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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended February 26, 2005
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9681
JENNIFER CONVERTIBLES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-2824646
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
419 Crossways Park Drive, Woodbury, New York 11797
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 496-1900
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 whether registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
As of April 12, 2005 5,783,058 shares of the issuer's common
stock, par value $.01, were outstanding.
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Index
Part I - Financial Information
Item 1. - Financial Statements (Unaudited)
Consolidated Balance Sheets at February 26, 2005
(Unaudited) and August 28, 2004 ........................... 2
Comparative Consolidated Statements of Operations
(Unaudited) for the thirteen and twenty-six weeks ended
February 26, 2005 and February 28, 2004.................... 3
Comparative Consolidated Statements of Cash Flows
(Unaudited) for the twenty-six weeks ended
February 26, 2005 and February 28, 2004.................... 4
Notes to Unaudited Consolidated Financial Statements ...... 5
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 13
Item 3. - Quantitative and Qualitative Disclosures about
Market Risk............................................... 18
Item 4. - Controls and Procedures.......................... 18
Part II - Other Information..................................... 19
Item 1 - Legal Proceedings................................. 19
Item 2 - Unregistered Sales of Equity Securities and Use of
Proceeds................................................... 19
Item 3 - Defaults Upon Senior Securities................... 19
Item 4 - Submission of Matters to a Vote of Security
Holders.................................................... 19
Item 5 - Other Information................................. 20
Item 6 - Exhibits.......................................... 20
Signatures ..................................................... 21
Exhibit Index .................................................. 22
Warrant dated as of March 30, 2005 issued to Kenneth Grossman... 23
Executive Compensation Arrangements ............................ 40
Director Compensation Arrangements ............................. 41
Certification of Chief Executive Officer ....................... 42
Certification of Chief Financial Officer ....................... 43
Certification of Chief Executive Officer ....................... 44
Certification of Chief Financial Officer ...................... 45
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
ASSETS
February 26, August 28,
2005 2004
Current assets:
Cash and cash equivalents $7,757 $3,294
Restricted cash 112 110
Accounts receivable 1,011 935
Merchandise inventories, net 13,392 14,044
Due from Private Company, net of reserves
of $4,722 at February 26, 2005 and
August 28, 2004 3,359 3,288
Federal income tax refund receivable 314 314
Deferred tax asset - 1,172
Prepaid expenses and other current assets 1,543 1,195
Total current assets 27,488 24,352
Store fixtures, equipment and leasehold
improvements, at cost, net 2,500 3,032
Annuity contract 997 1,088
Deferred lease costs and other intangibles, net 35 42
Goodwill, net 1,650 1,796
Other assets (primarily security deposits) 600 607
Deferred tax asset - 605
$33,270 $31,522
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Current liabilities:
Accounts payable, trade $15,715 $12,812
Customer deposits 10,415 7,878
Accrued expenses and other current
liabilities 7,734 3,709
Due to Private Company 500 500
Deferred rent and allowances - current portion 491 489
Total current liabilities 34,855 25,388
Deferred rent and allowances, net of current
portion 3,289 3,320
Total liabilities 38,144 28,708
Commitments and contingencies
Stockholders' Equity (Capital Deficit):
Preferred stock, par value $.01 per share
Authorized 1,000,000 shares
Series A Convertible Preferred-10,000
shares issued and outstanding at February 26,
2005 and August 28, 2004
(liquidation preference $5,000)
Series B Convertible Preferred-57,381
shares issued and outstanding at February 26,
2005 and August 28, 2004
(liquidation preference $287) 1 1
Common stock, par value $.01 per share
Authorized 12,000,000 shares at February
26, 2005 and August 28, 2004; issued
and outstanding 5,783,058 shares at
February 26, 2005 and 5,713,058 shares at
August 28, 2004 57 57
Additional paid-in capital 27,868 27,728
Accumulated deficit (32,800) (24,972)
(4,874) 2,814
$33,270 $31,522
See Notes to Consolidated Financial Statements.
2
191:
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data)
Thirteen weeks ended Twenty-six weeks ended
February 26, February 28, February 26, February 28,
2005 2004 2005 2004
Revenue:
Net sales 23,280 28,881 52,919 60,383
Revenue from service contracts 1,590 2,045 3,611
4,267
24,870 30,926 56,530 64,650
Cost of sales, including store
occupancy, warehousing, delivery
and service costs 19,145 22,414 41,932 46,153
Selling, general and
administrative expenses 8,458 8,721 19,187 20,027
Impairment of goodwill 146 - 146 -
Depreciation and amortization 178 377 578 825
27,927 31,512 61,843 67,005
Loss from operations (3,057) (586) (5,313) (2,355)
Interest income 27 23 50 50
Interest expense 1 2 1 2
Loss from continuing operations
before income taxes (3,031) (565) (5,264) (2,307)
Income tax expense 1,783 30 1,838 62
Loss from continuing operations (4,814) (595) (7,102) (2,369)
Loss from discontinued operations
(including loss on store
closings of $197 for the thirteen
weeks and $331 for the twenty-
six weeks ended in 2005) (549) (532) (726) (449)
Net loss $(5,363) $(1,127) $(7,828) $(2,818)
Basic and diluted loss per common
share:
Loss from continuing operations $(0.83) $(0.11) $(1.23) $(0.42)
Loss from discontinued
operations (0.10) (0.09) (0.13) (0.08)
Net loss $(0.93) $(0.20) $(1.36) $(0.50)
Weighted average common shares
outstanding basic and diluted
loss 5,775,947 5,713,058 5,760,351 5,713,058
262:
264:
See Notes to Consolidated Financial Statements.
266:
3
JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands, except share data)
Twenty-six weeks ended
February February
26, 28,
2005 2004
Cash flows from operating activities:
Net loss $(7,828) $(2,818)
Adjustments to reconcile net loss to net cash
provided by (used in)
operating activities from continuing operations:
Depreciation and amortization 578 825
Impairment of goodwill 146 -
Loss from discontinued operations 726 449
Loss on disposal of equipment 13 22
Gains on annuity contract (16) -
Deferred rent 112 (172)
Deferred tax expense 1,777 -
Changes in operating assets and liabilities,
net of effects from discontinued operations:
Merchandise inventories-net 248 (1,683)
Prepaid expenses and other current assets (349) (168)
Accounts receivable (118) 221
Due from Private Company-net (91) (248)
Deferred leases costs and other intangibles (1) -
Other assets, net 7 4
Accounts payable trade 2,903 (4,669)
Customer deposits 2,732 4,231
Accrued expenses and other current 3,941 1,246
Net cash provided by (used in) operating
activities from continuing operations 4,780 (2,760)
Cash flows from investing activities:
Capital expenditures (275) (224)
Purchase of annuity contract - (1,007)
Restricted cash - (110)
Proceeds from partial redemption of annuity
contract 107 -
Net cash (used in) investing activities from
continuing operations (168) (1,341)
Cash flows from financing activities:
Proceeds from exercise of stock options 140 -
Net cash provided by financing activities from
continuing operations 140 -
Net increase (decrease) in cash and cash
equivalents from continuing operations 4,752 (4,101)
Net (decrease) in cash and cash equivalents from
discontinued operations (289) (241)
Cash and cash equivalents at beginning of 3,294 12,761
period
Cash and cash equivalents at end of period $7,757 $8,419
Supplemental disclosure of cash flow
information:
Income taxes paid $133 $64
Interest paid $2 $2
See Notes to Consolidated Financial Statements.
4
JENNIFER CONVERTIBLES, INC.
For the Twenty-Six Weeks Ended February 26, 2005
(In thousands, except for share amount)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Jennifer Convertibles, Inc. and its subsidiaries (the "Company")
have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting
principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals plus other
adjustments referred to in Note 3) considered necessary for a
fair presentation have been included. The operating results for
the twenty-six week period ended February 26, 2005 are not
necessarily indicative of the results that may be expected for
the fiscal year ending August 27, 2005.
The balance sheet as of August 28, 2004 has been derived from the
audited consolidated financial statements as such date but does
not include all of the information and footnotes required by
accounting principles generally accepted in the United States of
America for complete financial statements.
For further information, please refer to the consolidated
financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended August
28, 2004, as filed with the Securities Exchange Commission.
Intercompany transactions have been eliminated in consolidation.
Certain reclassifications have been made to prior period
financial statements to conform to the current year presentation.
NOTE 2: 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:
February 26, August 28,
2005 2004
Showrooms $6,318 $6,797
Warehouses 7,074 7,247
$13,392 $14,044
5
JENNIFER CONVERTIBLES, INC.
For the Twenty-Six Weeks Ended February 26, 2005
(In thousands, except for share amount)
Vendor discounts and allowances in respect of merchandise
purchased by the Company are included as a reduction to the cost
of inventory on hand and cost of sales upon sale of the
merchandise.
NOTE 3: REVENUE RECOGNITION
Sales are recognized upon delivery of the merchandise to the
customer. A minimum deposit of 50% is typically required when a
non-financed sales order is placed. The Company also finances
sales and sells financed receivables on a non-recourse basis to
an independent finance company. The Company neither retains any
interests in nor services 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 are
included in selling, general and administrative expenses.
The Company also derives revenues from the sale of service
contracts related to lifetime protection plans. Prior to an
amendment to the Company's Warehouse Agreement with a related
private company (the "Private Company"), as described below, the
Company was responsible for providing services related to
separately priced fabric protection plans.
The Company amended its warehouse agreement with the Private
Company, whereby, effective June 23, 2002, the Private Company
became the sole obligor on all lifetime fabric and leather
protection plans sold by the Company or the Private Company on or
after such date through August 28, 2004 (extended to August 27,
2005) and assumed all performance obligations and risk of loss
there under. The Company has no obligation with respect to such
plans. The Private Company receives a monthly payment of $50,
subject to an adjustment based on the annual volume of sales of
the plans. In addition, for a payment of $400 (payable $50 per
month beginning three months after the date of the agreement) to
be made 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 and revenue from the sale of fabric
protection plans is recognized upon delivery of the merchandise.
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 $24 and $25 for the thirteen
weeks ended February 26, 2005 and February 28, 2004,
respectively. For the twenty-six weeks ended February 26, 2005
and February 28, 2004, royalty income amounted to $54 and
$55,respectively. Such amounts are included in net sales in the
consolidated statements of operations.
NOTE 4: GOODWILL
Goodwill consists of the excess of cost of the Company's
investments in certain subsidiaries over the fair value of net
assets acquired. The Company reviews goodwill for impairment
annually during the fourth quarter of each year, and also upon the
occurrence of trigger events. The reviews are performed at the
6
JENNIFER CONVERTIBLES, INC.
For the Twenty-Six Weeks Ended February 26, 2005
(In thousands, except for share amount)
store level. Generally fair value represents discounted projected
future cash flows. Potential impairment is indicated when the
carrying value of a store including goodwill exceeds its fair value.
If potential for impairment exists, the fair value of a store is
subsequently measured against the fair value of its underlying
assets and liabilities, excluding goodwill, to estimate an
implied fair value of the store's goodwill. Impairment loss
is recognized for any excess of the carrying value of the stores
goodwill over the implied fair value.
As a result of the adverse change in the business climate during
the thirteen-week period ended February 26, 2005, the Company
tested goodwill for impairment. In the six-months ended
February 26, 2005 certain stores in Chicago experienced a
substantial decline in operating performance and did not meet
projected 2005 results. Additionally, the Company has forecasted
a further decline in the future operating performance of these
stores. The Company recorded a charge of $146 related to the
impairment of goodwill for these stores in the thirteen-weeks
ended February 26, 2005 due to this evaluation. No impairment
was indicated during this review of goodwill at other Company stores.
NOTE 5: CONTINGENCIES
The Derivative Litigation
Beginning in December 1994, a series of six actions were
commenced as derivative actions on the Company's behalf against
certain present and former officers and directors of the Company,
the Private Company and others.
The complaints in each of these actions assert various acts of
wrongdoing by the defendants, as well as claims of breach of
fiduciary duty by the Company's present and former officers and
directors. The Company had entered into settlement agreements
with respect to the derivative litigation, subject, in the case
of certain of those agreements, to court approval of the
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.
On July 6, 2001, the Private Company and the Company entered into
a series of agreements designed to settle the derivative action
among the Private Company, certain of our current and former
officers and directors and certain of our former accounting firms
and the Company. Effectiveness of the agreements was 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 designed to implement
certain of the provisions of the settlement agreement prior to
court approval.
On February 4, 2005, the United States District Court for the
Eastern District of New York approved the settlement of the
derivative lawsuit. In connection with the settlement, the Court
approved the series of agreements that the Company entered into
with the Private Company as referred to above. Pursuant to the
settlement agreements, such agreements will be implemented
in accordance with the terms prescribed by the Omnibus
Agreement, (see Note 10). For a more detailed discussion
of the terms of the settlement agreements, please see "Certain
Relationships and Related Transactions" in our Proxy Statement
furnished in connection with our Annual Meeting of Stockholders
7
JENNIFER CONVERTIBLES, INC.
For the Twenty-Six Weeks Ended February 26, 2005
(In thousands, except for share amount)
held on February 8, 2005.
In connection with the class action litigation, on November 7,
2003, the Company 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 February 26, 2005 on the 57,381 Series B
Preferred Stock outstanding amounted to $37. 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.
Other Matters
The Company is also subject to other litigation, including a
claim for $10 million 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 $139 for this litigation as of February 26, 2005,
representing its half of a settlement, with the other half paid
by the Private Company pursuant to a separate agreement between
the two companies. As of February 26, 2005, restitution payments
to consumers total $31.
NOTE 6: TRANSACTIONS WITH THE PRIVATE COMPANY
Included in the Consolidated Statements of Operations are the
following amounts charged by and to the Private Company:
8
JENNIFER CONVERTIBLES, INC.
For the Twenty-Six Weeks Ended February 26, 2005
(In thousands, except for share amount)
Increase (decrease)
Thirteen weeks ended Twenty-six weeks ended
February 26, February 28, February 26, February 28,
2005 2004 2005 2004
Net Sales:
Royalty income $24 $25 $54 $55
Warehouse fees 317 303 686 658
Delivery charges 524 549 1,132 1,159
$865 $877 $1,872 $1,872
Revenue from Service Contracts:
Fabric protection fees
charged by the Private
Company $(100) $(100) $(250) $(250)
Selling, General and
Administrative Expenses:
Administrative fees paid by
the Private Company (28) - (56) -
Advertising reimbursement
paid by the Private Company (375) (368) (744) (731)
Royalty expense paid to the
Private Company 33 100 133 200
Expenses related to
shortfall payments charged
by the Private Company 101 157 468 512
$(269) $(111) $(199) $(19)
NOTE 7: INCOME TAXES
A valuation allowance has been established to offset the
deferred tax asset to the extent that the Company has not
determined that it is more likely than not that the future tax
benefits will be realized. During the thirteen weeks ended
February 26, 2005, the valuation allowance increased by $1,777
resulting from a change in judgment about the realization of tax
benefits in future years due to consecutive losses and
anticipated losses for the current fiscal year, as well as longer
than anticipated deflationary pressure in the furniture industry
sector.
NOTE 8: STOCK OPTION PLANS
In December 2002, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," which
amends the disclosure requirements of SFAS 123, "Accounting for
Stock-Based ompensation" and provides alternative methods of
transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. As permitted by
SFAS 148, the Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees'
(APB 25) and related interpretations in accounting for its employee
9
JENNIFER CONVERTIBLES, INC.
For the Twenty-Six Weeks Ended February 26, 2005
(In thousands, except for share amount)
stock options. Under APB 25, in the event that the exercise price of
the Company's employee stock options is less than the market
price of the underlying stock on the date of the grant,
compensation expense is recognized. No stock-based employee
compensation cost is reflected in net loss, as all options
granted under the Company's employee stock option plans had an
exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the
effect on net loss and loss per share if the Company had applied
the fair value recognition provisions of SFAS No. 123 to stock-
based employee compensation.
Thirteen weeks Twenty-six weeks
ended ended
February February February February
26, 28, 26, 28,
2005 2004 2005 2004
Net loss, as reported $(5,363) $(1,127) $(7,828) $(2,818)
Deduct: Total stock-based
employee compensation
expense determined under the
fair value based method,
net of related tax effects 134 134 262 268
Pro forma net loss $(5,497) $(1,261) $(8,090) $(3,086)
Loss per share (basic and
diluted):
As reported $(0.93) $(0.20) $(1.36) $(0.50)
Pro forma $(0.95) $(0.22) $(1.41) $(0.54)
The fair value of each option grant on the date of grant is
estimated using the Black-Scholes option-pricing model based on a
weighted average volatility of 36.1%, expected life of options of
five years, weighted average risk free interest rate of 3.61% and
a dividend yield of 0% for the twenty-six week period ended
February 26, 2005. The weighted average fair value of options
granted during the twenty-six week period ended February 26, 2005
was $0.62. During the twenty-six week period ended February 26,
2005, 383,333 options were granted. No options were granted
during the twenty-six week period ended February 28, 2004. (See
Note 10).
NOTE 9: DISCONTINUED OPERATIONS
During fiscal 2005, the Company decided to close nineteen
stores and may close additional stores. Of the nineteen
stores that will be closed, two are located in Kansas City,
Missouri, one in Lenexa, Kansas, three in Hartford,
Connecticut, four in Pittsburgh, Pennsylvania, one in
Cerritos, California, one in West Roxbury, Massachusetts,
one in Indianapolis, Indiana, one in Miami, Florida, one
upstate New York, and four in the metropolitan New York City
area. The stores in Missouri, Kansas, Hartford, and
Pittsburgh represent the only stores the Company has in
those areas. In accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, as those stores are
closed, their results will be reported as discontinued
operations in the consolidated statement of operations for
the current and prior periods. Stores to be closed in
California, Indiana, Florida, and the metropolitan New York
City area will also be reflected as discontinued operations
except for those stores where in management's judgment there
will be significant continuing sales to customers of the
closed stores from other stores in the area, as in the case
of West Roxbury.
10
JENNIFER CONVERTIBLES, INC.
For the Twenty-Six Weeks Ended February 26, 2005
(In thousands, except for share amount)
During the thirteen-week period ended November 27, 2004, the
Company closed the two stores in Kansas City, one store in
Lenexa, and one store in Hartford. During the thirteen-week
period ended February 26, 2005, the Company closed the four
stores in Pittsburgh, one store in the metropolitan New York
City area, two stores in Hartford, one store in Cerritos and
one store in West Roxbury. Of these store closings all,
except for West Roxbury, have been reported as discontinued
operations. Revenues from these stores, exclusive of West
Roxbury, amounted to $1,072 and $1,510 in the thirteen-week
periods ended February 26, 2005 and February 28, 2004,
respectively and $1,333 and $1,784 in the twenty-six week
periods ended February 26, 2005 and February 28, 2004,
respectively.
Losses related to store closing consist of the following:
Thirteen-weeks Twenty six-weeks
ended ended
February 26, 2005 February 26, 2005
Store fixtures and
leasehold improvements $ 148 $ 203
Lease termination costs 49 128
Total loss on store closings $ 197 $ 331
NOTE 10: SUBSEQUENT EVENTS
On March 9, 2005, the Board of Directors opted to accelerate the
vesting of all out of the money stock options. The option terms
were modified to reduce the impact of adopting the provisions of
Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment, (SFAS 123(R)), issued December 2004,
which requires that compensation cost related to share-based
payment transactions be recognized in financial statements at the
fair value of the instruments issued.
As discussed in Note 5, the Company is in the process of
implementing the settlement agreement approved by the court,
in accordance with the terms described in the Omnibus
agreement. The effects of the settlement agreements on the
Company's financial statements will be as follows:
. The execution of three promissory notes by the Private
Company payable 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.
11
JENNIFER CONVERTIBLES, INC.
For the Twenty-Six Weeks Ended February 26, 2005
(In thousands, except for share amount)
. The acquisition of 100% of certain of the Company's limited
partnership licensees whose results are included in the Company's
consolidated financial statements, some of which continue to
generate operating losses.
. The payment of a royalty of $400 per year, which provides
the Company with the right to open an unlimited number of stores
in the state of New York, including stores already opened.
. The execution of a consulting agreement between the Company
and one of the parties objecting to the original settlement
between the Private Company and the Company. Pursuant to the
agreement, the individual shall perform consulting services
including, among other things, providing advice with respect to
the operation and financing of our business; assisting us in
identifying and communicating with potential market makers and
investors; assisting us with strategic planning and capital-
raising activities; and identifying potential strategic partners.
In consideration for his services, we shall pay the individual a
fee of $50 per annum and a warrant to purchase 150,000 shares of
our common stock, as more fully described below. In addition,
the Company will establish a monitoring committee to review the
relationship between the Private Company and the Company. The
aforementioned individual will be a member of the committee, and
will be compensated $50 per annum for five years.
On March 30, 2005, in connection with the settlement of the
derivative litigation, as additional compensation for consulting
services, the Company issued to a consultant a warrant to
purchase 150,000 shares of common stock, $.01 par value per
share, at an exercise price of $2.37 per share. These warrants
expire ten years from the date of issuance and shall vest as
follows: 50,000 shares upon issuance, 50,000 shares on the first
anniversary thereof, and 50,000 shares on the second anniversary
thereof. The warrant will become fully vested if the closing
price of our common stock exceeds $7.00 per share for five
consecutive trading days. The fair value of the warrants on the
date of issuance was approximately $146 utilizing the Black-
Scholes option-pricing model with the following assumptions: 40%
volatility, five-year expected life, risk-free interest rate of
4.27 % and a dividend yield ratio of 0%.
12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and accompanying notes
filed as part of this report.
Forward-Looking Information
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
outcome 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 the risk factors set forth under
the caption "Risk Factors" in our Annual Report on Form 10-K for
the fiscal year ended August 28, 2004, as filed with the
Securities and Exchange Commission. In addition to statements
that 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.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of total revenue contributed by each class:
Thirteen weeks Twenty-six weeks
ended ended
February February February February
26, 28, 26 28,
2005 2004 2005 2004
Merchandise Sales - net 83.2% 83.3% 83.2% 83.2%
Home Delivery Income 6.9% 7.3% 7.1% 7.3%
Charges to the Private Company 3.5% 2.8% 3.3% 2.9%
Net Sales 93.6% 93.4% 93.6% 93.4%
Revenue from Service Contracts 6.4% 6.6% 6.4% 6.6%
Total Revenue 100.0% 100.0% 100.0% 100.0%
Net sales from continuing operations include merchandise sales
and home delivery income of $23,280,000 and $28,881,000 for the
thirteen-week periods ended February 26, 2005 and February 28,
2004, respectively. Net sales of merchandise and home delivery
income from continuing operations decreased by 19.4% in the
thirteen-week period ended February 26, 2005, down $5,601,000
from the thirteen-week period ended February 28, 2004. Revenue
from service contracts from continuing operation decreased by
22.2% in the thirteen-week period ended February 26, 2005 to
$1,590,000, from $2,045,000 for the thirteen-week period ended
February 28, 2004. Such decreases during the second quarter of
fiscal 2005, compared to the same quarter in fiscal 2004, are
largely impacted by the deflationary pressure in the furniture
industry caused by a change in the source of supply to China,
which reduced unit prices to customers. In addition, the
13
reduction in merchandise sales was affected by a decline in
overall demand within the furniture industry sector, as well as
going out of business promotions by a competitor. The decrease
in merchandise sales directly impacted home delivery income and
revenues from service contracts.
Net sales from continuing operations for the twenty-six weeks
ended February 26, 2005, inclusive of merchandise sales and home
delivery income, were $52,919,000, a decrease of 12.4% compared
to $60,383,000 for the twenty-six weeks ended February 28, 2004.
Revenue from service contracts from continuing operations
decreased by 15.4% during the twenty-six week period ended
February 26, 2005 to $3,611,000, from $4,267,000 for the twenty-
six week period ended February 28, 2004. Such decreases during
the twenty-six weeks ended February 26, 2005, compared to the
same period ended February 28, 2004, are largely impacted by the
deflationary pressure in the furniture industry caused by a
change in the source of supply to China, which reduced unit
prices to customers. In addition, the reduction in merchandise
sales was affected by a decline in overall demand within the
furniture industry sector, as well as going out of business
promotions by a competitor. The decrease in merchandise sales
directly impacted home delivery income and revenues from service
contracts.
Same store sales (sales at those stores open for the entire
current and prior comparable periods) decreased 20.4% and 13.7%
for the thirteen and twenty-six weeks ended February 26, 2005,
respectively, compared to the same periods ended February 28,
2004. Not included in same store sales is one store that
relocated during the thirteen weeks ended February 26, 2005 and
three stores that relocated during the twenty-six weeks ended the
same date. Total square footage leased decreased approximately
0.2% as a result of the three relocated stores.
Cost of sales, as a percentage of revenue for the thirteen-week
period ended February 26, 2005, was 77.0% compared to 72.5% for
the same period ended February 28, 2004. Cost of sales from
continuing operations decreased to $19,145,000 for the thirteen
weeks ended February 26,2005, from $22,414,000 for the thirteen
weeks ended February 28, 2004. Store occupancy costs as a
percentage of revenues were 21.6% and 16.8% for the thirteen
weeks ended February 26, 2005 and February 28, 2004,
respectively.
Cost of sales, as a percentage of revenue for the twenty-six week
period ended February 26, 2005, was 74.2% compared to 71.4% for
the same period ended February 28, 2004. Cost of sales from
continuing operations decreased to $41,932,000 for the twenty-six
weeks ended February 26, 2005, from $46,153,000 for the twenty-
six weeks ended February 28, 2004. Store occupancy costs as a
percentage of revenues were 19.6% and 16.3% for the twenty-six
weeks ended February 26, 2005 and February 28, 2004, respectively.
Selling, general and administrative expenses from continuing
operations were $8,458,000 (34.0% as a percentage of revenue) and
$8,721,000 (28.2% as a percentage of revenue) during the thirteen-
week period ended February 26, 2005 and February 28, 2004,
respectively. The decrease is primarily attributable to lower
compensation expense to salespersons in the form of commissions
and bonuses in the amount of $327,000, net of an increase in fees
associated with our private label card business in the amount of
$165,000, compared to the same period last year. Compensation to
salespersons is lower due to the decrease in our sales volume.
Private label card fees have risen as a result of an increase in
deferred financing promotions.
Selling, general and administrative expenses from continuing
operations were $19,187,000 (33.9% as a percentage of revenue)
and $20,027,000 (31.0% as a percentage of revenue) during the
14
twenty-six week period ended February 26, 2005 and February 28,
2004, respectively. For the twenty-six weeks ended February 26,
2005, advertising expense from continuing operations decreased by
approximately $394,000 and compensation expense to salespersons
in the form of commissions and bonuses decreased by approximately
$462,000, compared to the same period last year. The decrease in
advertising costs are partially attributed to a refund of
$119,000 received from a newspaper in which we advertise which
failed to meet its circulation requirements. The decrease in
compensation expense to salespersons is attributable to lower
sales volume.
The net loss from continuing operations was $4,814,000 and
$595,000 for the thirteen-week period ended February 26, 2005 and
February 28, 2004, respectively. Net loss from continuing
operations for the twenty-six weeks ended February 26, 2005 was
$7,102,000 compared to a net loss from continuing operations of
$2,369,000 for the twenty-six week period ended February 28,
2004. Such increases are largely attributable to the decrease in
revenues. In addition, during the thirteen weeks ended February
26, 2005, we increased the valuation allowance of the deferred
tax asset by $1,777,000 resulting from a change in judgment about
the realization of tax benefits in future years due to
consecutive losses incurred by the Company, as well as longer
than anticipated deflationary pressure in the furniture industry
sector.
During the thirteen-week period ended February 26, 2005, we
closed four stores in Pittsburgh, one store in the metropolitan
New York City area, two stores in Hartford, one store in Cerritos
and one store in West Roxbury. Revenues from these stores,
exclusive of West Roxbury, amounted to $1,072,000 and $1,510,000
in the thirteen-week periods ended February 26, 2005 and February
28, 2004, respectively. For the thirteen-week period ended
February 26, 2005, the loss from operations of these stores was
$549,000, including loss related to store closings of $197,000.
For the thirteen-week period ended February 28, 2004, loss from
operations of these stores amounted to $532,000.
During the twenty-six week period ended February 26, 2005, we
closed two stores in Kansas City, one store in Lenexa, three
stores in Hartford, four stores in Pittsburgh, one store in the
metropolitan New York City area, one store in Cerritos and one
store in West Roxbury. Revenues from these stores, exclusive of
West Roxbury, amounted to $1,333,000 and $1,784,000 in the twenty-
six week periods ended February 26, 2005 and February 28, 2004,
respectively. For the twenty-six week period ended February 26,
2005, the losses from operations of these stores were $726,000,
including loss related to store closings of $331,000. For the
twenty-six week period ended February 28, 2004 loss from
operations of these stores amounted to $449.
Liquidity and Capital Resources
As of February 26, 2005, we had an aggregate working capital
deficiency of $7,367,000 compared to an aggregate working capital
deficiency of $1,036,000 at August 28, 2004 and had available
cash and cash equivalents of $7,757,000 compared to $3,294,000 at
August 28, 2004. The increase in cash and cash equivalents is a
result of extended payment terms with our principal suppliers.
In addition, we held $1,575,000 of insurance proceeds received in
connection with the settlement of the derivative litigation,
pending remittance to plaintiff's attorneys, as of February 26,
2005.
On February 4, 2005, the United States District Court for
the Eastern District of New York issued an Order and Final
Judgment approving the settlement of certain previously
disclosed derivative litigation actions commenced against us
and a number of our affiliates and other related parties in
December 1994. In connection with the settlement, the court
approved a series of agreements (the "Settlement
Agreements") that we entered into with a related private
company on July 6, 2001, which were designed to settle the
derivative actions among such private company, certain of
our current and former officers and directors, former
accounting firms and us. We have been operating under an
Interim Operating Agreement designed to implement certain
provisions of the Settlement Agreements. Effectiveness of
the Settlement Agreements is subject to certain conditions,
including the court's approval. We expect to take the
additional steps necessary to consummate the settlement and
thereby effectuate Settlement Agreements by the end of April
2005.
15
On March 4, 2005, the law firm of Schoengold Sporn Laitman &
Lometti ("Schoengold Sporn"), which represented the plaintiffs in
one of the derivative actions, wrote to the court seeking
permission to move to vacate and/or modify the Order and Final
Judgment and to make an application for attorneys' fee, on the
grounds that the settlement was improperly negotiated by the law
firm of Abbey Gardy LLP ("Abbey Gardy"), attorneys for certain
of the plaintiffs, and without the knowledge Schoengold Sporn and
another law firm representing the plaintiffs, Kaplan Fox. Abbey
Gardy wrote a letter to the court in opposition to the letter
submitted by Schoengold Sporn.
On March 29, 2005, our counsel made a motion to stay the
implementation of the settlement, and most particularly, the
payment to the law firm of Feder Kaszovitz Isaacson Weber Skala &
Bass, pending the resolution of Schoengold Sporn's motion. The
court denied our counsel's request and set a briefing schedule
for Schoengold Sporn's motion.
We continue to fund the operations of certain of our limited
partnership licensees whose results are included in our
consolidated financial statements, some of which continue to
generate operating losses. Any such losses have been consolidated in our
consolidated financial statements. It is our intention to
continue to fund these operations in the future. Pursuant to the
Settlement Agreements, we are in the process of acquiring 100% of
such limited partnerships.
As of February 26, 2005, we had net receivables of $2,859,000
from the private company. As of such date, we have fully
reserved uncollected amounts, which totaled an additional
$4,722,000. Pursuant to the Settlement Agreements, 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.
Starting in 1995, we entered into agreements with the private
company that permit us to offset our current monthly obligations
to one another for an amount 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, all current obligations of the private company
and the unconsolidated licensees as of February 28, 2004, were
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. As described above,
our receivables from the private company and the unconsolidated
licensees, which arose in fiscal 1996 and prior years, had been
reserved.
We opened one store and closed thirteen stores during the twenty-
six weeks ended February 26, 2005. We spent $275,000 for capital
expenditures during such twenty-six week period and we anticipate
16
capital expenditures approximating $100,000 during the balance of
fiscal 2005 to support the maintenance of existing facilities.
We do not anticipate needing outside financing for such
maintenance.
The furniture industry has experienced a significant change in
source of supply, which has resulted in a reduction in unit
prices for customers, which impacts revenues. We experienced
various delays effectuating our new supply chain that had been
moved from Italy to China. This impeded additional sales growth
through fiscal 2004 until February 2005. The supply chain is
now in place and believe we have a clear marketing strategy
that will capitalize on this supply chain shift.
We expect to benefit from an amendment to the Interim Operating
Agreement with the private company whereby the private company
has waived all shortfall payments due from us under the Agreement
commencing January 2005 through the end of fiscal 2007. That
payment amounted to $1,201,000 in fiscal 2004. The Amendment
also eliminates the royalty payment of $400,000 commencing
January 2005 running until the effective date of the settlement,
which we expect to be at the end of April 2005.
We anticipate generating positive operating cash flow for the
year ending August 27, 2005. This is to be achieved through the
combined effects of expected benefits from our new supply chain,
the waiver of shortfall payments and the closing of unprofitable
stores. In the opinion of management, cash on hand and cash flow
from operations will be adequate to fund operations during the
current fiscal year.
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly
Report on Form 10-Q (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.
18
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
On February 4, 2005, the United States District Court for
the Eastern District of New York issued an Order and Final
Judgment approving the settlement of certain previously
disclosed derivative litigation actions commenced against us
and a number of our affiliates and other related parties in
December 1994. In connection with the settlement, the court
approved a series of agreements (the "Settlement
Agreements") that we entered into with a related private
company on July 6, 2001, which were designed to settle the
derivative actions among such private company, certain of
our current and former officers and directors, former
accounting firms and us. We have been operating under an
Interim Operating Agreement designed to implement certain
provisions of the Settlement Agreements. Effectiveness of
the Settlement Agreements is subject to certain conditions,
including the court's approval. We expect to take the
additional steps necessary to consummate the settlement and
thereby effectuate Settlement Agreements by the end of April
2005.
On March 4, 2005, the law firm of Schoengold Sporn Laitman &
Lometti ("Schoengold Sporn"), which represented the plaintiffs in
one of the derivative actions, wrote to the court seeking
permission to move to vacate and/or modify the Order and Final
Judgment and to make an application for attorneys' fee, on the
grounds that the settlement was improperly negotiated by the law
firm of Abbey Gardy LLP ("Abbey Gardy"), attorneys for certain
of the plaintiffs, and without the knowledge Schoengold Sporn and
another law firm representing the plaintiffs, Kaplan Fox. Abbey
Gardy wrote a letter to the court in opposition to the letter
submitted by Schoengold Sporn.
On March 29, 2005, our counsel made a motion to stay the
implementation of the settlement, and most particularly, the
payment to the law firm of Feder Kaszovitz Isaacson Weber Skala &
Bass, pending the resolution of Schoengold Sporn's motion. The
court denied our counsel's request and set a briefing schedule
for Schoengold Sporn's motion.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
At our annual meeting of stockholders, which was held on February
8, 2005, our stockholders:
19
(1) Elected five nominees for directors to serve for a term ending in 2006;
(2) Ratified the appointment of Eisner LLP as our independent
auditors and public accountants for the fiscal year ended
August 27, 2005.
The following tables show the common stock votes cast with
respect to the proposals identified above:
Withheld
Election of Directors: For Authority
Harley J. Greenfield 4,846,225 221,155
Edward Bohn 5,036,825 30,555
Kevin Coyle 5,036,825 30,555
Rami Abada 5,036,825 30,555
Mark Berman 5,036,825 30,555
Total All Directors 24,993,525 343,375
Proposal 2 For Against Abstentions
Appointment of Eisner LLP 5,052,228 9,408 5,744
Item 5. Other Information.
None.
Item 6. Exhibits
The following exhibits are filed with this report:
4.1 Warrant dated as of March 30, 2005 issued to
Kenneth Grossman
10.1 Executive Compensation Arrangements
10.2 Director Compensation Arrangements
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
20
JENNIFER CONVERTIBLES, INC.
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.
April 12, 2005 By: /s/Harley J. Greenfield
Harley J. Greenfield, Chairman of
the Board and Chief Executive Officer
April 12, 2005 By: /s/Rami Abada
Rami Abada, Chief Financial Officer
and Chief Operating Officer
21
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
4.1 Warrant dated as of
March 30, 2005 issued to Kenneth
Grossman
10.1 Executive Compensation Arrangements
10.2 Director Compensation Arrangements
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.
22
EXHIBIT 4.1
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAW OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR
PURSUANT TO AN APPLICABLE EXEMPTION TO THE REGISTRATION
REQUIREMENTS OF SUCH ACT OR SUCH LAWS.
THIS WARRANT IS EXERCISABLE UNTIL 5:00 P.M., NEW YORK CITY TIME,
ON THE EXPIRATION DATE (AS DEFINED HEREIN).
Date: March 30, 2005
WARRANT TO PURCHASE
COMMON SHARES
OF
JENNIFER CONVERTIBLES, INC.
TRANSFER RESTRICTED -- SEE SECTION 5.2
This certifies that, for good and valuable consideration,
Kenneth S. Grossman (the "Warrantholder"), is entitled to
purchase from Jennifer Convertibles, Inc., a Delaware corporation
(the "Company"), subject to the terms and conditions hereof, at
any time during the Exercise Period (as defined herein), 150,000
fully paid Common Shares stated above at the Exercise Price. The
Exercise Price and the number of shares purchasable hereunder are
subject to adjustment from time to time as provided in Article
III hereof.
ARTICLE 1.
Section 1.1 Definition of Terms. As used in this Warrant, the
following capitalized terms shall have the following respective
meanings:
(a) Business Day: A day other than a Saturday, Sunday or other
day on which banks in the State of New York are authorized by law
to remain closed.
(b) Common Shares: Shares of Common Stock, par value $.01 per
share, of the Company.
(c) Common Shares Equivalents: Securities that are convertible
into or exercisable for Common Shares.
(d) Conversion Date: See Section 2.2.4(b).
23
EXHIBIT 4.1
(e) Conversion Right: See Section 2.2.4(a).
(f) Converted Warrant Shares: See Section 2.2.4(a).
(g) Determination Date: See Section 2.2.4(c).
(h) Exchange Act: The Securities Exchange Act of 1934, as amended.
(i) Exercise Period: The period commencing on the date hereof
as to 50,000 Warrants, the period commencing on the first
anniversary of the date hereof as to an additional 50,000
Warrants and the period commencing on the second anniversary of
the date hereof as to the final 50,000 Warrants and each such
period ending on the Expiration Date. The Exercise Period for
all the Warrants shall be automatically accelerated to commence
on the earlier to occur of (i) the date the Consulting Agreement
dated of even date herewith between the Warrantholder and the
Company is terminated (for any reason, including death or
disability) or (ii) the date that the closing price of the Common
Shares exceeds $7.00 per share for five (5) consecutive trading
days.
(j) Exercise Price: The price per Warrant Share shall equal
$2.37, as such price may be adjusted from time to time pursuant
to Article III hereof
(k) Expiration Date: 5:00 P.M., New York City time, on the
tenth anniversary of the date hereof, or if such day is not a
Business Day, the next succeeding day which is a Business Day.
(l) Person: An individual, partnership, joint venture,
corporation, trust, unincorporated organization or government or
any department or agency thereof.
(m) SEC: The Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act or
the Exchange Act.
(n) Securities Act: The Securities Act of 1933, as amended.
(o) Transfer: See Section 5.2.
(p) Warrant(s): The Warrants represented by this certificate.
(q) Warrantholder: The person(s) or entity(ies) to whom this
Warrant is originally issued, or any successor in interest
thereto, or any assignee or transferee thereof, in whose name
this Warrant is registered upon the books to be maintained by the
Company for that purpose.
(r) Warrant Shares: Common Shares, Common Share Equivalents and
other securities purchased or purchasable upon exercise of the
Warrants. For purposes of Section 4.4, the term also includes
Common Shares issued or issuable to the Warrantholder based upon
Common Shares obtained pursuant to any provision hereof.
24
EXHIBIT 4.1
ARTICLE 2.
Duration and Exercise of Warrant
Section 2.1 Duration of Warrant. The Warrantholder may
exercise this Warrant (as to vested Warrants) at any time during
the appropriate Exercise Period. If this Warrant is not
exercised on or prior to the Expiration Date, it shall become
void, and all rights hereunder shall thereupon cease.
Section 2.2 Exercise of Warrant.
2.2.1 Manner of Exercise; Payment in Cash.
This Warrant may be exercised by the Warrantholder, in whole
or in part, by surrendering this Warrant, with the purchase
form appended hereto as Exhibit A duly executed by the
Warrantholder, at the principal office of the Company, or at
such other place as the Company may designate, accompanied
by payment in full of the Exercise Price payable in respect
of the number of Warrant Shares of Warrant Stock purchased
upon such exercise. Payment of the Exercise Price shall be
in cash or by certified or official bank check payable to
the order of the Company or pursuant to a Conversion Right
(as defined below) in accordance with Section 2.2.4.
2.2.2 Effectiveness. Each exercise of this
Warrant shall be deemed to have been effected immediately
prior to the close of business on the day on which this
Warrant shall have been surrendered to the Company as
provided in Section 2.2 above. At such time, the person or
persons in whose name or names any certificates for Warrant
Shares shall be issuable upon such exercise as provided in
Section 2.2.4 below shall be deemed to have become the
holder or holders of record of the Warrant Shares
represented by such certificates.
2.2.3. Delivery of Certificates. As soon as
practicable after the exercise of this Warrant in full or in
part, and in any event within ten (10) business days
thereafter, the Company at its sole expense will cause to be
issued in the name of, and delivered to, the Warrantholder,
or, subject to the terms and conditions hereof, as such
Warrantholder (upon payment by such Warrantholder of any
applicable transfer taxes) may direct:
(a) A certificate or certificates for the
number of full Warrant Shares to which such
Warrantholder shall be entitled upon such exercise
plus, in lieu of any fractional share to which such
Warrantholder would otherwise be entitled, cash in an
amount determined pursuant to Section 2.2 hereof, and
25
EXHIBIT 4.1
(b) In case such exercise is in part only, a
new warrant or warrants (dated the date hereof) of like
tenor, calling in the aggregate on the face or faces
thereof for the number of Warrant Shares (without
giving effect to any adjustment therein) equal to the
number of such shares called for on the face of this
Warrant minus the number of such shares purchased by
the Holder upon such exercise as provided in Section
2.2 above.
2.2.4 Right to Convert Warrant into Stock: Net
Issuance.
(a) Right to Convert. In addition to and
without limiting the rights of the holder under the terms of
this Warrant, the holder shall have the right to convert
this Warrant or any portion thereof (the "Conversion Right")
into Common Shares as provided in this Section 2.2.4 at any
time or from time to time during the term of this Warrant.
In lieu of exercising this Warrant by payment of cash, the
holder may exercise this Warrant by a cashless exercise in
accordance with the provisions of this Section 2.2. Upon
exercise of the Conversion Right with respect to a
particular number of shares subject to this Warrant (the
"Converted Warrant Shares"), the Company shall deliver to
the holder (without payment by the holder of any Exercise
Price or any cash or other consideration) that number of
shares of fully paid and nonassessable Common Shares equal
to the quotient obtained by dividing (X) the value of this
Warrant (or the specified portion hereof) on the Conversion
Date (as defined in subsection (b) hereof), which value
shall be determined by subtracting (A) the aggregate
Exercise Price of the Converted Warrant Shares immediately
prior to the exercise of the Conversion Right from (B) the
aggregate fair market value of the Converted Warrant Shares
issuable upon exercise of this Warrant (or the specified
portion hereof) on the Conversion Date (as herein defined)
by (Y) the fair market value of one share of Common Stock on
the Conversion Date (as herein defined).
Expressed as a formula, such conversion shall be computed as
follows:
X = B-A
Y
where: X = the number of shares of Common Stock that
may be issued to holder
Y = the fair market value (FMV) of one share of
Common Stock
A = the aggregate Warrant Price (Converted Warrant
Shares x Purchase Price)
B = the aggregate FMV (i.e., FMV x Converted
Warrant Shares)
26
EXHIBIT 4.1
No fractional shares shall be issuable upon exercise of the
Conversion Right, and, if the number of shares to be issued
determined in accordance with the foregoing formula is other than
a whole number, the Company shall pay to the holder an amount in
cash equal to the fair market value of the resulting fractional
share of the Conversation Date (as herein defined).
(b) Method of Exercise. The Conversion
Right may be exercised by the holder by the surrender of
this Warrant at the principal office of the Company together
with the Purchase Form in the form attached hereto as
Exhibit B duly completed and executed and indicating the
number of shares subject to this Warrant which are being
surrendered (referred to in Section 2.2.4(a) hereof as the
Converted Warrant Shares) in exercise of the Conversion
Right. Such conversion shall be effective upon receipt by
the Company of this Warrant together with the aforesaid
written statement, or on such later date as is specified
therein (the "Conversion Date"). Certificates for the
shares issuable upon exercise of the Conversion Right and,
if applicable, a new Warrant evidencing the balance of the
shares remaining subject to this Warrant, shall be issued as
of the Conversion Date and shall be delivered to the holder
within thirty (30) days following the Conversion Date.
(c) Determination of Fair Market Value. For
purposes of this Section 2.2, "fair market value" of a share
of Common Shares as of a particular date (the "Determination
Date") shall mean:
(i) If traded on a securities exchange,
the fair market value of the Common Shares shall
be deemed to be the average of the closing prices
of the Common Shares on such exchange over the
five-day period ending one business day prior to
the Determination Date or, if less, such number of
days as the Common Shares has been traded on such
exchange;
(ii) If traded over-the-counter, the
fair market value of the Common Shares shall be
deemed to be the average of the closing bid prices
of the Common Shares over the five-day period
ending one business day prior to the Determination
Date or, if less, such number of days as the
Common Shares has been traded over-the-counter;
and
(iii) If there is no public market
for the Common Shares, then fair market value
shall be determined in good faith by the Board of
Directors of the Company.
Section 2.3 Reservation of Shares. The Company hereby agrees
that at all times there shall be reserved for issuance and
delivery upon exercise of this Warrant such number of Common
Shares or other shares of capital stock of the Company as are
from time to time issuable upon exercise of this Warrant. All
such shares shall be duly authorized, and when issued upon such
exercise, shall be validly issued and fully paid, free and clear
of all liens and security interests and free and clear of all
preemptive rights.
27
EXHIBIT 4.1
Section 2.4 Fractional Shares. The Company shall not be
required to issue any fraction of a share of its capital stock in
connection with the exercise of this Warrant, and in any case
where the Warrantholder would, except for the provisions of this
Section 2.4, be entitled under the terms of this Warrant to
receive a fraction of a share upon the exercise of this Warrant,
the Company shall, upon the exercise of this Warrant and receipt
of the Exercise Price (as adjusted to cover the balance of the
share), issue the larger number of whole shares purchasable upon
exercise of this Warrant. The Company shall not be required to
make any cash or other adjustment in respect of such fraction of
a share to which the Warrantholder would otherwise be entitled.
Section 2.5 Listing. Prior to the issuance of any Common
Shares upon exercise of this Warrant, the Company shall secure
the listing of such Common Shares upon each national securities
exchange or automated quotation system, if any, upon which Common
Shares are then listed (subject to official notice of issuance
upon exercise of this Warrant) and shall maintain, so long as any
other Common Shares shall be so listed, such listing of all
Common Shares from time to time issuable upon the exercise of
this Warrant; and the Company shall so list on each national
securities exchange or automated quotation system, and shall
maintain such listing of, any other shares of capital stock of
the Company issuable upon the exercise of this Warrant if and so
long as any shares of the same class shall be listed on such
national securities exchange or automated quotation system.
ARTICLE 3.
Adjustment of Warrant Shares Purchasable and of Exercise Price
The Exercise Price and the number and kind of Warrant Shares
shall be subject to adjustment from time to time upon the
happening of certain events as provided in this Article III.
Section 3.1 Mechanical Adjustments.
(a) If at any time prior to the exercise of this Warrant in
full, the Company shall (1) declare a dividend or make a
distribution on the Common Shares payable in shares of its
capital stock (whether Common Shares or shares of capital stock
of any other class); (ii) subdivide, reclassify or recapitalize
its outstanding Common Shares into a greater number of shares; or
(iii) combine, reclassify or recapitalize its outstanding Common
Shares into a smaller number of shares; the Exercise Price in
effect at the time of the record date of such dividend,
distribution, subdivision, combination, reclassification or
recapitalization shall be adjusted so that it shall equal the
price determined by multiplying the Exercise Price in effect
immediately prior thereto by a fraction, of which the numerator
shall be the number of shares of Common Stock outstanding
28
EXHIBIT 4.1
immediately before such dividend, distribution, subdivision,
combination or reclassification, and of which the denominator
shall be the number of shares of Common Stock outstanding
immediately after such dividend, distribution, subdivision,
combination or reclassification. Any adjustment required by this
paragraph 3.1 (a) shall be made successively immediately after
the record date, in the case of a dividend or distribution, or
the effective date, in the case of a subdivision, combination,
reclassification or recapitalization, to allow the purchase of
such aggregate number and kind of shares.
(b) Whenever the Exercise Price payable upon exercise of each
Warrant is adjusted pursuant to paragraph (a) of this Section
3.1, the Warrant Shares shall simultaneously be adjusted by
multiplying the number of Warrant Shares initially issuable upon
exercise of each Warrant by the Exercise Price in effect on the
date of such adjustment and dividing the product so obtained by
the Exercise Price, as adjusted.
(c) No adjustment in the Exercise Price shall be required unless
such adjustment would require an increase or decrease of at least
1% in such price; provided, however that any adjustments which by
reason of this paragraph (c) are not required to be made shall be
carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 3.1 shall be made
to the nearest cent or to the nearest one-hundredth of a share,
as the case may be. Notwithstanding anything in this Section 3.1
to the contrary, the Exercise Price shall not be reduced to less
than the then-existing par value of the Common Shares as a result
of any adjustment made hereunder, provided that the Company shall
take all such action as may be required to assure that the par
value per share of the Warrant Shares is at all times equal to or
less than the effective Exercise Price.
(d) In the event that at any time, as a result of any adjustment
made pursuant to Section 3.1(a), the Warrantholder thereafter
shall become entitled to receive any shares of the Company other
than Common Shares, thereafter the number of such other shares so
receivable upon exercise of any Warrant shall be subject to
adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the
Common Shares contained in Section 3.1(a) or this paragraph
3.1(d).
Section 3.2 Notice of Adjustment. Whenever the number of
Warrant Shares or the Exercise Price is adjusted as herein
provided, the Company shall promptly prepare and deliver
forthwith to the Warrantholder a certificate signed by its
President, and by any Vice President, Treasurer or Secretary,
setting forth the adjusted number of shares purchasable upon the
exercise of this Warrant and the Exercise Price of such shares
after such adjustment, setting forth a brief statement of the
facts requiring such adjustment and setting forth the computation
by which such adjustment was made.
Section 3.3 No Adjustment for Dividends. Except as provided
in Section 3.1 of this Agreement no adjustment in respect of any
cash dividends shall be made during the term of this Warrant or
upon the exercise of this Warrant.
Section 3.4 Form of Warrant After Adjustments. The form of
this Warrant need not be changed because of any adjustments in
the Exercise Price or the number or kind of the Warrant Shares,
29
EXHIBIT 4.1
and Warrants theretofore or thereafter issued may continue to
express the same price and number and kind of shares as are
stated in this Warrant, as initially issued.
Section 3.5 Treatment of Warrantholder. Prior to due
presentment for registration of transfer of this Warrant, the
Company may deem and treat the Warrantholder as the absolute
owner of this Warrant (notwithstanding any notation of ownership
or other writing hereon) for all purposes and shall not be
affected by any notice to the contrary.
Section 3.6 Consolidation, Merger or Sale of Assets. In
addition to any other rights of the Warrantholder set forth
herein, in case any consolidation of the Company with, or merger
of the Company into, any other Person, any merger of another
Person into the Company (other than a merger which does not
result in any reclassification, conversion, exchange or
cancellation of outstanding Common Shares) or any sale or
transfer of all or substantially all of the assets of the Company
to the Person formed by such consolidation or resulting from such
merger or which acquires such assets, as the case may be, the
Warrantholder shall have the right thereafter to exercise this
Warrant for the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, sale or
transfer by a holder of the number of Common Shares for which
this Warrant could have been exercised immediately prior to such
consolidation, merger, sale or transfer. Adjustments for events
subsequent to the effective date of such a consolidation, merger
and sale of assets shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Warrant. In
any such event, effective provisions shall be made in the
certificate of incorporation (or other charter documents) of the
resulting or surviving corporation, in any contract of sale,
conveyance, lease or transfer or otherwise so that the provisions
set forth herein for the protection of the rights of the
Warrantholder shall thereafter continue to be applicable; and any
such surviving or resulting corporation shall expressly assume
the obligation to deliver, upon exercise, such shares of. stock,
other securities, cash and/or property to which the Warrantholder
would be entitled. The provisions of this Section 3.6 shall
similarly apply to successive consolidations, merger, sales,
leases or transfers.
ARTICLE 4.
Other Provisions Relating to Rights of Warrantholder
Section 4.1 No Rights as Shareholders; Notice to
Warrantholders. Nothing contained in this Warrant shall be
construed as conferring upon the Warrantholder or his or its
transferees the right to vote or to receive dividends or to
consent or to receive notice as a shareholder in respect of any
meeting of shareholders for the election of directors of the
Company or any other matter, or any rights whatsoever as
shareholders of the Company provided that upon receipt of a
written request from a Warrantholder the Company agrees to
deliver promptly to such Warrantholder a copy of its most recent
publicly available financial statements. The Company shall give
notice to the Warrantholder by registered mail if at any time
prior to the expiration or exercise in full of the Warrants, any
of the following events shall occur:
30
EXHIBIT 4.1
(a) the Company shall authorize the payment of any dividend
payable in any securities upon Common Shares or authorize the
making of any distribution (other than a cash dividend subject to
the parenthetical set forth in Section 3.1 (c) to all holders of
Common Shares);
(b) the Company shall authorize the issuance to all holders of
Common Shares of any additional Common Shares or Common Share
Equivalents or of rights, options or warrants to subscribe for or
purchase Common Shares or Common Share Equivalents or of any
other subscription rights, options or warrants;
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation, merger, or sale
or conveyance of the property of the Company as an entirety or
substantially as an entirety), or
(d) a capital reorganization or reclassification of the Common
Shares (other than a subdivision or combination of the
outstanding Common Shares and other than a change in the par
value of the Common Shares) or any consolidation or merger of the
Company with or into another corporation (other than a
consolidation or merger in which the Company is the surviving
corporation and that does not result in any reclassification or
change of Common Shares outstanding) or in the case of any sale
or conveyance to another corporation of the property of the
Company as an entirety or substantially as an entirety.
Such giving of notice shall be initiated at least 10 Business
Days prior to the date fixed as a record date or effective date
or the date of closing of the Company's share transfer books for
the determination of the shareholders entitled to such dividend,
distribution or subscription rights, or for the determination of
the shareholders entitled to vote on such proposed merger,
consolidation, sale, conveyance, dissolution, liquidation or
winding up. Such notice shall specify such record date or the
date of closing the share transfer books, as the case may be.
Failure to provide such notice shall not affect the validity of
any action taken in connection with such dividend, distribution
or subscription rights, or proposed merger, consolidation, sale,
conveyance, dissolution, liquidation or winding up.
Section 4.2 Lost, Stolen, Mutilated or Destroyed Warrants. If
this Warrant is lost, stolen, mutilated or destroyed, the Company
may, on such terms as to indemnity or otherwise as it may in its
discretion impose (which shall, in the case of a mutilated
Warrant, include the surrender thereof), issue a new Warrant of
like denomination and tenor as, and in substitution for, this
Warrant.
Section 4.3 No Dilution or Impairment. The Company will not,
by amendment of its Certificate of Incorporation or through any
reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of
any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in
order to protect the rights of the holder of this Warrant against
31
EXHIBIT 4.1
dilution or other impairment. Without limiting the generality of
the foregoing, the Company (a) will not increase the par value of
any shares of stock receivable on the exercise of this Warrant
above the amount payable therefor on such exercise, (b) will at
all times reserve and keep available the maximum number of its
authorized Common Shares, free from all preemptive rights
therein, which will be sufficient to permit the exercise of this
Warrant, and (e) will take all such action as may be necessary or
appropriate in order that all Common Shares as may be issued
pursuant to the exercise of this Warrant will, upon issuance, be
duly and validly issued, fully paid and nonassessable, and free
from all liens, claims and encumbrances with respect to the
issuance thereof.
Section 4.4 Registration Rights. The Company hereby grants
the Warrantholder the following registration rights for the
Warrants and the Warrant Shares (collectively, the "Registrable
Securities"):
(a) The Company agrees that from the date hereof
through the Expiration Date, the Warrantholder shall be entitled
to registration rights consisting of one "demand" and two "piggy
back" registration rights, at the Warrantholder's election, to
have all or any portion of the Registrable Securities included in
a registration statement to be filed by the Company with the
Securities and Exchange Commission, provided, in the case of a
"piggy back" request, that the registration statement being filed
by the Company is not inappropriate for the Registrable
Securities such as a Form S-4 or S-8. These registration rights
shall attach to the Registrable Securities and survive any
transfer by the Warrantholder. The obligation of the Company to
register the Registrable Securities as requested or demanded (as
the case may be) shall be satisfied only at such time as a
registration statement covering the number of Registrable
Securities specified by the Warrantholder in its demand or
request shall be declared effective by the Securities and
Exchange Commission. The Company shall give the Warrantholder at
least 30 days notice prior to its filing a form of registration
statement appropriate for the Registrable Securities.
(b) The Company shall pay all Registration Expenses
(as defined below) incurred in connection with the registration
statement(s) filed pursuant hereto. Registration Expenses shall
mean all expenses incurred by the Company in complying with its
registration obligations including, without limitation, all
registration, qualifications and filing fees, "blue sky" fees and
expenses, printing expenses, fees and disbursements of counsel
and independent public accountants for the Company, fees of the
National Association of Securities Dealers, Inc., transfer taxes,
escrow fees, fees of transfer agents and registrars and costs of
insurance.
(c) The Company shall indemnify and hold harmless the
Warrantholder and his agents, attorneys and representatives
against any losses, claims, damages or liabilities or actions in
respect thereof, joint or several, to any of them who may become
subject under the Securities Act or otherwise, insofar as such
losses, claims, damages, liabilities or actions (i) arise out of
or are based upon any untrue statement or alleged untrue
statement of a material fact contained in any registration
statement under which the Registrable Securities were registered
32
EXHIBIT 4.1
under the Securities Act, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement
thereof, (ii) arise out of or are based upon the omission or
alleged omission to state therein or necessary to make the
statements therein not misleading or (iii) arise out of or are
based upon any violation by the Company of any rule or regulation
promulgated under the Securities Act or the Exchange Act and will
reimburse them for any legal or other expenses incurred by them
in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case if and to the extent
that any such loss, claim, damage, liability or action arises out
of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon
and in conformity with information furnished to the Company by or
on behalf of the Warrantholder in writing expressly for use in
such registration statement or prospectus and the Warrantholder
shall indemnify and hold the Company, its officers, directors,
stockholders, employees, agents, attorneys and representatives
harmless from and against any and all losses, claims, damages,
liabilities or actions which any of them may incur that are based
upon the inclusion of such information in such registration
statement or prospectus, up to the amount of any profit actually
realized by the Warrantholder upon the exercise of the Warrants
and the sale of the underlying Warrant Shares.
(d) Notwithstanding the above, in the event of a
"piggy back" registration, if the managing underwriter or
underwriters of any offering described herein shall advise the
Company that the inclusion of the Registrable Securities would
adversely effect the proposed offering, the amount of Registrable
Securities to be included in such offering shall be reduced by
the amount recommended by such managing underwriter or
underwriters; provided, that such reduction in amount shall be
pro rata with the reduction in amount of Common Shares of any
other person (including entities) to be included in such
offering, including the Company in the event the registration
statement was precipitated by a person's exercise of "demand"
registration rights. In any such event, the Warrantholder shall
be granted an additional "piggy back" registration right for each
time its requested number of Registrable Shares is cut back
pursuant hereto.
ARTICLE 5.
Split-Up, Combination Exchange and Transfer of Warrants
Section 5.1 Split-Up, Combination and Exchange of Warrants.
Subject to the provisions of Section 5.2 hereof, this Warrant may
be split up, combined or exchanged for another Warrant or
Warrants containing the same terms to purchase a like aggregate
number of Warrant Shares. If the Warrantholder desires to split
up, combine or exchange this Warrant, the Warrantholder shall
make such request in writing delivered to the Company and shall
surrender to the Company this Warrant and any other Warrants to
be so split up, combined or exchanged. Upon any such surrender
for a split up, combination or exchange, the Company shall
execute and deliver to the person entitled thereto a Warrant or
Warrants, as the case may be, as so requested. The Company shall
not be required to effect any split up, combination or exchange
33
EXHIBIT 4.1
which will result in the issuance of a Warrant entitling the
Warrantholder to purchase upon exercise a fraction of a Common
Share or a fractional Warrant. The Company may require such
Warrantholder to pay a sum sufficient to cover any tax or
governmental charge that may be imposed in connection with any
split up, combination or exchange of Warrants.
Section 5.2 Transfer of Warrants and Warrant Shares. The
Warrantholder, by acceptance hereof, represents that it is
acquiring this Warrant with the intent of holding such securities
for investment for its own account and not with a view to
participating directly or indirectly in a distribution thereof,
and acknowledges that the Warrants and the Warrant Shares may not
be sold, hypothecated or transferred except (i) pursuant to an
effective statement or an exemption from registration pursuant to
the Securities Act (it being understood by the Warrantholder that
the Warrants and the Warrant Shares are not now so registered),
(ii) in compliance with state securities and blue sky laws, and
(iii) pursuant to an opinion of the Warrantholder's counsel (a
copy of which opinion shall be delivered to the Company) to such
effect in form and substance satisfactory to the Company.
ARTICLE 6.
Other Matters
Section 6.1 Counterparts. This Warrant may be executed in any
number of counterparts and by the parties hereto in separate
counterparts, each of which so executed shall be deemed to be an
original and all of which taken together shall constitute one and
the same agreement.
Section 6.2 Governing Law. This Warrant shall be governed by
and construed in accordance with the laws of the State of New
York without reference to such State's conflicts of laws
principles.
Section 6.3 Severability. In the event that any one or more
of the provisions contained herein, or the application thereof in
any circumstances, is held invalid, illegal or unenforceable, the
validity, legality and enforceability of any such provision in
every other respect and of the remaining provisions contained
herein shall not be affected or impaired thereby.
Section 6.4 Attorneys' Fees. In any action or proceeding
brought to enforce any provisions of this Warrant or where any
provision hereof or thereof is validly asserted as a defense, the
successful party shall be entitled to recover reasonable
attorneys' fees and disbursements in addition to its costs and
expenses and any other available remedy.
Section 6.5 Notice. Any notices or certificates by the
Company to the Warrantholder and by the Warrantholder to the
Company shall be deemed delivered if in writing and delivered in
person or by registered mail (return receipt requested) as
follows: if to the Warrantholder, addressed to such
Warrantholder at his, her, or its address set forth in the
records of the Company; and if to the Company, addressed to it at
331 Route 4 West, Paramus, New Jersey. The Company may change
34
EXHIBIT 4.1
its address by written notice to the Warrantholder and the
Warrantholder may change its address by written notice to the
Company.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
35
EXHIBIT 4.1
IN WITNESS WHEREOF, this Warrant has been duly executed by
the Company as of the date first written above.
JENNIFER CONVERTIBLES, INC.
By:
Name: Harley J. Greenfield
Title: Chief Executive Officer
36
ASSIGNMENT
(To be executed only upon assignment of Warrant Certificate)
For value received, _________________________ hereby sells,
assigns and transfers unto __________________________ the within
Warrant Certificate, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint
____________________ _________________ attorney, to transfer said
Warrant Certificate on the books of the within-named Company with
respect to the number of Warrants set forth below, with full
power of substitution in the premises:
Name of Assignee(s) Address No. of
Warrants
And if said number of Warrants shall not be all the Warrants
represented by the Warrant Certificate, a new Warrant Certificate
is to be issued in the name of said undersigned for the balance
remaining of the Warrants represented by said Warrant
Certificate.
Dated:
Note: The above signature should
correspond exactly with the name on
the face of this Warrant
Certificate.
37
EXHIBIT B
PURCHASE FORM
To: JENNIFER CONVERTIBLES, INC.
The undersigned pursuant to the provisions set forth in the
attached Warrant hereby irrevocably elects to (check one):
_____ (A) purchase ___ shares of the
Common Stock, par value $0.01 per share, of
Jennifer Convertibles, Inc. (the "Common Stock"),
covered by such Warrant and herewith makes payment
of $_____, representing the full purchase price
for such shares at the price per share provided
for in such Warrant; or
_____ (B) convert ___ Converted Warrant
Shares into that number of shares of fully paid
and nonassessable shares of Common Stock,
determined pursuant to the provisions of Section
2.2.4 of the Warrant.
The Common Stock for which the Warrant may be exercised or
converted shall be known herein as the "Warrant Stock."
The undersigned is aware that the Warrant Stock has not been
and will not be registered under the Securities Act of 1933, as
amended (the "Securities Act") or any state securities laws. The
undersigned understands that reliance by the Company on
exemptions under the Securities Act is predicated in part upon
the truth and accuracy of the statements of the undersigned in
this Purchase Form.
The undersigned represents and warrants that (1) it has been
furnished with all information which it deems necessary to
evaluate the merits and risks of the purchase of the Warrant
Stock, (2) it has had the opportunity to ask questions concerning
the Warrant Stock and the Company and all questions posed have
been answered to its satisfaction, (3) it has been given the
opportunity to obtain any additional information it deems
necessary to verify the accuracy of any information obtained
concerning the Warrant Stock and the Company and (4) it has such
knowledge and experience in financial and business matters that
it is able to evaluate the merits and risks of purchasing the
Warrant Stock and to make an informed investment decision
relating thereto.
The undersigned hereby represents and warrant that it is
purchasing the Warrant Stock for its own account for investment
and not with a view to the sale or distribution of all or any
part of the Warrant Stock.
The undersigned understands that because the Warrant Stock
has not been registered under the Securities Act, it must
continue to bear the economic risk of the investment for an
indefinite period of time and the Warrant Stock cannot be sold
unless it is subsequently registered under applicable federal and
38
state securities laws or an exemption from such registration is
available.
The undersigned agrees that it will in no event sell or
distribute or otherwise dispose of all or any part of the Warrant
Stock unless (1) there is an effective registration statement
under the Securities Act and applicable state securities laws
covering any such transaction involving the Warrant Stock, or (2)
the Company receives an opinion satisfactory to the Company of
the undersigned's legal counsel stating that such transaction is
exempt from registration. The undersigned consents to the
placing of a legend on its certificate for the Warrant Stock
stating that the Warrant Stock has not been registered and
setting forth the restriction on transfer contemplated hereby and
to the placing of a stop transfer order on the books of the
Company and with any transfer agents against the Warrant Stock
until the Warrant Stock may be legally resold or distributed
without restriction.
The undersigned has considered the federal and state income
tax implications of the exercise of the Warrant and the purchase
and subsequent sale of the Warrant Stock.
Dated:
39
EXHIBIT 10.1
EXECUTIVE COMPENSATION ARRANGEMENTS
The compensation for our principal executive officer and
principal financial officer is governed by the terms of
preexisting employment agreements with each of these individuals.
With respect to the annual salaries of our other executives,
the Compensation Committee of the Board of Directors reviews how
well these executives are serving the Company's goals and
determines annual compensation for the coming year.
The Compensation Committee also determines annual bonus and stock
option awards, if any, to our executive officers.
Listed below are salaries and bonuses for our executive officers
that were awarded during fiscal 2004 and the salaries that have
been established for fiscal 2005. Bonuses for fiscal 2005 have
not yet been determined.
Executive Officer 2004 Salary 2004 Bonus` 2005 Salary
Harley J. Greenfield $440,700 $4,865 $350,000
Rami Abada $542,800 $4,865 $350,000
Edward B. Seidner $300,000 - $275,000
Kevin Mattler $131,000 $20,582 $151,000
Leslie Falchook $116,000 - $116,000
40
EXHIBIT 10.2
DIRECTOR COMPENSATION ARRANGEMENTS
Pursuant to our existing Board of Directors Compensation Plan, we
pay each non-employee director an annual fee of $10,000 (payable
quarterly in arrears); the chairman of the Audit Committee is
also entitled to an annual fee of $50,000 (payable quarterly in
arrears). In addition, each Board and Committee member is
entitled to a fee for each board or committee meeting of $500 for
attendance. Ordinary and necessary expenses incurred in
attending Board and Committee meetings are reimbursed.
Directors who are not employees of the Company or any of our
affiliates may also be entitled to receive options under our
Stock Option Plan. During fiscal 2004, we did not grant any
options to non-employee directors for their Board service.
41
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Harley J. Greenfield, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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: April 12, 2005 /s/ Harley J. Greenfield
Harley J. Greenfield, Chief Executive Officer
42
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Rami Abada, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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: April 12, 2005 /s/Rami Abada
Rami Abada, Chief Financial Officer
43
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
quarterly report on Form 10-Q for the period ending February 26,
2005 of Jennifer Convertibles, Inc. (the "Form 10-Q") 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-Q fairly presents, in all material respects, the
financial condition and results of operations of Jennifer
Convertibles, Inc.
Dated: April 12, 2005 /s/ Harley J. Greenfield
Harley J. Greenfield
Chief Executive Officer
(Principal Executive Officer)
44
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 quarterly report
on Form 10-Q for the period ending February 26, 2005 of Jennifer
Convertibles, Inc. (the "Form 10-Q") 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-Q fairly
presents, in all material respects, the financial condition and
results of operations of Jennifer Convertibles, Inc.
Dated: April 12, 2005 /s/ Rami Abada
Rami Abada
Chief Financial Officer
(Principal Financial Officer)
45