectively. The 2002 benefit resulted primarily from
decreases in the valuation allowance on our deferred tax asset, net of
current tax expense. The 2003 tax benefit resulted from the tax effect
of the loss for the year, net of an increase in the valuation
allowance on the deferred tax asset.
Net loss in the fiscal year ended August 30, 2003 was $3,377,000
compared to net income of $10,991,000 in the fiscal year ended August
31, 2002, resulting in a decrease of income of $14,368,000 in fiscal
2003. The principal reasons for the decrease were the overall softness
of the economy, current world affairs, the extremely inclement weather
in the Northeast, the increase in the amount charged to us by the
private company pursuant to the Interim Operating Agreement and
$2,121,000 of deferred revenue from fiscal 2001 which was recognized
as revenue in the year ended August 31, 2002.
Liquidity and Capital Resources
As of August 28, 2004, we had aggregate working capital deficiency
of $1,036,000 compared to aggregate working capital of $3,625,000 as of
August 30, 2003, and had available cash and cash equivalents of
$3,294,000 compared to cash and cash equivalents of $12,761,000 as of
August 30, 2003. The decrease in cash and cash equivalents is a
result of our operating loss during fiscal 2004 as well as shorter
payment terms with principal suppliers, stocking up on inventory from
our oversea suppliers in order to meet delivery obligations to our
customers and the purchase of an annuity contract.
We have negotiated extended payment terms with principal suppliers
effective September 2004 and we are contemplating closing certain
unproductive stores during fiscal 2005. As a result, although general
trends in the economy have adversely affected retail sales and our
operating cash flow, in the opinion of management, cash flows,
together with available working capital will be adequate to fund
operations during fiscal 2005.
We continue to fund the operations of certain of our limited
partnership licensees, some of which continue to generate operating
losses. Any such losses have been included in our consolidated
financial statements. It is our intention to continue to fund these
operations in the future and, if the settlement agreements referred to
below are approved, we will acquire 100% of such limited partnerships.
Starting in 1995, the private company entered into offset
agreements with us that permit us to offset our current monthly
obligations to one another 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 30, 2003, have been subsequently
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. Our receivables from the private company
and the unconsolidated licensees, which arose in fiscal 1996 and prior
years, had been reserved for.
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. 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 in January 1998. See
"Certain Relationships and Related Transactions" in our Proxy
Statement to be furnished in connection with our Annual Meeting of
Stockholders to be held February 8, 2005, which is hereby incorporated
by reference. 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
May 2003, we executed a Termination Agreement and Release whereby
Klaussner released the liens on our assets.
In fiscal 2004, we opened five new stores and closed two stores. Since
the end of fiscal 2004, we have closed four stores and the private company
has closed three.
For the fiscal years ended August 28, 2004 and August 30, 2003, we
had $757,000 and $1,264,000, respectively, in capital expenditures.
We currently anticipate capital expenditures of approximately $100,000
during fiscal 2005 to support the opening of a new store during the
next fiscal year. We do not anticipate the need for outside financing
for such expansion. In connection with the Termination Agreement and
13
Release executed by Klaussner and us in May 2003, a credit line which
Klaussner had made available to us in December 1999, whereby Klaussner
agreed to lend us $150,000 per new store for up to 10 new stores, was
also terminated. The credit line had never been drawn upon.
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:
In return for providing warehousing services to the stores
owned by the private company, the private company will pay us
(i) through May 2006, 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 May 2006, until we either buy the private
company or until December 31, 2049, a fee based on all fabric
protection and warranty services sold in their stores plus
7.5% of their yearly net sales.
We have 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), provided however,
that on November 18, 2004, the Management Agreement and
License pursuant to which we are required to make such
royalty payments to the private company was amended such that
the private company has agreed to waive its rights to receive
from us such annual royalty payment during the period
commencing January 1, 2005 through the date on which court
approval is granted.
The private company is obligated to pay us $125,750 per month
for advertising. This represents a decrease from the
$150,000 per month to which we were previously entitled. In
addition, if private company sales had been less than
$45,358,000 for the initial period from January 1, 2002
through August 30, 2003 or are less than
$27,640,000 for each succeeding 12-month period commencing
August 31, 2003, we must reimburse the private company $0.50
for every dollar of sales under those amounts subject to the
$4,500,000 and $2,700,000 caps described in the paragraph
below. We were obligated to pay the private company $924,000
and $1,105,000 under this provision in fiscal 2004 and fiscal
2003, respectively.
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 agreed to pay the private company 10% of
the amount by which its net sales for the initial period from
January 1, 2002 through August 30, 2003 were less than
$45,358,000, provided that if its sales fell below
$42,667,000 for that initial period, we were obligated to pay
the private company 15% of such shortfall amount, provided
further that such amounts, together with amounts we were
required to pay for advertising if the private company's
sales had dropped below $45,358,000 during such initial
period, shall not have, in the aggregate, exceeded $4,500,000
for such initial period. Upon the expiration of the initial
period, if the private company's sales during any 12-month
period commencing on August 31, 2003 are less than
$27,640,000, we are obligated to pay the private company 10%
of such shortfall amount, provided that if its 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 during in
any 12-month period, shall not, in the aggregate, exceed
$2,700,000 during such 12-month period. We were obligated to
pay the private company $277,000 and $221,000 under this
provision in fiscal 2004 and fiscal 2003, respectively. On
November 18, 2004, the Management Agreement and License
pursuant to which we are required to make such payments to
the private company was amended such that the private company
has agreed to waive its rights to receive the payments
described above during the period commencing January 1, 2005
through August 31, 2007. This waiver also covers any
payments during such period in the event that the settlement
agreements are approved by the court and become effective
during such period.
Harley J. Greenfield, our Chairman and Chief Executive
Officer and a principal stockholder, and Edward Seidner, our
Executive Vice President, former director and a principal
stockholder had agreed to be responsible for up to an
aggregate of $300,000 of amounts due under these provisions
in each year. This agreement with Messrs. Greenfield and
Seidner was terminated effective July 16, 2003 and they were
not required to pay $188,000 for the year ended August 30,
2003. The Company recorded $188,000 of compensation expense
and a corresponding increase to additional paid in capital
representing the benefit received by Messrs. Greenfield and
Seidner as a result of the termination of the agreement.
14
In settlement of certain disputes as to amounts due us from
the private company, all of which have been fully reserved,
the private company will execute three promissory notes to us
in the aggregate principal amount of $2,600,000, 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 principal amount of
$1,000,000 due over five years without interest, plus amounts
owed as of the date in which settlement is approved by the
court, for purchasing and other services.
The effect of these agreements with the private company,
including our assumption of the warehousing responsibilities,
adversely effected our operating results by $694,000 and $931,000
in fiscal 2004 and 2003, respectively, and improved our
operating results by $1,190,000 for fiscal 2002, compared to
the results we would have achieved based on the same sales
levels under the agreements effective prior to the Initial
Operating Agreement. There is no assurance that the
agreement will improve our future operating results in the
future.
For a more detailed discussion of the proposed settlement agreement
and the Interim Operating Agreement, see "Certain Relationships and
Related Transactions" in our Proxy Statement to be furnished in
connection with our Annual Meeting of Stockholders to be held February
8, 2005, which is hereby incorporated by reference.
The following table sets forth our future contractual obligations
in total, for each of the next five years and thereafter, as of August
28, 2004. Such obligations include the retail store and shuttle warehouse
leases, the lease for the executive office, written employment contracts
for two of our executive officers, and agreements to pay the private company
royalties.
(CAPTION>
(Dollars in thousands) 2005 2006 2007 2008 2009 Thereafter Total
Operating leases for
retail stores, shuttle
warehouses and executive
office (1) (4) $17,342 $16,015 $14,769 $12,613 $9,248 $18,350 $88,337
Royalty payments to the
private company (2) 133 - - - - - 133
Employment contracts 900 - - - - - 900
Fabric protection fees to
the private company 600 - - - - - 600
Total contractual
obligations (3) $18,975 $16,015 $14,769 $12,613 $9,248 $18,350 $89,970
(1) While we pay the private company, pursuant to the Interim
Operating Agreement, for the cost of the warehouse leases, such leases
are not contractual obligations for which we are directly liable. The
approximate amount that we pay the private company for the leases is
$1,113,000 per year (see note 4 below) and is not included in the
table above.
(2) The amount of the royalty payments, as well as our obligation to make
such payments to the private company, may be contingent upon the
approval of the proposed settlement agreement by the court.
based on the approval of the proposed settlement agreements.
(3) The table does not include a commitment to pay the private
company a maximum of $2.7 million annually (see discussion
above) in shortfall payments and certain other amounts that
are not currently determinable, such as warehousing fees.
(4) We are party to four warehouse leases of which the private
company pays two. These amounts include the approximate
payments for all four warehouse leases.
Significant Accounting Policies
The receivable from the private company as of August 28, 2004
represents current charges aggregating $3,288,000, principally for
merchandise transfers, warehousing services and advertising costs,
which are payable within 85 days of the end of the month in which the
transactions originate. Such amount has been fully paid subsequent to
the balance sheet date. In addition to the above, the receivables
from the private company include $4,722,000, representing unpaid
amounts from fiscal 1996 and prior years, which are in dispute and
have been fully reserved for in the accompanying financial statements.
As explained in Note 3 in Notes to Consolidated Financial Statements,
as part of a proposed settlement, the disputed balance will be settled
by the private company executing two notes to us in the aggregate
principal amount of $2,400,000 payable over a three to five year
period. We intend to maintain a reserve for the full amount of the
notes and record income as collections are received.
15
The arrangement with respect to the transfer of merchandise between
the private company, which operates retail stores operating under the
Jennifer Convertibles name, and us arises from the private company's
desire to avail itself of our economic leverage in purchasing
merchandise for its Jennifer Convertibles stores. The purchasing
agreement provides that the we will purchase merchandise on behalf of
ourselves and the private company and bill the private company at cost
as invoiced by the vendor and pass through to the private company the
benefit of volume related discounts received from the vendor. We do
not believe it likely that the private company, if purchasing directly
from vendors, would get the same favorable volume related pricing that
we receive. In effect, we are accommodating the private company,
which is a related party. The merchandise transfers are not reflected
in our consolidated statements of operations and do not impact our
earnings.
Sales and delivery fees paid by customers are recognized as revenue
upon delivery of the merchandise to the customer. Sales are made on
either a non-financed or financed basis. A minimum deposit of 50% is
typically required upon placing a non-financed sales order with the
balance payable upon delivery.
Commencing June 23, 2002, and prior to May 27, 2001, a subsidiary
of the private company assumed all performance obligations and risks
of any loss under the lifetime protection plans and accordingly, we
recognized revenue from the sale of service contracts related to the
plans during such periods at the time of sale to the customer. During
the period from May 27, 2001 through June 22, 2002 as part of the
Interim Operating Agreement entered into with the private company, we
agreed to assume responsibility and risk of loss under the plans for
sales of service contracts during such period and accordingly revenue
from sales of the service contracts was deferred and amortized into
income in proportion to the costs expected to be incurred in
performing services under the plans.
Inflation
There was no significant impact on our operations as a result of
inflation during the three fiscal years ended August 31, 2002, August
30, 2003 and August 28, 2004.
16
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 operate profitably.
We incurred a net loss of ($4,142,000) and ($3,377,000) in the
fiscal years ended August 28, 2004 and August 30, 2003, respectively
and achieved net income of $10,991,000 in the fiscal year ended August
31, 2002. The furniture business is cyclical and we have been
impacted and will continue to be affected by changes in such cycles,
by losses from new stores, the overall economic and political climate,
changes in consumer preferences or demographics or unknown risks and
uncertainties that may cause us to continue to incur losses from
operations.
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 which we
expect will soon be presented to the court for its approval,
effectiveness of such agreements is subject to such court approval and
other conditions and there can be no assurance that such conditions
will be met. In addition to the derivative litigation, as described
under "Legal Proceedings", there are several other actions in which we
are involved. There is no assurance that we will prevail in these
actions and to the extent that any recovery is not covered by
insurance, it could adversely affect our cash position.
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 $4,500,000 for the initial period
beginning January 1, 2002 and ended August 30, 2003 and $2,700,000 per
year thereafter, if its sales drop below specified levels. For the
initial period, which ended August 30, 2003, the amount of "short-
fall" payments we paid to the private company was $1,326,000 and for
fiscal year ended August 28, 2004 the amount was $1,201,000. The
provisions of the proposed settlement are currently in effect as a
result of the Interim Operating Agreement. However, on November 18,
2004, the Management Agreement and License pursuant to which we are
required to make such payments to the private company was amended such
that the private company has agreed to waive its rights to receive the
payments described above during the period commencing January 1, 2005
through August 31, 2007. This waiver also covers any payments during
such period in the event that the settlement agreements are approved
by the court and become effective during such period. In addition,
pursuant to the amendment, the private company has agreed to waive its
rights to receive from us an annual royalty payment in the amount of
$400,000 per year during the period commencing January 1, 2005 through
the date on which court approval is granted.
Our company could suffer from potential conflict of interest.
Potential conflicts of interest exist since Harley J. Greenfield,
our Chairman of the Board and Chief Executive Officer, and Edward B.
Seidner, our Executive Vice President, and a former director, are owed
over $10 million by the private company, which owns, controls or
licenses the private company stores. Accordingly, such persons derive
substantial economic benefits from the private company. In addition,
Fred Love, the co-founder of the related private company, was
Mr. Greenfield's brother-in-law. Mr. Love passed away in October 2004
and Jane Love, Mr. Greenfield's sister, is currently acting as the
interim President of the private company. 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
17
private company, manage its stores and provide it other services. See
"Certain Relationships and Related Transactions" in our Proxy
Statement to be furnished in connection with our Annual Meeting of
Stockholders to be held February 8, 2005, which is hereby incorporated
by reference.
We heavily depend on three suppliers.
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 28, 2004, we purchased
approximately 42% of our merchandise from Klaussner. Since a large
portion of our revenues have been derived from sales of Klaussner
products, the loss of this supplier could have a material adverse
impact on us until alternative sources of supply are established.
Klaussner is also a principal stockholder and creditor of ours and
owns retail stores that compete with ours. 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. See "Certain Relationships and
Related Transactions" in our Proxy Statement to be furnished in
connection with our Annual Meeting of Stockholders to be held February
8, 2005, which is hereby incorporated by reference. Also, we
purchase a significant percentage of our merchandise from two other
non-affiliated suppliers. During the fiscal year ended August 28,
2004, we purchased approximately 39% of our merchandise from the two
non-affiliated suppliers.
The cyclical nature of the furniture industry poses risks to us from
prolonged economic downturn.
The furniture industry has been historically 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 and political
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 or equity financing. Until May 2003, when we executed
the Termination and Release Agreement, all of our assets were pledged
to Klaussner as security for the amounts we owe under the Klaussner
Credit and Security Agreement. 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 11, 2004, Harley J. Greenfield, our Chairman of the
Board and Chief Executive Officer and principal stockholder,
beneficially owns approximately 29.7% of our outstanding shares of
common stock. Approximately 66.2% 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,
18
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 do not have key man insurance on the lives of such
individuals.
We are not likely to declare dividends on common stock.
We have never declared or paid any cash dividends on our common
stock and do not intend to pay any cash dividends in the foreseeable
future. We currently anticipate that we will retain all our earnings
for use in the operation and expansion of our business and, therefore,
do not anticipate that we will pay any cash dividends in the
foreseeable future.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and supplementary data
required in this item are set forth on the pages indicated in Item
15(a)(1).
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. In response
to the requirements of the Sarbanes-Oxley Act of 2002, as of the end
of the period covering this report, the evaluation date, our Chief
Executive Officer and Chief Financial Officer carried out an
evaluation of the effectiveness of our "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules
13a-15(e) and 15d-15(e)). Based on that evaluation, these officers
concluded that, as of the evaluation date, our disclosure controls and
procedures were adequate and effective to ensure that material
information relating to us and our consolidated subsidiaries was made
known to them by others within those entities, particularly during the
period in which this report was being prepared.
Changes in Internal Controls. There were no changes in our
internal controls over financial reporting, identified in connection
with the evaluation of such internal controls that occurred during our
last fiscal quarter, that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting.
Item 9B. Other Information.
On November 18, 2004, we entered into an amendment to the
Management Agreement and License between the private company, Jennifer
Acquisition Corp., Inc., our wholly-owned subsidiary, and us, dated as
of July 6, 2001, as amended. Pursuant to the agreement, if sales in
certain stores owned or operated by the private company during any 12-
month period commencing on August 31, 2003 are less than $27,640,000,
we are obligated to pay the private company 10% of such shortfall
amount, provided that if its 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
during any 12-month period, shall not, in the aggregate, exceed
$2,700,000 during such 12-month period. Pursuant to the amendment,
the private company has agreed to waive its rights to receive the
payments described above during the period commencing January 1, 2005
through August 31, 2007. This waiver also covers any payments
required under the agreement during such period in the event that the
agreement, in addition to certain other related agreements designed to
settle the derivative action among the private company, certain of our
current and former officers and directors, our former accounting firms
and us, are approved by the court and become effective during such
period. In addition, pursuant to the amendment, the private company
has agreed to waive its rights to receive from us an annual royalty
payment in the amount of $400,000 per year during the period
commencing January 1, 2005 through the date on which court approval is
granted.
PART III
Item 10. Our Directors and Executive Officers.
The information set forth under the caption "Election of Directors"
in our Proxy Statement to be furnished in connection with our Annual
Meeting of Stockholders to be held February 8, 2005 is hereby
incorporated by reference.
19
Item 11. Executive Compensation.
The information set forth under the caption "Executive
Compensation" in our Proxy Statement to be furnished in connection
with our Annual Meeting of Stockholders to be held February 8, 2005 is
hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in our Proxy Statement to be
furnished in connection with our Annual Meeting of Stockholders to be
held February 8, 2005 is hereby incorporated by reference. Please see
"Item 5. Market for Registrant's Equity, Related Stockholders Matters
and Issuer Purchases of Equity Securities" for the information
required by Item 201(d) of Regulation S-K with respect to Equity
Compensation Plan Information.
Item 13. Certain Relationships and Related Transactions.
The information set forth under the caption "Certain Relationships
and Related Transactions" in our Proxy Statement to be furnished in
connection with our Annual Meeting of Stockholders to be held February
8, 2005 is hereby incorporated by reference.
Item 14. Principal Accountant Fees and Services
The information set forth under the caption "Principal Accounting
Fees and Services" in our Proxy Statement to be furnished in
connection with our Annual Meeting of Stockholders to be held February
8, 2005 is hereby incorporated by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) (1) Financial Statements.
The financial statements required by this item are submitted in a
separate section beginning on Page F-1 of this report.
(2) Financial Statement Schedules
Schedules have been omitted because of the absence of conditions
under which they are required or because the required information
is included in the financial statements or notes thereto.
20
(3) 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.
4.1 Form of Non-Qualified Stock Option Agreement with certain
directors and officers of Jennifer Convertibles, Inc.
incorporated herein by reference to our Quarterly Report
on Form 10-Q for the quarterly period ended March 1, 2003.
4.2 Form of Non-Qualified Stock Option Agreement with certain
employees and consultants of Jennifer Convertibles, Inc.
incorporated herein by reference to our Quarterly Report
on Form 10-Q for the quarterly period ended March 1, 2003.
4.4 Jennifer Convertibles, Inc. 2003 Stock Option Plan,
incorporated herein by reference to our Proxy Statement on
Schedule 14A filed on August 11, 2003.
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.
21
(3) Exhibits.
10.11 Form of Note, dated November 1994, made by Jara
Enterprises, Inc. to Harley J. Greenfield and Edward B.
Seidner, incorporated herein by reference to Exhibit 10.43
to our Annual Report on Form 10-K for the fiscal year
ended August 26, 1995.
10.12 Form of Option, dated November 7, 1994 to purchase common
stock from Fred Love, Jara Enterprises, Inc. and certain
subsidiaries to Harley J. Greenfield and Fred Love,
incorporated herein by reference to Exhibit 10.44 to our
Annual Report on Form 10-K for the fiscal year ended
August 26, 1995.
10.13 Form of Subordination Agreement, dated as of August 9,
1996, by Harley J. Greenfield and Edward B. Seidner,
incorporated herein by reference to Exhibit 10.45 to our
Annual Report on Form 10-K for the fiscal year ended
August 26, 1995.
10.14 Credit and Security Agreement, dated as of March 1, 1996,
among Klaussner Furniture Industries, Inc., Jennifer
Convertibles, Inc. and the other signatories thereto,
incorporated herein by reference to Exhibit 4 to our
Current Report on Form 8-K dated March 18, 1996.
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.
22
(3) Exhibits.
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.
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.
23
(3) Exhibits.
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.
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 regarding 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.
10.46 Audit Committee Charter incorporated herein by reference
to our Quarterly Report on Form 10-Q for the quarterly
period ended February 23, 2002.
10.47 Amendment No. 1 to Management Agreement and License by and
among Jara Enterprises, Inc., Jennifer Convertibles, Inc.,
Fred Love and Jennifer Acquisition Corp. incorporated
herein by reference to our Quarterly Report on Form 10-Q
for the quarterly period ended May 25, 2002.
10.48 Amendment No. 1 to Warehouse Agreement by and between Jara
Enterprises, Inc. and Jennifer Convertibles, Inc.
incorporated herein by reference to our Quarterly Report
on Form 10-Q for the quarterly period ended May 25, 2002.
10.49 Termination Agreement and Release, by and among Klaussner
Furniture Industries, Inc., Jennifer Convertibles, Inc.
and the other signatories thereto incorporated herein by
reference to our Current Report on Form 8-K filed on May
13, 2003 reporting as an Item 5 event.
10.50 Amendment No. 2 to Warehousing Agreement, by and between
Jara Enterprises, Inc. and Jennifer Convertibles, Inc.
incorporated herein by reference to our Current Report on
Form 8-K filed on May 13, 2003 reporting as an Item 5
event.
10.51 Amendment No. 2 to Management Agreement and License, by
and between Jara Enterprises, Inc., Jennifer Convertibles,
Inc., Fred Love and Jennifer Acquisition Corp.,
incorporated herein by reference to our Quarterly Report
on Form 10-Q for the quarterly period ended May 31, 2003.
10.52 Termination Agreement by and between Jennifer
Convertibles, Inc., Harley Greenfield and Edward Seidner,
incorporated herein by reference to our Annual Report on
Form 10-K for the fiscal year ended August 30, 2003.
10.53 Purchase Administration Fee Agreement by and between
Jennifer Convertibles, Inc. and Jara Enterprises, Inc.
incorporated herein by reference to our Quarterly Report
on Form 10-Q for the quarterly period ended May 31, 2004
10.54 Customer Service Administration Fee Agreement by and
between Jennifer Convertibles, Inc. and Jara Enterprises,
Inc. incorporated herein by reference to our Quarterly
Report on Form 10-Q for the quarterly period ended May 31,
2004
10.55 Amendment No. 3 to Management Agreement and License, by
and between Jara Enterprises, Inc., Jennifer Convertibles,
Inc. and Jennifer Acquisition Corp. *
14 Corporate Code of Conduct and Ethics. *
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.
24
(3) Exhibits.
23.1 Consent of Eisner LLP. *
31.1 Certification of Chief Executive Officer.*
31.2 Certification of Chief Financial Officer.*
32.1 Certification of Principal Executive Officer pursuant to
U.S.C. Section 1350.*
32.2 Certification of Principal Financial Officer pursuant to
U.S.C. Section 1350.*
* Filed herewith.
(b) Exhibits.
See (a) (3) above.
(c) Financial Statement Schedules.
See (a)(2) above.
25
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 24, 2004
Harley J. Greenfield and Chief Executive
Officer (Principal
Executive Officer)
/s/Edward Bohn Director November 24, 2004
Edward Bohn
/s/Kevin J. Coyle Director November 24, 2004
Kevin J. Coyle
/s/Mark Berman Director November 24, 2004
Mark Berman
/s/Rami Abada President, Director, November 24, 2004
Rami Abada Chief Operating Officer
and Chief Financial
Officer
26
Exhibit 10.55
AMENDMENT NO. 3 TO
MANAGEMENT AGREEMENT AND LICENSE
This Amendment No. 3 to Management Agreement and
License is made as of November 18, 2004 by and among Jara
Enterprises, Inc., a New York corporation ("Jara"), Jennifer
Convertibles, Inc., a Delaware Corporation ("JCI") and
Jennifer Acquisition Corp., a Delaware Corporation ("JAC"),
a wholly owned subsidiary of JCI.
RECITALS
Reference is made to that certain Management Agreement
and License, executed as of July 6, 2001 between Jara, Fred
Love, the sole shareholder of Jara, JCI and JAC, as amended
by Amendment No. 1 to Management and Agreement and License,
dated as of April 30, 2002 and as further amended by
Amendment No. 2 to Management and Agreement and License,
dated as of July 10, 2003 (the "Agreement").
The parties to the Agreement desire to amend the
Agreement as set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
AMENDMENTS
For $1.00 and other good and valuable consideration,
receipt whereof is acknowledged, the parties hereto hereby
agree as follows.
1. All capitalized terms used herein shall have their
defined meanings from the Agreement.
2. Notwithstanding anything to the contrary contained
in the Agreement, including without limitation, Section 5
thereof, JCI shall not be required to make the payments
contemplated by Section 2.1(c) of the Agreement for the
period commencing January 1, 2005 through and including
August 31, 2007 ( the "Period"), and Jara hereby waives its
rights to payments under such Section for such Period. Such
waiver shall also cover any such payment required under the
Agreement during the Period in the event that the Definitive
Agreements are approved by the court and become effective
during such Period.
3. Notwithstanding anything to the contrary, contained
in the Agreement, including without limitation, Section 5
thereof, JCI shall not be required to make the payments
contemplated by Section 5.3(a) or (b) of the Agreement for
the period commencing January 1, 2005 through and including
the Closing Date of the Definitive Agreements after the
court approval thereof and Jara hereby waives its rights to
payments under such Section for such period. After the
Closing Date, JCI shall resume making payments required
under Sections 5.3(a) and 5.3(b) for periods commencing from
and after the Closing Date.
ARTICLE II
MISCELLANEOUS
1. This Amendment No. 3 to Management Agreement and
License shall be governed by and construed in accordance
with the laws of the State of New York.
1
Exhibit 10.55
2. This Amendment No. 3 to Management Agreement and
License may be executed in one or more counterparts, each of
which shall constitute an original, and all of which, taken
together, shall be deemed to constitute one and the same
agreement.
3. Except as amended hereby, the Agreement remains in
full force and effect.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
2
Exhibit 10.55
IN WITNESS WHEREOF, the parties have executed this
agreement as of this 18th day of November, 2004.
JENNIFER CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
Harley J. Greenfield
Chief Executive Officer
JARA ENTERPRISES, INC.
By: /s/ Jane Love
Jane Love
President
JENNIFER ACQUISITION CORP.
By: /s/ Harley J. Greenfield
Harley J. Greenfield
Chief Executive Officer
3
Exhibit 14
JENNIFER CONVERTIBLES, INC.
CORPORATE CODE OF CONDUCT AND ETHICS
FOREWORD
This Corporate Code of Conduct and Ethics, referred to as
the "Code," is intended to provide our associates, as defined
below, with a clear understanding of the principles of business
conduct and ethics that are expected of them. The standards set
forth in the Code apply to us all. Every associate of the
company must acknowledge his or her review of and agreement to
comply with the Code as a condition of his or her relationship
with the company. The term "associate" means every full and part-
time employee of the company and its subsidiaries, all members of
the company's senior management, including the company's Chief
Executive Officer and Chief Financial Officer, and every member
of the company's Board of Directors, even if such member is not
employed by the company.
Many of the standards outlined on the following pages will
be familiar, for they reflect the fundamental values of fairness
and integrity that are a part of our daily lives. Applying these
standards to our business lives is an extension of the values by
which we are known as individuals and by which we want to be
known as a company.
It is our responsibility to conduct ourselves in an ethical
business manner and also to ensure that others do the same. If
any one of us violates these standards, he or she can expect a
disciplinary response, up to and including termination of any
employment or other relationship with the company, and possibly
other legal action. If any breach of the Code is known to you,
you are obligated to report violations to the Corporate
Compliance Officer or any member of the Compliance Committee,
described in more detail below. By doing so, we ensure that the
good faith efforts of all of us to comply with the Code are not
undermined.
The ultimate responsibility for maintaining our Code rests
with each of us. As individuals of personal integrity, we can do
no less than to behave in a way that will continue to bring
credit to our company and ourselves.
While it is impossible for this Code to describe every
situation that may arise, the standards explained in this Code
are guidelines that should govern our conduct at all times. If
you are confronted with situations not covered by this Code, or
have questions regarding the matters that are addressed in the
Code, you are urged to consult with the Corporate Compliance
Officer or a member of the Compliance Committee.
The provisions of the Code regarding the actions the company
will take are guidelines, which the company intends to follow.
There may be circumstances, however, that in the company's
judgment require different measures or actions and in such cases
it may act accordingly while still attempting to fulfill the
principles underlying this Code.
1
Exhibit 14
Table of Contents
Page
I. IMPLEMENTATION OF THE CODE 3
II. GENERAL REQUIREMENTS 5
III. CONFLICTS OF INTEREST 6
IV. PROTECTION AND PROPER USE OF COMPANY ASSETS 8
A. Proper Use of Company Property 8
B. Confidential Information 8
C. Accurate Records and Reporting 8
D. Document Retention 10
E. Corporate Advances 10
V. FAIR DEALING WITH CUSTOMERS, SUPPLIERS, COMPETITORS, AND
ASSOCIATES 11
A. Giving Gifts 11
B. Receiving Gifts 11
C. Unfair Competition 11
D. Antitrust Concerns 12
VI. GOVERNMENT RELATIONS 14
A. Payments to Officials 14
B. Political Contributions 14
VII. COMPLIANCE WITH LAWS, RULES AND REGULATIONS 15
A. Insider Trading Policy 15
B. Equal Employment Opportunity 15
C. Sexual Harassment Policy 16
D. Health, Safety & Environment Laws 16
VIII. REPORTING VIOLATIONS UNDER THE CODE: NON-RETALIATION
POLICY 17
IX. QUESTIONS UNDER THE CODE AND WAIVER PROCEDURES 18
X. FREQUENTLY ASKED QUESTIONS AND ANSWERS 19
APPENDIX
ASSOCIATE'S AGREEMENT TO COMPLY 20
2
Exhibit 14
I. IMPLEMENTATION OF THE CODE
The following questions and answers address the company's
implementation of the Code. The company has attempted to design
procedures that ensure maximum confidentiality and, most
importantly, freedom from the fear of retaliation for complying
with and reporting violations under the Code.
Q:Who is responsible for administering, updating and enforcing
the Code?
A: The Company's Board of Directors has appointed a Corporate
Compliance Officer and a Compliance Committee Member to
administer, update and enforce the Code. Ultimately, the Board
of Directors of the company must ensure that the Corporate
Compliance Officer and the Compliance Committee Member fulfill
their responsibilities.
The Corporate Compliance Officer has overall responsibility
for overseeing the implementation of the Code. Specific
responsibilities of the position are to:
Develop the Code based on legal requirements,
regulations and ethical considerations that are raised
in the company's operations;
Ensure that the Code is distributed to all associates
and that all associates acknowledge the principles of
the Code;
Assess compliance success with the Code;
Serve as a point person for reporting violations and
asking questions under the Code; and
Revise and update the Code to respond to detected
violations and changes in the law.
The Compliance Committee Member is comprised of Edward G.
Bohn. The primary responsibilities of the Compliance Committee
Member is to:
Assist the Corporate Compliance Officer in developing and
updating the Code;
Develop internal procedures to monitor and audit
compliance with the Code;
Serve as point persons for reporting violations and
asking questions under the Code;
Set up a mechanism for anonymous reporting of suspected
violations of the Code by associates and refer, when
appropriate, such reports to the Audit Committee;
Conduct internal investigations, with the assistance of
counsel, of suspected compliance violations;
Evaluate disciplinary action for associates who violate the
Code;
In the case of more severe violations of the Code, make
recommendations regarding disciplinary action to the Board
of Directors or a committee thereof; and
Evaluate the effectiveness of the Code and improve the
Code.
The Compliance Committee Member will provide a summary of
all matters considered under the Code to the Board of Directors
or a committee thereof at each regular meeting thereof, or sooner
if warranted by the severity of the matter. All proceedings and
the identity of the person reporting will be kept as confidential
as practicable under the circumstances.
3
Exhibit 14
Q: How can I contact the Corporate Compliance Officer and the
Compliance Committee Member?
A: The names and phone numbers of the Corporate Compliance
Officer and the Compliance Committee Member are listed below.
Any one of these individuals can assist you in answering
questions or reporting violations or suspected violations under
the Code.
Edward B. Seidner 516-496-1900 extension 3228
Corporate Compliance Officer
Edward G. Bohn 201-567-4404 extension 312
Compliance Committee Member
4
Exhibit 14
II. GENERAL REQUIREMENTS
To be honest, fair, and accountable in all business dealings
and obligations, and to ensure:
The ethical handling of conflicts of interest between
personal and professional relationships;
Full, fair, accurate, timely and understandable
disclosure in the reports required to be filed by the
company with the Securities and Exchange Commission and
in other public communications made by the company; and
Compliance with applicable governmental laws, rules and
regulations.
5
Exhibit 14
III. CONFLICTS OF INTEREST
Associates should avoid any situation that may involve, or
even appear to involve, a conflict between their personal
interests and the interests of the company. In dealings with
current or potential customers, suppliers, contractors, and
competitors, each associate should act in the best interests of
the company to the exclusion of personal advantage. Associates
are prohibited from any of the following activities, which could
represent an actual or perceived conflict of interest:
No associate or immediate family member of an associate
shall have a significant financial interest in, or
obligation to, any outside enterprise which does or seeks to
do business with the company or which is an actual or
potential competitor of the company, without prior approval
from the Compliance Committee Member, or in the case of
executive officers or members of the Board of Directors, the
full Board of Directors or a committee thereof.
No associate shall conduct a significant amount of business
on the company's behalf with an outside enterprise which
does or seeks to do business with the company if an
immediate family member of the associate is a principal,
officer or employee of such enterprise, without prior
approval from the Compliance Committee Member, or in the
case of executive officers or members of the Board of
Directors, the full Board of Directors or a committee
thereof.
No associate or immediate family member of an associate
shall serve as a director of any actual or potential
competitor of the company.
No associate shall use any company property or information
or his or her position at the company for his or her
personal gain.
No associate shall engage in activities that are directly
competitive with those in which the company is engaged.
No associate shall divert a business opportunity from the
company to such individual's own benefit. If an associate
becomes aware of an opportunity to acquire or profit from a
business opportunity or investment in which the company is
or may become involved or in which the company may have an
existing interest, the associate should disclose the
relevant facts to the Corporate Compliance Officer or the
Compliance Committee Member. The associate may proceed to
take advantage of such opportunity only if the company is
unwilling or unable to take advantage of such opportunity as
notified in writing by the Compliance Committee Member.
No associate or immediate family member of an associate
shall receive any loan or advance from the company, or be
the beneficiary of a guarantee by the company of a loan or
6
Exhibit 14
advance from a third party, except for customary advances or
corporate credit in the ordinary course of business or
approved by the Compliance Committee Member. Please see
Section IV.E. below, "Corporate Advances", for more
information on permitted corporate advances.
In addition, the Audit Committee of the Board of Directors
will review and approve all related-party transactions, as
required by the Securities and Exchange Commission, The Nasdaq
Stock Market or any other regulatory body to which the company is
subject.
Each associate should make prompt and full disclosure in
writing to the Corporate Compliance Officer or Compliance
Committee Member of any situation that may involve a conflict of
interest. Failure to disclose any actual or perceived conflict
of interest is a violation of the Code.
7
Exhibit 14
IV. PROTECTION AND PROPER USE OF COMPANY ASSETS AND ASSETS
ENTRUSTED TO IT
Proper protection and use of company assets and assets
entrusted to it by others, including proprietary information, is
a fundamental responsibility of each associate of the company.
Associates must comply with security programs to safeguard such
assets against unauthorized use or removal, as well as against
loss by criminal act or breach of trust. The provisions hereof
relating to protection of the Company's property also apply to
property of others entrusted to it (including proprietary and
confidential information).
A. Proper Use of Company Property
The removal from the company's facilities of the company's
property is prohibited, unless authorized by the company. This
applies to furnishings, equipment, and supplies, as well as
property created or obtained by the company for its exclusive use
- - such as client lists, files, personnel information, reference
materials and reports, computer software, data processing
programs and data bases. Neither originals nor copies of these
materials may be removed from the company's premises or used for
purposes other than the company's business without prior written
authorization from the Compliance Committee Member.
The company's products and services are its property;
contributions made by any associate to their development and
implementation are the company's property and remain the
company's property even if the individual's employment or
directorship terminates.
Each associate has an obligation to use the time for which
he or she receives compensation from the company productively.
Work hours should be devoted to activities directly related to
the company's business.
B. Confidential Information
The company provides its associates with confidential
information relating to the company and its business with the
understanding that such information is to be held in confidence
and not communicated to anyone who is not authorized to see it,
except as may be required by law. The types of information that
each associate must safeguard include (but are not limited to)
the company's plans and business strategy, unannounced products
and/or contracts, sales data, significant projects, customer and
supplier lists, patents, patent applications, trade secrets,
manufacturing techniques and sensitive financial information,
whether in electronic or conventional format. These are costly,
valuable resources developed for the exclusive benefit of the
company. No associate shall disclose the company's confidential
information to an unauthorized third party or use the company's
confidential information for his or her own personal benefit.
C. Accurate Records and Reporting
Under law, the company is required to keep books, records
and accounts that accurately and fairly reflect all transactions,
dispositions of assets and other events that are the subject of
8
Exhibit 14
specific regulatory record keeping requirements, including
generally accepted accounting principles and other applicable
rules, regulations and criteria for preparing financial
statements and for preparing periodic reports filed with the
Securities and Exchange Commission. All company reports,
accounting records, sales reports, expense accounts, invoices,
purchase orders, and other documents must accurately and clearly
represent the relevant facts and the true nature of transactions.
Reports and other documents should state all material facts of a
transaction and not omit any information that would be relevant
in interpreting such report or document. Under no circumstance
may there be any unrecorded liability or fund of the company,
regardless of the purposes for which the liability or fund may
have been intended, or any improper or inaccurate entry knowingly
made on the books or records of the company. No payment on
behalf of the company may be approved or made with the intention,
understanding or awareness that any part of the payment is to be
used for any purpose other than that described by the
documentation supporting the payment. In addition, intentional
accounting misclassifications (e.g., expense versus capital) and
improper acceleration or deferral of expenses or revenues are
unacceptable reporting practices that are expressly prohibited.
The company has developed and maintains a system of internal
controls to provide reasonable assurance that transactions are
executed in accordance with management's authorization, are
properly recorded and posted, and are in compliance with
regulatory requirements. The system of internal controls within
the company includes written policies and procedures, budgetary
controls, supervisory review and monitoring, and various other
checks and balances, and safeguards [such as password protection
to access certain computer systems.]
The company has also developed and maintains a set of
disclosure controls and procedures to ensure that all of the
information required to be disclosed by the company in the
reports that it files or submits under the Securities Exchange
Act is recorded, processed, summarized and reported within the
time periods specified by the Securities and Exchange
Commission's rules and forms.
Associates are expected to be familiar with, and to adhere
strictly to, these internal controls and disclosure controls and
procedures.
Responsibility for compliance with these internal controls
and disclosure controls and procedures rests not solely with the
company's accounting personnel, but with all associates involved
in approving transactions, supplying documentation for
transactions, and recording, processing, summarizing and
reporting of transactions and other information required by
periodic reports filed with the Securities and Exchange
Commission. Because the integrity of the company's external
reports to shareholders and the Securities and Exchange
Commission depends on the integrity of the company's internal
reports and record-keeping, all associates must adhere to the
highest standards of care with respect to our internal records
and reporting. The company is committed to full, fair, accurate,
timely, and understandable disclosure in the periodic reports
required to be filed by it with the Securities and Exchange
Commission, and it expects each associate to work diligently
towards that goal.
Any associate who believes the company's books and records
are not in accord with these requirements should immediately
report the matter to the Corporate Compliance Officer or the
9
Exhibit 14
Compliance Committee Member. The company has adopted explicit
non-retaliation policies with respect to these matters, as
described in Section VIII below.
D. Document Retention
Numerous federal and state statutes require the proper
retention of many categories of records and documents that are
commonly maintained by companies. In consideration of those
legal requirements and the company's business needs, all
associates must maintain records in accordance with the company's
Document Retention Policy, a copy of which is available from the
Corporate Compliance Officer.
In addition, any record, in paper or electronic format,
relevant to a threatened, anticipated or actual internal or
external inquiry, investigation, matter or lawsuit may not be
discarded, concealed, falsified, altered, or otherwise made
unavailable, once an associate has become aware of the existence
of such threatened, anticipated or actual internal or external
inquiry, investigation, matter or lawsuit. Associates must
handle such records in accordance with the procedures outlined in
the company's Document Retention Policy.
When in doubt regarding retention of any record, an
associate must not discard or alter the record in question and
should seek guidance from the Corporate Compliance Officer the
Compliance Committee Member. Associates should also direct all
questions regarding our Document Retention Policy and related
procedures to the Corporate Compliance Officer or the Compliance
Committee Member.
E. Corporate Advances
Under law, the company may not loan money to associates
except in limited circumstances. It shall be a violation of the
Code for any associate to advance company funds to any other
associate or to himself or herself except for usual and customary
business advances for legitimate corporate purposes which are
approved by a supervisor or pursuant to a corporate credit card
for usual and customary, legitimate business purposes.
Company credit cards are to be used only for authorized,
legitimate business purposes. An associate will be responsible
for any unauthorized charges to a company credit card.
10
Exhibit 14
V. FAIR DEALING WITH CUSTOMERS, SUPPLIERS, COMPETITORS, AND
ASSOCIATES
The company does not seek to gain any advantage through the
improper use of favors or other inducements. Good judgment and
moderation must be exercised to avoid misinterpretation and
adverse effect on the reputation of the company or its
associates. Offering, giving, soliciting or receiving any form
of bribe to or from an employee of a customer or supplier to
influence that employee's conduct is strictly prohibited.
A. Giving Gifts
An associate must not give cash or cash-equivalent gifts to
any person or enterprise.
B. Receiving Gifts
Gifts, favors, entertainment or other inducements may not be
accepted by associates or members of their immediate families
from any person or organization that does or seeks to do business
with, or is a competitor of, the company, except as common
courtesies usually associated with customary business practices.
If the gift is of more than token value, the Compliance Committee
must approve its acceptance.
An especially strict standard applies when suppliers are
involved. If a gift unduly influences or makes an associate feel
obligated to "pay back" the other party with business, receipt of
the gift is unacceptable.
It is never acceptable to accept a gift in cash or cash
equivalent.
C. Unfair Competition
Although the free enterprise system is based upon
competition, rules have been imposed stating what can and what
cannot be done in a competitive environment. The following
practices can lead to liability for "unfair competition" and
should be avoided. They are violations of the Code.
Disparagement of Competitors. It is not illegal to point
out weaknesses in a competitor's service, product or operation;
however, associates may not spread false rumors about competitors
or make misrepresentations about their businesses. For example,
an associate may not pass on anecdotal or unverified stories
about a competitor's products or services as the absolute truth
(e.g., the statement that "our competitors' diagnostic testing
procedures have poor quality control").
11
Exhibit 14
Misrepresentations of Price and Product. Lies or
misrepresentations about the nature, quality or character of the
company's services and products are both illegal and contrary to
company policy. An associate may only describe our services and
products based on their documented specifications, not based on
anecdote or his or her belief that our specifications are too
conservative.
D. Antitrust Concerns
Federal and state antitrust laws are intended to preserve
the free enterprise system by ensuring that competition is the
primary regulator of the economy. Every corporate decision that
involves customers, competitors, and business planning with
respect to output, sales and pricing raises antitrust issues.
Compliance with the antitrust laws is in the public interest, in
the interest of the business community at large, and in our
company's interest.
Failing to recognize antitrust risk is costly. Antitrust
litigation can be very expensive and time-consuming. Moreover,
violations of the antitrust laws can, among other things, subject
you and the company to the imposition of injunctions, treble
damages, and heavy fines. Criminal penalties may also be
imposed, and individual employees can receive heavy fines or even
be imprisoned. For this reason, antitrust compliance should be
taken seriously at all levels within the company.
A primary focus of antitrust laws is on dealings between
competitors. In all interactions with actual or potential
competitors all associates must follow these rules:
Never agree with a competitor or a group of competitors to
charge the same prices or to use the same pricing methods,
to allocate services, customers, private or governmental
payor contracts or territories among yourselves, to boycott
or refuse to do business with a provider, vendor, payor or
any other third party, or to refrain from the sale or
marketing of, or limit the supply of, particular products or
services.
Be careful of your conduct. An "agreement" that violates
the antitrust laws may be not only a written or oral
agreement, but also a "gentlemen's agreement" or a tacit
understanding. Such an "agreement" need not be in writing.
It can be inferred from conduct, discussions or
communications of any sort with a representative of a
competitor.
Make every output-related decision (pricing, volume, etc.)
independently, in light of costs and market conditions and
competitive prices.
Carefully monitor trade association activity. These forums
frequently create an opportunity for competitors to engage
in antitrust violations.
12
Finally, always immediately inform the Corporate Compliance
Officer or the Compliance Committee Member if local, state or
federal law enforcement officials request information from the
company concerning its operations.
13
Exhibit 14
VI. GOVERNMENT RELATIONS
Associates must adhere to the highest standards of ethical
conduct in all relationships with government employees and must
not improperly attempt to influence the actions of any public
official.
A. Payments to Officials
Payments or gifts shall not be made directly or indirectly
to any government official or associate if the gift or payment is
illegal under the laws of the country having jurisdiction over
the transaction, or if it is for the purpose of influencing or
inducing the recipient to do, or omit to do, any act in violation
of his or her lawful duty. Under no circumstances should gifts
be given to employees of the United States Government.
B. Political Contributions
Company funds, property or services may not be contributed
to any political party or committee, or to any candidate for or
holder of any office of any government. This policy does not
preclude, where lawful, company expenditures to support or oppose
public referendum or separate ballot issues, or, where lawful and
when reviewed and approved in advance by the Compliance Committee
Member, the formation and operation of a political action
committee.
14
Exhibit 14
VII. COMPLIANCE WITH LAWS, RULES AND REGULATIONS
A. Insider Trading Policy
The company expressly forbids any associate from trading on
material non-public information or communicating material non-
public information to others in violation of the law. This
conduct is frequently referred to as "insider trading." This
policy applies to every associate of the company and extends to
activities both within and outside their duties to the company,
including trading for a personal account.
The concept of who is an "insider" is broad. It includes
officers, directors and employees of a company. In addition, a
person can be a "temporary insider" if he or she enters into a
special confidential relationship in the conduct of a company's
affairs and as a result is given access to information solely for
the company's purpose. A temporary insider can include, among
others, a company's investment advisors, agents, attorneys,
accountants and lending institutions, as well as the employees of
such organizations. An associate may also become a temporary
insider of another company with which our company has a
contractual relationship, to which it has made a loan, to which
it provides advice or for which it performs other services.
Trading on inside information is not a basis for liability
unless the information is material. This is information that a
reasonable investor would consider important in making his or her
investment decisions, or information that is likely to have a
significant effect on the price of a company's securities.
Information is non-public until it has been effectively
communicated to the marketplace. Tangible evidence of such
dissemination is the best indication that the information is
public. For example, information found in a report filed with
the Securities and Exchange Commission or appearing in a national
newspaper would be considered public.
B. Equal Employment Opportunity
The company makes employment-related decisions without
regard to a person's race, color, religious creed, age, sex,
sexual orientation, marital status, national origin, ancestry,
present or past history of mental disorder, mental retardation,
learning disability or physical disability, including, but not
limited to, blindness and genetic predisposition, or any other
factor unrelated to a person's ability to perform the person's
job. "Employment decisions" generally mean decisions relating to
hiring, recruiting, training, promotions and compensation, but
the term may encompass other employment actions as well.
The company encourages its associates to bring any problem,
complaint or concern regarding any alleged employment
discrimination to the attention of the Human Resources
Department. Associates who have concerns regarding conduct they
believe is discriminatory should also feel free to make any such
reports to the Corporate Compliance Officer or the Compliance
Committee Member.
15
Exhibit 14
C. Sexual Harassment Policy
The company is committed to maintaining a collegial work
environment in which all individuals are treated with respect and
dignity and which is free of sexual harassment. In keeping with
this commitment, the company will not tolerate sexual harassment
of associates by anyone, including any supervisor, co-worker,
vendor, client or customer, whether in the workplace, at
assignments outside the workplace, at company-sponsored social
functions or elsewhere.
[Each associate should be familiar with and abide by the
company's Sexual Harassment Policy. A copy of this policy is
given to all associates of the company and is available from the
Human Resources Department, the Corporate Compliance Officer or
the Compliance Committee Member.]
D. Health, Safety & Environment Laws
Health, safety, and environmental responsibilities are
fundamental to the company's values. Associates are responsible
for ensuring that the company complies with all provisions of the
health, safety, and environmental laws of the United States and
of other countries where the company does business.
The penalties that can be imposed against the company and
its associates for failure to comply with health, safety, and
environmental laws can be substantial, and include imprisonment
and fines.
16
Exhibit 14
VIII. REPORTING VIOLATIONS UNDER THE CODE: NON-RETALIATION
POLICY
Any associate of the company having any information or
knowledge regarding the existence of any violation or suspected
violation of the Code has a duty to report the violation or
suspected violation to the Corporate Compliance Officer or the
Compliance Committee Member. Failure to report suspected or
actual violations is itself a violation of the Code and may
subject the associate to disciplinary action, up to and including
termination of employment or legal action. The Company will
endeavor to keep reports confidential to the fullest extent
practicable under the circumstances.
Any associate who reports a suspected violation under the
Code by the company, or its agents acting on behalf of the
company, to the Corporate Compliance Officer the Compliance
Committee Member, may not be fired, demoted, reprimanded or
otherwise harmed for, or because of, the reporting of the
suspected violation, regardless of whether the suspected
violation involves the associate, the associate's supervisor or
senior management of the company.
In addition, any associate who reports a suspected violation
under the Code which the associate reasonably believes
constitutes a violation of a federal statute by the company, or
its agents acting on behalf of the company, to a federal
regulatory or law enforcement agency, may not be reprimanded,
discharged, demoted, suspended, threatened, harassed or in any
manner discriminated against in the terms and conditions of the
associate's employment for, or because of, the reporting of the
suspected violation, regardless of whether the suspected
violation involves the associate, the associate's supervisor or
senior management of the company.
17
Exhibit 14
IX. QUESTIONS UNDER THE CODE AND WAIVER PROCEDURES
Associates are encouraged to consult with the Corporate
Compliance Officer and the Compliance Committee Member about any
uncertainty or questions they may have under the Code.
If any situation should arise where a course of action would
likely result in a violation of the Code but for which the
associate thinks that a valid reason for the course of action
exists, the associate should contact the Corporate Compliance
Officer or the Compliance Committee Member to obtain a waiver
prior to the time the action is taken. No waivers will be
granted after the fact for actions already taken. Except as
noted below, the Compliance Committee Member will review all the
facts surrounding the proposed course of action and will
determine whether a waiver from any policy in the Code should be
granted.
Waiver Procedures for Executive Officers and Directors.
Waiver requests by an executive officer or member of the Board of
Directors shall be referred by the Compliance Committee Member,
with his recommendation, to the Board of Directors or a committee
thereof for consideration. If either (i) a majority of the
independent directors on the Board of Directors, or (ii) a
committee comprised solely of independent directors agrees that
the waiver should be granted, it will be granted. The company
will disclose the nature and reasons for the waiver on a Form 8-K
to be filed promptly with the Securities and Exchange Commission
or otherwise as required by the Securities and Exchange
Commission or The Nasdaq Stock Market. If the Board denies the
request for a waiver, the waiver will not be granted and the
associate may not pursue the intended course of action.
It is the company's policy only to grant waivers from the
Code in limited and compelling circumstances.
18
Exhibit 14
X. FREQUENTLY ASKED QUESTIONS AND ANSWERS
The following questions and answers address each associate's
obligation to comply with the Code. The company has attempted to
design procedures that ensure maximum confidentiality and, most
importantly, freedom from the fear of retaliation for complying
with and reporting violations under the Code.
Q: Do I have a duty to report violations under the Code?
A: Yes, participation in the Code and its compliance
program is mandatory. You must immediately report any suspected
or actual violation of the Code to the Corporate Compliance
Officer or the Compliance Committee Member. The Company will
endeavor to keep reports confidential to the fullest extent
practicable under the circumstances. Failure to report
suspected or actual violations is itself a violation of the Code
and may subject you to disciplinary action, up to and including
termination of employment or legal action.
Q: I'm afraid of being fired for raising questions or
reporting violations under the Code. Will I be risking my job if
I do?
A: The Code contains a clear non-retaliation policy which
is located in Section VIII of the Code, meaning that if you in
good faith report a violation of the Code by the company, or its
agents acting on behalf of the company, to the Corporate
Compliance Officer or the Compliance Committee Member, the
company will undertake to protect you from being fired, demoted,
reprimanded or otherwise harmed for reporting the violation, even
if the violation involves you, your supervisor, or senior
management of the company. The Company will endeavor to keep
confidential any report you make to the Corporate Compliance
Officer or the Compliance Committee Member to the extent
practicable under the circumstances.
In addition, if you report a suspected violation under the
Code which you reasonably believe constitutes a violation of a
federal statute by the company, or its agents acting on behalf of
the company, to a federal regulatory or law enforcement agency,
you may not be reprimanded, discharged, demoted, suspended,
threatened, harassed or in any manner discriminated against in
the terms and conditions of your employment for reporting the
suspected violation, regardless of whether the suspected
violation involves you, your supervisor or senior management of
the company.
Q: How are suspected violations investigated under the
Code?
A: When a suspected violation is reported to the Corporate
Compliance Officer or the Compliance Committee Member, the
Corporate Compliance Officer will gather information about the
allegation by interviewing the associate reporting the suspected
violation, the associate who is accused of the violation and/or
any co-workers or associates of the accused associates to
determine if a factual basis for the allegation exists. The
reporting associate's immediate supervisor will not be involved
in the investigation if the reported violation involved that
supervisor. The Company will endeavor to keep the identity of
the reporting associate confidential to the fullest extent
practicable under the circumstances.
19
Exhibit 14
If the report is not substantiated, the reporting associate
will be informed and at that time will be asked for any
additional information not previously communicated. If there is
no additional information, the Corporate Compliance Officer will
close the matter as unsubstantiated.
If the allegation is substantiated, the Compliance Committee
Member will make a judgment as to the degree of severity of the
violation and the appropriate disciplinary response. In more
severe cases, the Compliance Committee Member will make a
recommendation to the Board of Directors of the company for its
approval. The Board's decision as to disciplinary and corrective
action will be final. In the case of less severe violations, the
Corporate Compliance Officer may refer the violation to the Human
Resources Department for appropriate disciplinary action.
The Compliance Committee Member shall provide a summary of
all matters considered under the Code to the Board of Directors
or a committee thereof at each regular meeting thereof, or sooner
if warranted by the severity of the matter.
The company will endeavor to keep all proceedings and the
identity of the reporting person as confidential as practicable
under the circumstances.
Q: Do I have to participate in any investigation under the
Code?
A: Your full cooperation with any pending investigation
under the Code is a condition of your continued relationship with
the company. The refusal to cooperate fully with any
investigation is a violation of the Code and grounds for
discipline, up to and including termination.
Q: What are the consequences of violating the Code?
A: As explained above, associates who violate the Code may
be subject to discipline, up to and including termination of
employment. Associates who violate the Code may simultaneously
violate federal, state, local or foreign laws, regulations or
policies. Such associates may be subject to prosecution,
imprisonment and fines, and may be required to make reimbursement
to the company, the government or any other person for losses
resulting from the violation. They may be subject to punitive or
treble damages depending on the severity of the violation and
applicable law.
Q: What if I have questions under the Code or want to
obtain a waiver under any provision of the Code?
A: The Corporate Compliance Officer and the Compliance
Committee Member can help answer questions you may have under the
Code. Particularly difficult questions will be answered with
input from the Compliance Committee Member. In addition, Section
IX of the Code provides information on how you may obtain a
waiver from the Code; waivers will be granted only in very
limited circumstances. You should never pursue a course of
20
Exhibit 14
action that is unclear under the Code without first consulting
the Corporate Compliance Officer or the Compliance Committee
Member, and if necessary, obtaining a waiver from the Code.
21
Exhibit 14
APPENDIX
ASSOCIATE'S AGREEMENT TO COMPLY
I have read Jennifer Convertibles Corporate Code of Conduct
and Ethics (the "Code"). I have obtained an interpretation of
any provision about which I had a question. I agree to abide by
the provisions of the Code. Based on my review, I acknowledge
that
_____ To the best of my knowledge, I am not in violation
of, or aware of any violation by others of, any
provision contained in the Code;
OR
_____ I have made a full disclosure on the reverse side
of this acknowledgement of the facts regarding any
possible violation of the provisions set forth in
the Code.
In addition, I understand that I am required to report any
suspected or actual violation of the Code. I understand that I
am required to cooperate fully with the company in connection
with the investigation of any suspected violation. I understand
that my failure to comply with the Code or its procedures may
result in disciplinary action, up to and including termination.
By: Date:
Name (Please print):
Department/Location:
22
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the
Registration Statement on Form S-8 (No. 333-101024) of
Jennifer Convertibles, Inc. of our report dated November 11,
2004, except for Note 3, as to which the date is November 18,
2004 with respect to our audits of the consolidated financial
statements as of August 28, 2004 and August 30, 2003 and for
each of the three years in the period ended August 28, 2004,
which is included in the Annual Report on Form 10-K for the
year ended August 28, 2004.
Eisner LLP
New York, New York
November 22, 2004
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Harley J. Greenfield, certify that:
1. I have reviewed this annual report on Form 10-K of
Jennifer Convertibles, Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: November 24, 2004
/s/ Harley J. Greenfield
Harley J. Greenfield, Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Rami Abada, certify that:
1. I have reviewed this annual report on Form 10-K of
Jennifer Convertibles, Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: November 24, 2004
/s/ Rami Abada
Rami Abada, Chief Financial Officer
EXHIBIT 32.1
Certification of Principal Executive Officer
Pursuant to U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
I, Harley J. Greenfield, Chief Executive Officer of Jennifer
Convertibles, Inc., hereby certify, to my knowledge, that
the annual report on Form 10-K for the period ending August
28, 2004 of Jennifer Convertibles, Inc. (the "Form 10-K")
fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 and the
information contained in the Form 10-K fairly presents, in
all material respects, the financial condition and results
of operations of Jennifer Convertibles, Inc.
Dated: November 24, 2004 /s/ Harley J. Greenfield
Harley J. Greenfield
Chief Executive Officer
(Principal Executive Officer)
A signed original of this written statement required by
Section 906 has been provided to us and will be retained by
us and furnished to the Securities and Exchange Commission
or its staff upon request.
EXHIBIT 32.2
Certification of Principal Financial Officer
Pursuant to U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
I, Rami Abada, Chief Financial Officer of Jennifer
Convertibles, Inc., hereby certify, to my knowledge, that
the annual report on Form 10-K for the period ending August
28, 2004 of Jennifer Convertibles, Inc. (the "Form 10-K")
fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 and the
information contained in the Form 10-K fairly presents, in
all material respects, the financial condition and results
of operations of Jennifer Convertibles, Inc.
Dated: November 24, 2004 /s/ Rami Abada
Rami Abada
Chief Financial Officer
(Principal Financial Officer)
A signed original of this written statement required by
Section 906 has been provided to us and will be retained by
us and furnished to the Securities and Exchange Commission
or its staff upon request.
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Index to Financial Statements
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets at August 28, 2004 and
August 30, 2003 F-2
Consolidated Statements of Operations for the years ended
August 28, 2004, August 30, 2003 and August 31, 2002 F-3
Consolidated Statements of Stockholders' Equity
Capital (Deficiency) for the years ended August 28, 2004,
August 30, 2003, and August 31, 2002 F-4
Consolidated Statements of Cash Flows for the years ended
August 28, 2004, August 30, 2003 and August 31, 2002 F-5
Notes to Consolidated Financial Statements F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 28, 2004 and August 30, 2003 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 28, 2004. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
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.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Jennifer Convertibles, Inc. and
subsidiaries as of August 28, 2004 and August 30, 2003, and
the consolidated results of their operations and their cash
flows for each of the three years in the period ended
August 28, 2004, in conformity with accounting principles
generally accepted in the United States of America.
As described in Note 3, the Company has significant
transactions with a company owned by a related party.
Eisner LLP
New York, New York
November 11, 2004,
except for Note 3, as to which
the date is November 18, 2004
F-1
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except for share data)
ASSETS
August 28, 2004 August 30, 2003
Current assets:
Cash and cash equivalents $3,294 $12,761
Restricted cash 110 -
Accounts receivable 935 408
Merchandise inventories, net 14,044 12,721
Due from Private Company, net of
reserves of $4,722 at August 28,
2004 and August 30, 2003 3,288 3,150
Federal income tax refund receivable 314 -
Deferred tax asset 1,172 2,895
Prepaid expenses and other current
assets 1,195 1,398
Total current assets 24,352 33,333
Store fixtures, equipment and
leasehold improvements, at
cost, net 3,032 3,854
Annuity contract 1,088 -
Deferred lease costs and other
intangibles, net 42 98
Goodwill 1,796 1,796
Other assets (primarily security
deposits) 607 626
Deferred tax asset 605 -
$31,522 $39,707
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $12,812 $15,049
Customer deposits 7,878 9,203
Accrued expenses and other current
liabilities 3,709 4,135
Due to Private Company 500 500
Deferred rent and allowances -
current portion 489 821
Total current liabilities 25,388 29,708
Deferred rent and allowances, net of
current portion 3,320 3,155
Total liabilities 28,708 32,863
Commitments and contingencies (Notes 9
and 10)
Stockholders' Equity:
Preferred stock, par value $.01 per share
Authorized 1,000,000 shares
Series A Convertible Preferred-
10,000 shares issued and outstanding
at August 28, 2004 and August 30, 2003
(liquidation preference $5,000)
Series B Convertible Preferred-
57,381 shares issued and
outstanding at August 28, 2004
(liquidation preference
$287) and 26,664 shares issued
and outstanding at August 30, 2003
(liquidation preference $133) 1 -
Common stock, par value $.01 per share
Authorized 12,000,000 shares at
August 28, 2004 and
10,000,000 shares at August 30,
2003; issued and outstanding
5,713,058 shares at August 28,
2004 and August 30, 2003 57 57
Additional paid-in capital 27,728 27,617
Accumulated deficit (24,972) (20,830)
2,814 6,844
$31,522 $39,707
See Notes to Consolidated Financial Statements.
F-2
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except for share data)
Year ended Year ended Year ended
August 28, August 30, August 31,
2004 2003 2002
(52 weeks) (52 weeks) (53 weeks)
Revenue:
Net sales $125,384 $118,577 $140,440
Revenue from service contracts 8,786 8,000 10,743
134,170 126,577 151,183
Cost of sales, including
store occupancy, warehousing
delivery and service costs 95,365 87,061 96,459
Selling, general and
administrative expenses 40,727 41,846 42,962
Depreciation and amortization 1,575 1,738 1,660
137,667 130,645 141,081
Operating (loss) income (3,497) (4,068) 10,102
Gain on sale of leasehold 220 - -
Interest income 111 136 210
Interest expense (3) (11) (14)
(Loss) income before income taxes (3,169) (3,943) 10,298
Income tax expense (benefit) 973 (566) (693)
Net (loss) income ($4,142) ($3,377) $10,991
Basic (loss) income per
common share ($0.73) ($0.60) $1.54
Diluted (loss) income per
common share ($0.73) ($0.60) $1.50
Weighted average common
shares outstanding 5,713,058 5,709,900 5,704,058
Common shares issuable on
conversion of Series A
participating preferred stock - - 1,424,500
Total weighted average common
shares outstanding basic
(loss) income per share 5,713,058 5,709,900 7,128,558
Effect of potential common
share issuance:
Stock options - - 177,868 - -
Series B convertible
preferred stock - - 18,664
Weighted average common
shares outstanding
diluted (loss) income per
share 5,713,058 5,709,900 7,325,090
See Notes to Consolidated Financial Statements.
F-3
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity Capital (Deficiency)
Years Ended August 28, 2004, August 30, 2003, and August 31, 2002
(In thousands, except for share data)
Preferred stock Preferred stock Additional
Series A Series B Common Stock paid-in Accumulated
Shares Par Value Shares Par Value Shares Par Value capital (deficit) Total
Balances at August 26, 2000 10,000 - 26,664 - 5,704,058 $57 $27,482 ($31,192) ($3,653)
Net income 2,748 2,748
Balances at August 25, 2001 10,000 - 26,664 - 5,704,058 $57 $27,482 ($28,444) ($905)
Net income 10,991 10,991
Balances at August 31, 2002 10,000 - 26,664 - 5,704,058 $57 $27,482 ($17,453) $10,086
Exercise of stock options 9,000 - 18 18
Dividends on Series B
preferred stock (71) (71)
Other 188 188
Net loss (3,377) (3,377)
Balances at August 30, 2003 10,000 - 26,664 - 5,713,058 $57 $27,617 ($20,830) $6,844
Issuance of Series B
preferred stock 30,717 1 128 129
Dividends on Series B
preferred stock (17) (17)
Net loss (4,142) (4,142)
Balances at August 28, 2004 10,000 - 57,381 1 5,713,058 $57 $27,728 ($24,972) $2,814
See Notes to Consolidated Financial Statements.
F-4
JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Year Ended Year Ended Year Ended
August 28, August 30, August 31,
2004 2003 2002
(52 weeks) (52 weeks) (53 weeks)
Cash flows from operating activities:
Net (loss) income ($4,142) ($3,377) $10,991
Adjustments to reconcile net
(loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,575 1,738 1,660
Loss on disposal of equipment 61 - 24
Gain on sale of leasehold (220) - -
Annuity contract (23) - -
Federal income tax refund receivable (314) - -
Provision for warranty costs (168) (23) 76
Provision for fabric protection
costs - - (273)
Deferred rent (167) (382) (478)
Deferred tax expense (benefit) 1,118 (533) (1,737)
Recovery of amounts due from
Private Company - (33) (58)
Non-cash compensation to
stockholders - 188 -
Deferred income - - (2,121)
Changes in operating assets and
liabilities
Merchandise inventories-net (1,323) 627 (688)
Prepaid expenses and other
current assets 186 (580) (318)
Accounts receivable (527) 67 282
Due from Private Company-net (138) 579 86
Other assets, net 19 122 (16)
Accounts payable trade (2,237) 1,012 (2,882)
Customer deposits (1,325) 1,514 (1,004)
Accrued expenses and other
current liabilities (130) (2,797) 2,041
Net cash (used in) provided by
operating activities (7,755) (1,878) 5,585
Cash flows from investing activities:
Capital expenditures (757) (1,264) (767)
Purchase of annuity contract (1,065) - -
Proceeds from sale of leasehold 220 - -
Restricted cash (110) - -
Net cash (used in) investing
activities (1,712) (1,264) (767)
Cash flows from financing activities:
Proceeds from exercise of stock
options - 18 -
Dividends on Series B preferred
stock - (88) -
Net cash (used in) financing
activities - (70) -
Net (decrease) increase in cash
and cash equivalents (9,467) (3,212) 4,818
Cash and cash equivalents at
beginning of year 12,761 15,973 11,155
Cash and cash equivalents at end
of year $3,294 $12,761 $15,973
Supplemental disclosure of cash
flow information:
Income taxes paid $81 $962 $699
Interest paid $3 $11 $14
See Notes to Consolidated Financial Statements.
F-5
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(1) Business
Jennifer Convertibles, Inc. and subsidiaries (the "Company") owns
and is the licensor of specialty retail stores that sell a
complete line of sofa beds, as well as sofas and companion pieces,
such as loveseats, chairs and recliners, and specialty retail
stores that sell leather living room furniture. Such stores are
in the United States and are located throughout the Eastern
Seaboard, in the Midwest, on the West Coast and in the Southwest.
As of August 28, 2004 and August 30, 2003, respectively, 141 and
138 Company-owned stores operated under the Jennifer Convertibles
and Jennifer Leather names. During fiscal 2004, the Company
closed two stores; however, the operations of such stores have not
been reported as discontinued operations as the Company
anticipates that it will continue to generate revenues from
customers of such stores in stores located in the same territory as
the closed stores. With respect to one store, the initial lease
term of which expired, the Company sold its option to renew the lease
for $220,000.
The Company licensed stores to limited partnerships ("LPs") of
which a subsidiary of Jennifer Convertibles, Inc. is the general
partner. The LPs have had cumulative losses since inception and
the Company has made advances to fund such losses. The Company
has control of the LPs and, as a result, consolidates the accounts
of the LPs in its financial statements. Included in the Company's
consolidated statements of operations are the losses of the LPs in
excess of the limited partners' capital contributions. As of
August 28, 2004 and August 30, 2003, respectively, the LPs
operated 48 stores under the Jennifer Convertibles name.
The Company also licenses stores to parties, certain of which may
be deemed affiliates ("Unconsolidated Licensees"). As of
August 28, 2004 and August 30, 2003, respectively, three stores
were owned by such Unconsolidated Licensees and operated by the
Private Company (see below) and the results of their operations
are not included in the consolidated financial statements. The
Company receives a royalty of 5% of sales from one Unconsolidated
Licensee and two stores owned by the Private Company.
Also not included in the consolidated financial statements are the
results of operations of 27 stores, licensed by the Company, that
are owned and operated by a company (the "Private Company"), which
is owned by the estate of a recently deceased principal stockholder of
the Company who also was the brother-in-law of the Company's Chairman
of the Board and Chief Executive Officer. Twenty five of the 27
stores are located in New York and are on a royalty free basis.
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. The Company has been advised that these options expired
unexercised in November 2004.
As more fully discussed in Note 3, the Company, the LPs, the
Private Company and the Unconsolidated Licensees have had numerous
transactions with each other. In July 2001, the Company and the
Private Company entered into a series of agreements that 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. Due to
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.
F-6
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(2) Summary of Significant Accounting Policies
Principles of consolidation:
The consolidated financial statements include the accounts of
Jennifer Convertibles, Inc., its subsidiaries and the LPs (see
Note 1).
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.
Use of estimates:
The preparation of financial statements, in conformity with
accounting principles generally accepted in the United States of
America, 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.
Segment information:
Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosure about Segments of an Enterprise and Related
Information", requires publicly held companies to report financial
and other information about key revenue-producing segments of the
entity for which such information is available and is utilized by
the chief operating decision maker in deciding how to allocate
resources and in assessing performance. SFAS No. 131 permits
operating segments to be aggregated if they have similar economic
characteristics, products, types of customers and methods of
distribution. Accordingly, the Company's specialty furniture
stores are considered to be one reportable operating segment.
Cash and cash equivalents:
The Company considers all short-term, highly liquid instruments
with a maturity of three months or less to be cash equivalents.
Merchandise inventories:
Merchandise inventories are stated at the lower of cost
(determined on the first-in, first-out method) or market and are
physically located as follows:
August 28 August 30,
2004 2003
Showrooms $6,797 $6,811
Warehouses 7,247 5,910
$14,044 $12,721
F-7
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(2) Summary of Significant Accounting Policies (continued)
Store fixtures, equipment and leasehold improvements:
Store fixtures and equipment are carried at cost less accumulated
depreciation, which is computed using the straight-line method
over the 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.
Annuity contract:
The Company is the owner and beneficiary of an annuity contract
purchased in November 2003 for purchase payments aggregating
$1,065. The annuity contract is carried at contract value which is
equivalent to the amount invested in the contract plus accumulated
earnings, less an insurance charge on the life of the annuitant
who is an officer of the Company. Withdrawals under the contract
may be made at any time and are payable to the Company.
Goodwill:
Goodwill consists of the excess of cost of the Company's
investments in certain subsidiaries over the fair value of net
assets acquired. In July 2001, the Financial Accounting Standards
Board issued 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 was effective for fiscal years beginning after
December 15, 2001; however, the Company elected to adopt this
standard as of the beginning of its fiscal year ended August 31,
2002. During fiscal years ended in 2004, 2003 and 2002, the
Company has performed the required impairment tests and has
determined that there is no impairment of the Company's goodwill.
Income taxes:
Deferred tax assets and liabilities are determined based on the
estimated future tax effects of net operating loss carryforwards
and temporary differences between the financial statement and tax
bases of assets and liabilities, as measured by the current
enacted tax rates. Deferred tax expense (benefit) is the result
of changes in the deferred tax assets and liabilities.
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 $3,809 and $3,976 at August 28,
2004 and August 30, 2003, respectively.
F-8
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(2) Summary of Significant Accounting Policies (continued)
Revenue recognition:
Sales and delivery fees paid by customers are recognized as
revenue upon delivery of the merchandise to the customer. Sales
are made on either a non-financed or financed basis (see Note 4).
A minimum deposit of 50% is typically required upon placing a non-
financed sales order with the balance payable upon delivery.
Commencing June 23, 2002, and prior to May 27, 2001, a subsidiary
of the Private Company assumed all performance obligations and
risks of any loss under the lifetime protection plans and
accordingly, the Company recognized revenue from the sale of
service contracts related to the plans during such periods at the
time of sale to the customer. During the period from May 27, 2001
through June 22, 2002, as part of the Interim Operating Agreement
entered into with the Private Company, the Company agreed to
assume the responsibility and risk of loss under the plans for
sales of service contracts during such period and accordingly,
revenue from sales of the service contracts was deferred and
amortized into income in proportion to the costs expected to be
incurred in performing services under the plans. (See last
paragraph Note 3 - Interim Operating Agreement.)
Warehousing and management fee income from the Private Company is
recognized when earned.
Per share data:
Basic net loss per common share is computed by dividing the net
loss increased by accumulated preferred stock dividends on
the Series B preferred stock of $20 and $20 for the fiscal years
ended in 2004 and 2003, respectively, by the weighted average
number of shares of common stock outstanding during each year.
Basic net income per common share for fiscal 2002 is computed by
dividing net income reduced by accumulated preferred stock
dividends on the Series B preferred stock of $9, by the weighted
average number of shares of common stock outstanding during the
year plus common shares issuable upon conversion of the Series A
participating preferred stock. Such per share amount has been
restated from the amount previously reported which was based on
the weighted average number of common stock outstanding during the
year. Diluted income per share for fiscal 2002 is based on the number
of common shares used in the basic computation increased by common
shares issuable upon exercise of dilutive stock options utilizing
the treasury stock method. Potentially dilutive shares, 4,403,444
in fiscal 2004 and 4,381,941 in fiscal 2003, related to exercise of
stock options and conversion of preferred stock were excluded from the
diluted loss per share calculation, because their effects would have
been anti-dilutive. For fiscal 2002, options for 603,333 shares,
which were anti-dilutive, were not included in the calculation of
diluted income per share.
Advertising:
The Company advertises in newspapers, on the radio and on
television. Advertising costs are expensed as incurred and are
included in selling, general and administrative expense.
Advertising expense for the years ended August 28, 2004,
August 30, 2003 and August 31, 2002 aggregated $14,424, $13,384
and $14,103, respectively, net of amounts charged to the Private
Company and Unconsolidated Licensees (see Note 3).
Shipping and handling costs:
Shipping and handling costs are included in cost of sales.
Delivery fees paid by customers are included in revenue.
Pre-opening costs:
Costs incurred in connection with the opening of stores are
expensed as incurred.
F-9
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(2) Summary of Significant Accounting Policies (continued)
Warranties:
Estimated warranty costs are expensed in the same period that
sales are recognized.
Concentration of risks:
The receivable from the Private Company as of August 28, 2004,
represents current charges aggregating $3,288, principally for
merchandise transfers, warehousing services and advertising costs,
which are payable within 85 days of the end of the month in which
the transactions originate. Such amount has been fully paid
subsequent to the balance sheet date. In addition to the above,
the receivables from the Private Company include $4,722,
representing unpaid amounts from fiscal 1996 and prior years,
which are in dispute and have been fully reserved for in the
accompanying financial statements. As explained in Note 3, as
part of a proposed settlement, the disputed balance will be
settled by the Private Company executing notes to the Company in
the aggregate principal amount of $2,400 payable over a three- to
five-year period. The Company intends to maintain a reserve for
the full amount of the notes and record income as collections are
received.
The Company primarily purchased inventory from three suppliers
under normal or extended trade terms amounting to 42%, 25% and 14%
of inventory purchases during fiscal year 2004, and from two
suppliers amounting to 60% and 33% of inventory purchases during
fiscal year 2003, and 67% and 28% of inventory purchases during
fiscal year 2002.
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. As of August 28, 2004 and August 30, 2003, amounts on
deposit with three banks totaled 55% and 63% of total cash and
cash equivalents, respectively.
Stock options:
The Company accounts for stock-based employee compensation under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. The
Company has adopted the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation", and SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure", which was released in December 2002 as an amendment
of SFAS No. 123. No stock-based employee compensation cost is
reflected in net income (loss), as all options granted under the
plans had an exercise price equal to the market value of the
underlying common stock on the date of grant (see Note 8).
F-10
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(2) Summary of Significant Accounting Policies (continued)
Stock options: (continued)
The following table illustrates the effect on net income (loss)
and earnings (loss) per share if the Company had applied the fair
value recognition provisions of SFAS 123 to stock-based employee
compensation:
Year Ended
August 28, August 30, August 31,
2004 2003 2002
Net (loss) income, as reported $(4,142) $(3,377) $10,919
Deduct: total stock-based
employee compensation
expense determined under the
fair value based
method, net of related tax
effects 536 478 156
Pro forma net (loss) income $(4,678) $(3,855) $10,835
Basic income (loss) per share:
As reported $(0.73) $(0.60) $1.54
Pro forma $(0.82) $(0.69) $1.52
Diluted income (loss) per share:
As reported $(0.73) $(0.60) $1.50
Pro forma $(0.82) $(0.69) $1.48
The fair value of options granted during fiscal 2003 is estimated
using the Black-Scholes option-pricing model with a weighted
average volatility of 49.4%, expected life of options of five
years, weighted average risk-free interest rate of 3.12% and a
dividend yield of 0%. The weighted average fair value of options
granted during fiscal 2003 was $1.80. No options were granted
during fiscal years ended 2004 and 2002.
Fair value of financial instruments:
The carrying amount of the investment in an annuity contract
approximates fair value. Financial instruments also include
accounts receivable, accounts payable and customer deposits. The
carrying amount of these instruments approximates fair value due
to their short-term nature.
F-11
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(3) Agreements and Transactions With Private Company
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:
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 the Private Company provided
to the Company. During each of 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 net delivered sales and 5% on net delivered sales over
$27,640. After five years, the Company will receive a
warehousing fee of 7.5% of all net delivered sales by the Private
Company. In addition, during the full term of the agreement, the
Company will receive a fee based on fabric protection and
warranty services sold by the Private Company at the rate the
Company was being charged, subject to increase for documented
cost increases. For the fiscal years ended August 28, 2004,
August 30, 2003 and August 31, 2002, respectively, charges
(included in net sales) to the Private Company for warehousing
fees amounted to $634, $597 and $673, based on net delivered
sales and $736, $579 and $603, based on sales of fabric
protection and warranty services.
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 previously, except that the
Private Company has 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 1, the operations of these stores are
currently included in the consolidated financial statements.
F-12
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(3) Agreements and Transactions With Private Company (continued)
Interim operating agreement: (continued)
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. For
the "initial period," which commenced January 1, 2002 and ended
August 30, 2003, the Private Company was required to pay to the
Company an amount equal to 48% of the total of the amount by
which the Private Company's net delivered sales exceed $45,358.
If during any annual period commencing on August 31, 2003, the
Private Company's net delivered sales exceed $27,640 but do not
surpass $29,640, then the Private Company will pay to the Company
an amount equal to ten percent (10%) of such excess and if the
Private Company's net delivered sales exceed $29,640, the Private
Company must pay to the Company 48% of any excess over $29,640.
The Company will record management fee income if and when the
sales thresholds are met. During fiscal year ended August 28,
2004 and the initial period ended August 30, 2003, no such
management fees were earned. 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 previously opened in New York,
provided however, that on November 18, 2004, the Management
Agreement and License pursuant to which the Company is required
to make such royalty payments to the Private Company was amended
such that the Private Company has agreed to waive its rights to
receive from the Company such annual royalty payment during the
period commencing January 1, 2005 through the date on which court
approval of settlement agreements is granted. For the fiscal years
ended August 28, 2004, August 30, 2003, and August 31, 2002 the
Company paid the Private Company a royalty of $400 each year.
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 net delivered sales for the period
January 1, 2002 through August 30, 2003 and for any 12-month
period commencing August 31, 2003 are below $45,358 and $27,640
respectively, provided that if such net delivered sales fall
below $42,667 and $26,000, the Company will pay the Private
Company 15% of such shortfall amount. However, such amounts
together with amounts the Company may pay for advertising if the
Private Company's net delivered sales drop below $45,358 and
$27,640 as described below, shall not, in the aggregate, exceed
$4,500 for the initial period or $2,700 in any 12-month period
thereafter. As Private Company sales did not meet the threshold
amount, the Company paid $277 to the Private Company for the 12-
month period ended August 28, 2004 and $221 during the initial
period ended August 30, 2003. On November 18, 2004, the
Management Agreement and License pursuant to which the Company is
required to make such payments to the Private Company was amended
such that the Private Company has agreed to waive its rights to
receive the payments described above during the period commencing
January 1, 2005 through August 31, 2007. This waiver also covers
any payments during such period in the event that the settlement
agreements are approved by the court and become effective during
such period. Messrs. Greenfield and Seidner, officers, directors
and principal stockholders of the Company, had agreed to be
responsible for up to an aggregate of $300 of amounts due under
these provisions in each year. The agreement with Messrs.
Greenfield and Seidner was terminated effective July 16, 2003 and
they were not required to pay a contribution of $188 for the year
ended August 30, 2003. For fiscal year 2003, the Company
recorded $188 of compensation expense and a corresponding
increase to additional paid-in capital representing the benefit
received by Messrs. Greenfield and Seidner as a result of the
termination of the agreement.
F-13
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(3) Agreements and Transactions With Private Company (continued)
Interim operating agreement: (continued)
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 (estimated at 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.
The Private Company is to contribute $126 per month to
advertising (compared with $150 per month previously
contributed), 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 for
the initial period ended August 30, 2003 were less than $45,358
and are less than $27,640 in any subsequent 12-month period
commencing August 31, 2003, the Company will pay the Private
Company (or reduce the advertising payment the Private Company
owes the Company by) an amount equal to 50% of the amount by
which its sales are below such amounts provided that such amount
plus any payments of the 10-15% with respect to sales shortfalls
as described above, had not exceeded $4,500 (for the initial
period) or will not exceed $2,700 (any 12-month period) in the
aggregate. For the fiscal years ended August 28, 2004,
August 30, 2003 and August 31, 2002, contributions from the
Private Company for advertising under the Interim Operating
Agreement, which reduced selling, general and administrative
expenses, amounted to $1,465, $1,468 and $1,470, respectively.
In addition, as the Private Company's sales did not meet the
threshold amount during the fiscal year ended August 28, 2004 and
during the initial period ended August 30, 2003, the Company was
required to pay $924 and $1,105 to the Private Company which was
charged to selling, general and administrative expenses for the
fiscal years ended August 28, 2004 and August 30, 2003,
respectively. On November 18, 2004, the Management Agreement and
License pursuant to which the Company is required to make such
payments to the Private Company was amended such that the Private
Company has agreed to waive its rights to receive the payments
described above during the period commencing January 1, 2005
through August 31, 2007. This waiver also covers any payments
during such period in the event that the settlement agreements
are approved by the court and become effective during such
period.
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 unable to sell furniture other
than leather furniture in New York, except in 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.
F-14
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(3) Agreements and Transactions with Private Company (continued)
Interim operating agreement: (continued)
Pursuant to an Option Agreement, the Company will receive the
option to purchase the assets relating to the 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, and decreasing over the term
of the option, plus the assumption of approximately $5,000 principal
amount of notes due to Messers. Greenfield and Seidner, and declining
over the term of the option.
A monitoring committee was 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.
Effective June 23, 2002, the Company amended the warehouse
agreement with the Private Company whereby the Private Company
became the sole obligor on all lifetime fabric and leather
protection plans sold by the Company or the Private Company on
and after such date through August 28, 2004 (extended to
August 27, 2005) and assumed all performance obligations and risk
of loss thereunder. The Company has no obligation with respect to
such plans. The Private Company is entitled to receive a monthly
payment of $50, payable by the Company 85 days after the end of
the month, subject to an adjustment based on the volume of annual
sales of the plans. The Company retains any remaining revenue
from the sales of the plans. Payments to the Private Company
amounted to $550, $450 and $500 for the fiscal years ended in
2004, 2003 and 2002, respectively. In addition, for a payment of
$400 by the Company, the Private Company also assumed
responsibility to service and pay any claims related to sales
made by the Company or the Private Company prior to June 23,
2002. Accordingly, the Company has no obligations for any claims
filed after June 23, 2002. As a result thereof, in the fourth
quarter of its fiscal year ended August 31, 2002, the Company
reversed into income $7,404 (included in revenue from service
contracts) representing the remaining balance of deferred revenue
related to the fabric protection plans together with $167
representing the remaining balance of the liability for warranty
costs related to sales made prior to May 27, 2001, reduced by the
$400 payment to the Private Company.
Transactions with the Private Company:
The Company purchased merchandise for itself, the LPs, the
Unconsolidated Licensees and the Private Company. During the
fiscal years ended August 28, 2004, August 30, 2003 and August 31,
2002, approximately $10,978, $10,232 and $11,537, respectively, of
inventory at cost was purchased by the Private Company and the
Unconsolidated Licensees through the Company. These transactions
are not reflected in the consolidated statements of operations of
the Company and do not impact the Company's earnings. The Company
receives the benefit of any vendor discounts and allowances in
respect of merchandise purchased by the Company on behalf of the
LPs 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. The Company generally maintains title to inventory
purchased on behalf of the Private Company until the Private
Company sells it and the Company is solely responsible for payment
to the merchandise vendors.
The Company is entitled to royalty income from two stores owned by
the Private Company and one store owned by an Unconsolidated
Licensee that is managed by the Private Company. Royalty income
from the three stores amounted to $110, $105 and $121 for the
fiscal years ended in 2004, 2003, and 2002, respectively. Such
amounts are included in net sales in the consolidated statements
of operations.
F-15
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(3) Agreements and Transactions with Private Company (continued)
Transactions with the Private Company: (continued)
Included in the consolidated statements of operations are the
following amounts charged by and to the Private Company:
Increase (Decrease)
Year Ended
August 28, August 30, August 31,
2004 2003 2002
Net sales:
Royalty income $ 11 $ 105 $ 121
Warehouse fees 1,370 1,176 1,276
Delivery charges 2,367 1,746 1,833
Total charged to the Private
Company $3,847 $3,027 $3,230
Revenue from service contracts:
Fabric protection fees charged by
the Private Company $(550) $(450) $(500)
Selling, general and administrative
expenses:
Administrative fees paid by the
Private Company $(27) - -
Advertising reimbursement paid by
the Private Company $(1,465) $(1,468) $(1,470)
Royalty expense paid to the Private
Company (a) 400 400 400
Expense related to shortfall
payments charged by the
Private Company (a) 1,201 1,326 -
Net charged by (to) the Private
Company $109 $ 258 $(1,070)
(a) Effective January 1, 2005, the Private Company waived its rights to
receive shortfall payments through August 31, 2007 and royalties
through the date of court approval of the settlement agreements.
(4) Sales of Receivables
The Company finances sales and sells financed receivables on a non-
recourse basis to a finance company. The Company does not retain
any interests in or service the sold receivables. The selling
price of the receivables represents the amount due from the
customer less a fee. Fees paid to the finance company, which
amounted to $207, $2,633, and $2,805 for the fiscal years ended
August 28, 2004, August 30, 2003 and August 31, 2002,
respectively, are included in selling, general and administrative
expenses. Proceeds received from the sale of the receivables
amounted to $27,076, $43,111, and $53,093, for the fiscal years
ended August 28, 2004, August 30, 2003 and August 31, 2002,
respectively. The decrease in the fees paid to the finance
company and the proceeds received from the sale of receivables in
fiscal 2004 is due to the decrease in private label card sales.
Accounts receivable in the accompanying balance sheets represent
amounts due from the finance company for certain sales made in
August of each year.
F-16
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(5) Store Fixtures, Equipment and Leasehold Improvements
Store fixtures, equipment and leasehold improvements consist of
the following:
Estimated
August 28, August 30, Useful Lives
2004 2003 (in Years)
Store fixtures and furniture $5,631 $5,699 5 to 10
Leasehold improvements 9,125 8,872 1 to 15
Computer equipment and
software 1,787 1,769 3 to 10
16,543 16,340
Less accumulated depreciation
and amortization (13,511) (12,486)
$3,032 $3,854
(6) 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 Company's Series A convertible preferred stock,
executed a Credit and Security Agreement in March 1996 that
effectively extended the payment terms for merchandise shipped
from 60 days to 81 days and provided 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 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. In May 2003, the Company
executed a Termination Agreement and Release whereby Klaussner
released the liens on the Company's assets. As of August 28, 2004
and August 30, 2003, the Company owed Klaussner $4,483 and $8,399,
respectively. The Company purchased approximately 42% (2004), 60%
(2003) and 67% (2002) of its inventory from Klaussner.
Purchase allowances of $836 (2004), $1,162 (2003) and $1,447
(2002) were obtained from Klaussner, which reduced cost of sales.
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 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 January 18, 2001, the Company granted Klaussner an
option to purchase 18,730 shares of common stock at an exercise
price of $2.00 per share. The option expires in January 2011.
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 expired on August 31, 2004.
F-17
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(7) Income Taxes
Components of income tax (benefit) expense are as follows:
Year Ended
August 28, August 30, August 31,
2004 2003 2002
Current:
Federal $(314) $(214) $527
State 170 181 517
Deferred:
Federal 985(b) (418) (1,581)(a)
State 132(b) (115) (156)(a)
$973 $(566) $(693)
(a) Includes reduction of beginning of the year balance of the
valuation allowance for the deferred tax asset of $1,380 federal and
$137 state in 2002.
(b) Represents increase in valuation allowance related to the
beginning of the year deferred tax asset balance.
Expected tax (benefit) expense based on the statutory rate is
reconciled with actual tax (benefit) expense as follows:
Year Ended
August 28, August 30, August 31,
2004 2003 2002
"Expected" tax (benefit) expense
(34.0)% (34.0)% 34.0 %
Increase (reduction) in taxes
resulting from:
State and local income tax, net of
federal income tax effect 3.5 % 1.1 % 3.1 %
Non-deductible items 1.7 % 1.6 % 0.3 %
Other (1.8)% (5.2)% 2.3 %
Utilization of net operating loss
carryforwards and benefit from
reversal of (net of originating),
deductible temporary differences 0.0 % (8.1)% (28.5)%
Reduction of valuation allowance to
recognize estimated future year
benefit of carryforward and
deductible temporary differences 0.0 % 0.0 % (17.9)%
Increase in valuation allowance 61.3 % 30.1 % 0.0 %
Actual tax expense (benefit) 30.7 % (14.5)% (6.7)%
F-18
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(7) Income Taxes (continued)
The principal components of deferred tax assets, liabilities and
the valuation allowance are as follows:
Year Ended
August 28, August 30,
2004 2003
Deferred tax assets:
Net operating loss carryforward $2,323 $1,519
Reserve for loans and advances 1,818 1,818
Deferred rent expense 1,466 1,536
Excess of tax over book basis of
leasehold improvements 1,921 1,728
Inventory capitalization 253 236
Other expenses for financial
reporting, not yet deductible
for taxes 244 424
Total deferred tax assets,
before valuation allowance 8,025 7,261
Less valuation allowance (6,093) (4,149)
Total deferred tax assets 1,932 3,112
Deferred tax liabilities:
Excess of book over tax basis of
store fixtures and equipment 155 217
Net deferred tax asset $1,777 $ 2,895
As of August 28, 2004, the Company has a net operating loss
carryforward of $5,331 which expires in 2023 and 2024. Such
amount includes a net operating loss incurred during the year
ended August 30, 2003 which the Company elected not to carryback.
A valuation allowance has been established to offset a portion of
the deferred tax asset to the extent the Company has not
determined that it is more likely than not that the future tax
benefits will be realized. During the years ended August 28,
2004, and August 30, 2003, the valuation allowance increased by
$1,944, and $1,181 respectively. The increase in the valuation
allowance in fiscal year 2004 includes $1,117 related to the
beginning of the year balances resulting from a change in
judgment about the realization of tax benefits in future years
due to losses incurred by the Company in fiscal 2004. During
the year ended August 31, 2002 the valuation allowance decreased
by $5,211. The reduction of the valuation allowance includes a
reduction of $1,517 of the beginning of the year balances
resulting from a change in judgment about the realization of tax
benefits in future years due to the Company's operating profits
and its anticipation of future taxable income.
F-19
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(8) Stock Option Plans
At the Company's annual meeting of stockholders, which was held on
September 9, 2003, the 2003 Stock Option Plan was adopted, under
which 700,000 common shares were reserved for issuance for grants
of incentive and non-qualified options to selected employees,
officers, directors, agents, consultants and independent
contractors of the Company. 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. As of
August 28, 2004, no options have been granted under the 1997 Plan.
Outstanding stock options represent options granted
under plans, which have expired plus options granted outside plans
pursuant to individual stock option agreements.
Additional information with respect to outstanding stock options
is as follows:
Options Exercisable Options
Weighted Weighted
Average Average
Exercise Exercise
Number Price Number Price
of Per of Per
Shares Share Shares Share
Outstanding at August 25, 2001 2,191,777 $2.99 1,225,349 $2.89
Expired (40,000) 8.38
Canceled (7,500) 2.00
Outstanding at August 31, 2002 2,144,277 2.89 1,610,773 $2.81
Granted 844,500 3.89
Exercised (9,000) 2.00
Expired (35,000) 13.13
Canceled (6,000) 2.00
Outstanding at August 30, 2003 2,938,777 3.06 1,894,699 $2.65
Granted 0
Exercised 0
Expired 0
Canceled 0
Outstanding at August 28, 2004 2,938,777 $3.06 2,375,777 $2.87
The options granted in fiscal year 2003 were outside the stock option
plans.
As of August 28, 2004, the weighted average remaining contractual
life of the outstanding options was 5.69 years.
As of the grant date of the options granted in 2003, the Company's
outstanding common stock and other convertible securities exceeded
the 10,000,000 shares of common stock, which were authorized.
Accordingly, for financial reporting purposes, 94,999 options are
deemed to be granted effective September 9, 2003, the date the
stockholders approved an increase in the authorized common shares
to 12,000,000. At such date, the quoted market price of the
Company's stock exceeded the option price.
F-20
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(9) Commitments and Other
Leases:
The Company and LPs lease retail store locations under operating
leases for varying periods through 2017, which are generally
renewable at the option of the lessee. Certain leases contain
provisions for additional rental payments based on increases in
certain indexes. Future minimum lease payments for all
non-cancelable leases with initial terms of one year or more
consisted of the following at August 28, 2004:
Year Ending
August
2005 $17,342
2006 16,015
2007 14,769
2008 12,613
2009 9,248
2010 and thereafter 18,350
$88,337
Rental expense for all operating leases amounted to approximately
$22,414, $20,199 and $18,305, net of sublease income of $161, $150
and $225, for the years ended August 28, 2004, August 30, 2003 and
August 31, 2002, respectively. In addition, the Company paid rent
of $1,127, $965 and $983 for the years ended August 28, 2004,
August 30, 2003 and August 31, 2002, respectively, in connection
with bearing the expenses of operating warehouses under the
Interim Operating Agreement with the Private Company (see Note 3).
Letter of credit:
In February 2004, the Company entered into a standby letter of
credit in the amount of $110, as required by the Company's new
workers' compensation insurance provider. The Company has
purchased a certificate of deposit for the same amount from a
financial institution as collateral for the letter of credit and
has classified the certificate as restricted cash.
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 LPs 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 set forth in the
Agreements.
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 Company will wholly own the LPs.
F-21
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(9) Commitments and Other (continued)
Certain related party transactions:
The Company incurred approximately $154, $154, and $156 of legal
fees payable to a director (and stockholder) of the Company in the
fiscal years ended in 2004, 2003, and 2002, respectively.
For fiscal years 2004 and 2003, the Company paid $52 and $22,
respectively, in rent for a month-to-month lease for a retail
store to the father of an officer, director and stockholder of the
Company.
For fiscal years 2004 and 2003, the Company paid $421 and $333,
respectively, for furniture repair service contracts entered into
with companies owned by employees of the Company.
Employment agreements:
On August 15, 1999, the Chief Executive Officer of the Company
entered into a five-year renewable employment agreement, which
provides for a base salary of $400 per annum, subject to certain
cost of living increases, and 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
renewable employment agreement which provides for a base salary of
$400 per annum for the first three years and $500 per annum
thereafter, subject to certain cost-of-living increases and
bonuses based on earnings and revenues.
Accrued expenses and other current liabilities:
The components of accrued expenses and other current liabilities
are:
Year Ended
August 28, August 30,
2004 2003
Advertising $553 $1,307
Payroll and bonuses 455 411
Accounting 215 2
Warehouse expenses 133 81
Litigation settlement costs 253 279
Sales tax 509 527
Warranty 386 554
Freight 358 169
Other 847 805
$3,709 $4,135
F-22
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(9) Commitments and Other (continued)
Warranties:
The aggregate changes in the liability for accruals relating to
the product warranties issued during the fiscal years ended 2004
and 2003 are as follows:
Year Ended
August 28, August 30,
2004 2003
Warranty payable at beginning of year $554 $576
Amount paid during fiscal year ( 760) (854)
Amount expensed during fiscal year 592 832
Warranty payable at end of year $386 $554
year
Amendment of certificate of incorporation:
On September 9, 2003, after shareholder approval, the Company
amended its certificate of incorporation to increase the
authorized common stock to 12,000,000 shares.
(10) Litigation
Between December 6, 1994 and January 5, 1995, the Company was
served with 11 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, and in November 2003 issued an
additional 30,717 shares of Series B preferred stock, convertible
into 21,501 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 ($287) and accrue
dividends at the rate of $.35 per share per annum. In June 2003,
the Company paid accrued dividends through April 30, 2003
amounting to $88 including $17 of dividends applicable to shares
to be issued in November 2003. Accumulated unpaid dividends for
the period May 1, 2003 through August 28, 2004 amounted to $27.
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.
As described in Note 3, in July 2001 the Company entered into
settlement agreements as to the derivative litigation, subject to
court approval of such settlement and certain other conditions.
Accrued expenses in the accompanying balance sheet at August 28,
2004 includes $151 for estimated remaining settlement costs in
connection with the derivative litigation accrued in a prior year.
F-23
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(10) Litigation (continued)
The Company is also subject to other litigation including a claim
for $10,000 for assault and battery, conversion of identity,
defamation, consumer fraud, and infliction of emotional distress,
and another claim for unspecified damages for sexual harassment,
discrimination, retaliation, mental infliction of emotional
stress, false imprisonment and collateral claims. The matters are
in early stages and the Company denies liability and does not
believe that these matters will have significant impact on its
financial position or results of operations.
On April 5, 2004, the Attorney General of the State of New York
filed a motion for contempt under New York law in the Supreme
Court of the State of New York, County of Albany, alleging non-
compliance with an order of the Attorney General's Office obtained
in 1998 which enjoined the Company from engaging in certain
alleged deceptive business practices. In the motion, the Attorney
General sought a court order holding the Company in civil and
criminal contempt for violations of the 1998 order and a fine in
the amount of $5 per day for each day it has allegedly disobeyed
the 1998 order and certain other fees, as well as an unspecified
amount of monetary damages to the petitioners. On July 8, 2004,
the Company and the State of New York reached an agreement to
settle the suit for a total of $277, which covers fines,
penalties, legal and administrative costs. The Company has paid
$37 and accrued $102 for this litigation as of August 28, 2004
representing its half of a proposed settlement, with the other
half to be paid by the Private Company.
(11) Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations
for the years ended August 28, 2004, and August 30, 2003:
Thirteen Weeks Ended
November 29, February 28, May 29, August 28,
2003 2004 2004 2004
Revenue:
Net sales $31,771 $30,276 $32,698 $30,639
Revenue from service
contracts 2,244 2,143 2,323 2,076
34,015 32,419 35,021 32,715
Cost of sales, including store
occupancy, warehousing,
delivery, and service costs 23,814 23,792 24,032 23,727
Operating income (loss) (1,686) (1,117) 1,294 (1,988)
Interest income 27 22 19 43
Interest expense 0 2 1 0
Income (loss) before
income taxes (1,659) (1,097) 1,312 (1,725)
Income tax expense (benefit) 32 30 29 882(a)
Net income (loss) $(1,691) $(1,127) $1,283 $(2,607)
Basic income (loss) per share ($0.30) ($0.20) $0.18(b) ($0.46)
Diluted income (loss) per
share ($0.30) ($0.20) $0.17 ($0.46)
F-24
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 28, 2004, August 30, 2003 and August 31, 2002
(in thousands, except for share amounts)
(11) Quarterly Results of Operations (Unaudited) (continued)
Thirteen Weeks Ended
November 30, March 1, May 31, August 30,
2002 2003 2003 2003
Revenue:
Net sales $34,865 $27,570 $28,061 $28,081
Revenue from service
contracts 2,210 1,825 2,061 1,904
37,075 29,395 30,122 29,985
Cost of sales, including
store occupancy,
warehousing, delivery,
and service costs 24,555 20,145 20,810 21,551
Operating income (loss) 556 (1,047) (1,466) (2,111)
Interest income 41 42 29 24
Interest expense 0 0 4 7
Income (loss) before
income taxes 597 (1,005) (1,441) (2,094)
Income tax expense
(benefit) 94 (184) (61) (415)
Net income (loss) $ 503 $(821) $(1,380) $(1,679)
Basic income (loss) per
share $0.07(b) ($0.14) ($0.24) ($.31)
Diluted income (loss)
per share $0.06 ($0.14) ($0.24) ($.31)
(a) Includes $1,117 ($0.20 per share) increase in valuation allowance related
to the beginning of the year deferred tax asset balance (see Note 7).
(b) Restated to include common shares issuable on conversion of Series A
participating preferred stock (see Note 2-Per Share Data).
F-25