Item 1. BUSINESS
UNLESS OTHERWISE SET FORTH HEREIN, THE TERM THE "COMPANY" INCLUDES JENNIFER CONVERTIBLES, INC., A DELAWARE CORPORATION, AND ITS DIRECT OR INDIRECT SUBSIDIARIES.
BUSINESS OVERVIEW
The Company is the owner and licensor of the largest group of sofabed specialty retail stores in the United States, with 121 Jennifer Convertibles(R) stores located on the Eastern seaboard, in the Midwest, on the West Coast and in the Southwest as of AugusT 29, 1998. As of August 29, 1998, the Company also operated 34 "Jennifer Leather" ("Jennifer Leather") stores. Of the Jennifer Convertibles(R) stores, as of August 29, 1998, 48 were owned by the Company and 73 were licensed by the Company.
Jennifer Convertibles(R) stores specialize in the retail sale of a complete line of sofabeds and companion pieces, such as loveseats, chairs and recliners, designed and priced to appeal to a broad range of consumers. The sofabeds and companion pieces are made by several manufacturers and range from medium high merchandise to relatively inexpensive models. Each store has a kiosk devoted to mattress sales. The Jennifer Leather stores specialize in the retail sale of leather livingroom furniture. In fiscal 1998, the Company also opened two test Jennifer Living Room stores which sell a broad range of livingroom furniture, including furniture of the type sold in Jennifer Convertibles and Jennifer Leather stores. The Company is the largest dealer of Sealy(R) sofabeds in the United States. Merchandise is displayed in attractively decorated model room settings in the store designed to show the merchandise as it would appear in the customer's home. In order to generate sales, the Company and its licensees rely on the attractive image of the stores, competitive pricing, prompt delivery and extensive advertising.
The Company believes that the image presented by its stores is an important factor in its overall marketing strategy. Accordingly, stores are designed to display the Company's merchandise in attractive model room settings. All the Company's stores are of a similar clearly defined style, are designed as showrooms for the merchandise and are carpeted, well-lighted and well-maintained. Inventories for delivery are maintained in separate warehouses. The Company displays a variety of sofabeds and companion pieces (including table and lamps) at each Jennifer Convertibles retail location with carpeting and accessories. In contrast to certain of its competitors that primarily target particular segments of the market, the Company attempts to attract customers covering a broad socio-economic range of the market and, accordingly, offers a complete line of sofabeds made by a number of manufacturers in a variety of styles at prices currently ranging from approximately $299 to $2,200. The Jennifer Leather stores similarly offer a complete line of leather living room furniture in a variety of styles and colors at prices currently ranging from approximately $599 to $5,000. The Company generally features attractive price incentives to promote the purchase of merchandise. In addition to offering merchandise by brand name manufacturers, the Company offers merchandise at its Jennifer Convertibles and Jennifer Leather stores under the "Jennifer" brand name for sofabeds and under the "Bellissimo Collection" brand name for leather merchandise.
Although each style of sofabed, loveseat, chair and recliner is generally displayed at Jennifer Convertibles stores in one color and fabric, samples of the other available colors and fabrics are available. On selected merchandise, up to 2,000 different colors and fabrics are available on selected items for an additional charge. To maximize the use of the Company's real estate and to offer its customers greater selection and value, the Company, as is common in the mattress industry, sells various sizes of sofabeds with various sizes of mattresses but displays only one size of sofabed at its stores. Leather furniture is offered in a number of different grades of leather and colors. The Company currently emphasizes contemporary and traditional sofabeds and companion pieces in the Jennifer Convertibles stores and in the Jennifer Leather stores. The Company generates additional revenue by selling tables and offering related services, such as fabric protection and product warranties. Fabric protection services are obtained from, and the warranty is given by, the Private Company, which retains approximately 1/3 of the revenues generated from such services. See "Certain Relationships and Related Transactions."
Merchandise ordered from inventory is generally available to be delivered within two weeks. Customers who place orders for items, colors or fabrics not in inventory ("special orders") must generally wait four to six weeks for delivery, except for Italian leather merchandise which may take up to 20 weeks. The Company believes that its delivery times on stocked items and special orders are significantly faster than the usual delivery times for furniture and that its ability to offer quick delivery of merchandise represents a significant competitive advantage.
OPERATIONS
Generally, the Company's stores are open seven days per week. Stores are typically staffed by a manager, one full-time salesperson and in some cases, one or more part-time salespersons, as dictated by the sales volume and customer traffic of each particular store. In some cases, where sales volume and customer traffic so warrant, stores may be staffed with one to three additional full-time salespersons. The Company's licensed stores are substantially the same in appearance and operation as the Company-owned stores.
The Company and its licensees have district managers throughout the United States. The district managers supervise store management and monitor stores within their assigned district to ensure compliance with operating procedures. District managers report to and coordinate operations in their district with the Company's executive management.
An inventory of approximately 70% of the items displayed in the stores, in the colors and fabrics displayed, is usually stocked at the Private Company's warehouse facilities (described below.) The Company and its licensees typically (except in the case of certain financed sales) require a minimum cash, check or credit card deposit of 50% of the purchase price when a sales order is given, with the balance, if any, payable in certified or official bank check upon delivery of the merchandise. The balance of the purchase price is collected by the independent trucker making the delivery.
MARKETING
The Company and its licensees advertise in newspapers and on mass transit and television in an attempt to saturate its marketplaces. The Company's approach to advertising requires the Company to establish a number of stores in each area it enters. This concentration of stores enables area advertising expenses to be spread over a larger revenue base and to increase the prominence of the local advertising program.
The Company creates advertising campaigns for use by the Company's stores which also may be used by the Private Stores. The Private Company bears a share of advertisement costs in New York. See "Certain Relationships and Related Transactions." However, the Company also advertises independently of the Private Company outside of the New York metropolitan area. The Company is entitled to reimbursement from most of its licensees, which are responsible for their respective costs of advertising; however, the approach and format of such advertising is usually substantially the same for the Company and its licensees. The Company has the right to approve the content of all licensee advertising.
In order to further understand its markets, the Company carefully monitors its sales, interviews customers and obtains other information reflecting trends in the furniture industry and changes in customer preferences. The Company also reviews industry publications, attends trade shows and maintains close contact with its suppliers to aid in identifying trends and changes in the industry.
LEASING STRATEGY AND CURRENT LOCATIONS
The Company considers the ability to obtain attractive, high-traffic store locations to be critical to the success of its stores. The Company, together with outside real estate consultants, selects sites and negotiates leases on behalf of its licensees. The site selection process involves numerous steps, beginning with the identification of territories capable of sustaining a number of stores sufficient to enable such stores to enjoy significant economies of scale, particularly in advertising, management and distribution. Significant factors in choosing a territory include market demographics and the availability of newspapers and other advertising media to efficiently provide an advertising umbrella in the new territory.
Once a territory is selected, the Company picks the specific locations within such territory. Although a real estate consultant typically screens sites within a territory and engages in preliminary lease negotiations, each site is inspected by an officer of the Company and the Company is responsible for approval of each location. The leased locations are generally in close proximity to heavily populated areas, shopping malls, and other competing retail operations which are on or near major highways or major thoroughfares, are easily accessible by auto or other forms of transportation and provide convenient parking.
The locations currently leased by the Company and its licensees range in size from 1,900 square feet to a little over 8,000 square feet. The Company anticipates that stores opened in the future will range from approximately 2,000 square feet to 4,000 square feet. Stores may be freestanding or part of a strip shopping center.
In fiscal 1998, the Company and the LPS closed an aggregate of three stores. The Company will continue to selectively close stores where the economics so dictate and it may selectively open additional stores if attractive opportunities present themselves.
SOURCES OF SUPPLY
The Company currently purchases merchandise, for its stores and the stores of its licensees and the Private Company, from a variety of domestic manufacturers generally on 60 to 90 day terms. The Company also purchases from overseas manufacturers on varying terms. The combined purchasing power of the Company, its licensees and the Private Company enables them to receive the right, in some instances, to market exclusively certain products, fabrics and styles. See "Certain Relationships and Related Transactions."
The Company's principal supplier of sofabeds is Klaussner Furniture Industries, Inc. ("Klaussner"), which also manufactures furniture under the Sealy(R) brand name. Sealy(R) brand name sofabeds are the Company's largest selling brand name item and the Company believes that Sealy(R) brand name mattresses are the largest selling mattresses in the world and have the highest consumer brand awareness. The Company is the largest sofabed specialty retailer and the largest Sealy(R) sofabed dealer in the United States. During the fiscal year ended August 29, 1998, the Company purchased approximately 70% of its merchandise from Klaussner. Leather furniture is purchased primarily from Softline S.p.A., Italdesign and Klaussner. The loss of Klaussner as a supplier could have a material adverse effect on the Company. In March 1996, as part of a series of transactions (the "Klaussner Transaction"), the Company, among other things, granted Klaussner a security interest in substantially all of its assets in exchange for improved credit terms. In addition, in December 1997, Klaussner purchased $5,000,000 of the Company's convertible preferred stock ("the Klaussner Investment"). In fiscal 1998, Klaussner also gave the Company certain vendor credits for repairs. See "Certain Relationships and Related Transactions" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a fuller description of the Klaussner Transaction, the Klaussner Investment and other transactions with Klaussner.
LICENSING ARRANGEMENTS
The Company's arrangements with its licensees typically involve providing the licensee with a license, bearing a royalty of 5% of sales, to use the name Jennifer Convertibles(R). The Company's existing licensing arrangements are not uniform and vary from licensee to licensee. Generally, however, the Company either manages the licensed stores or, if the licensee is a partnership, has a subsidiary act as general partner of such partnership, in each case, for 1% of the licensees' profits. The arrangements generally have a term ranging between 10 and 20 years (and may include options on the licensee's part to extend the license for additional periods) and involve the grant of exclusivity as to defined territories. In some cases, the Company also has an option to purchase the licensee or the licensed stores for a price based on an established formula or valuation method. Investors in certain licensees have, in certain circumstances (including a change of control of the Company), the right to put their investments to the Company for a price based upon an established formula or valuation method. The Private Company currently provides warehousing, fabric protection and other services to licensees on substantially the same basis as such
services are provided to the Company and the Company purchases merchandise for the licensees. The Company also provides certain accounting services to certain licensees for which it generally charges $6,000 per store, per annum. As of August 29, 1998, the Company was owed an aggregate of $10,336,000 for royalties, advances and merchandise by its licensees, a substantial portion of which was overdue. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Of such amount, $6,205,000 due from the LPS is eliminated in the Company's financial statements as a result of the consolidation of the LPS and $4,131,000 due from Unconsolidated Licensees was reserved against in such financial statements due to doubts as to collectibility. Most of the investors in the licensees have other relationships with the Company or its current or former management and, in December 1996, the Private Company acquired the limited partnership interests in LPS owning an aggregate of 49 licensed stores. See "Certain Relationships and Related Transactions."
WAREHOUSING AND RELATED SERVICES
Effective January 1, 1994, the Company and the Private Company entered into a new warehousing agreement (the "New Warehousing Agreement") which terminated the original Warehousing and Purchasing Agreement (the "Original Warehousing Agreement") entered into in 1986. Pursuant to the New Warehousing Agreement (which expires in 2001), the Company currently utilizes the warehousing and distribution facilities leased and operated by the Private Company consisting of a 236,000 square foot warehouse facility in North Carolina, and satellite warehouse facilities in New Jersey and California (collectively, the "Warehouse Facilities"). The Warehouse Facilities service Company-owned stores, licensed stores and the Private Stores.
The Company presently uses the Warehouse Facilities to service all of the Company-owned and licensed stores. Although the Company is not obligated to use the Warehouse Facilities of the Private Company, it has done so to avoid the administrative and other costs associated with developing and maintaining the infrastructure required to manage warehousing and handling independently. The New Warehousing Agreement provides that the Private Company is not obligated to provide services for more than 300 Company-owned stores. The Company pays the Private Company a monthly warehouse fee (the "Warehouse Fee") equal to 5% of the retail selling price of all merchandise (including the retail selling price of any related services, such as fabric protection) delivered from the Warehouse Facilities to customers of the Company-owned stores plus 5% of the retail selling price of all merchandise delivered from the Warehouse Facilities to Company-owned stores for display purposes. In addition, the Private Company has separately contracted with the Company's licensees to provide warehousing and handling services for licensed stores for a fee equal to 5% of the retail price of merchandise delivered to the licensees' customers and on other terms substantially similar to those under the New Warehousing Agreement.
The Private Company also provides a number of other services, including fabric protection and warranty services. In addition to the Warehouse Fee, the Company pays the Private Company a portion (approximately one-third) of fabric protection revenues from its customers. The Company also pays the Private Company for freight charges based on quoted freight rates. See "Certain Relationships and Related Transactions."
TRADEMARKS
The trademarks Jennifer Convertibles(R), Jennifer Leather(R), Jennifer House(R) With a Jennifer Sofabed, There's Always a Place to Stay(R), Jennifer's Worryfree Guarantee(R), Jennifer Living Rooms(R) and Bellissimo Collection(R) are registered with the U.S. Patent and Trademark Office and now owned by the Company. The Private Company, as licensee, was granted a perpetual royalty-free license to use and sublicense the proprietary marks in the State of New York, subject to certain exceptions. See "Certain Relationships and Related Transactions."
EMPLOYEES
As of August 29, 1998, the Company had 442 employees, including seven executive officers. The Company trains personnel to meet its expansion needs by having its most effective managers and salespersons train others and evaluate their progress and potential for the Company. The Company believes that its employee relations are satisfactory. The Company has never experienced a strike or other material labor dispute.
COMPETITION
The Company competes with other furniture specialty stores, major department stores, individual furniture stores, discount stores and chain stores, some of which have been established for a long time in the same geographic areas as the Company's stores (or areas where the Company or its licensees may open stores). The Company believes that the principal areas of competition with respect to its business are store image, price, delivery time, selection and service. The Company believes that it competes effectively with such retailers because its stores offer a broader assortment of convertible sofabeds than most of its competitors and, as a result of volume purchasing, it is able to offer its merchandise at attractive prices. The Company also advertises more extensively than many of its competitors and offers substantially faster delivery on most of its items.
Item 2.
Item 2. PROPERTIES
The Company maintains its executive offices in Woodbury, New York pursuant to a lease which expires in the year 2005.
As of August 29, 1998, the Company and the LPS lease all of their store locations pursuant to leases which expire between 1999 and 2013. During fiscal 1999, six leases will expire, although the lessee has an option to renew each such lease. The leases are usually for a base term of at least five years. For additional information concerning the leases, see Note 9 of "Notes to Consolidated Financial Statements."
Item 3.
Item 3. LEGAL PROCEEDINGS.
The Company is involved in a number of proceedings described below.
A. THE CLASS ACTION LITIGATION
Beginning in December 1994, a series of 11 class actions were brought against the Company, various of its present and former officers and directors, and certain third parties, in the United States District Court for the Eastern District of New York. The complaints in all of these actions alleged that the Company and the other defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder in connection with the press release (the "Press Release") issued by the Company on or about December 2, 1994. All of these class actions were consolidated under the caption IN RE JENNIFER CONVERTIBLES, Case No. 94 Civ. 5570, pending in the Eastern District of New York (the "Class Action Litigation").
On November 20, 1998, the court approved the settlement of the Class Action Litigation. The settlement provides for the payment to certain members of the class and their attorneys of an aggregate maximum amount of $7 million in cash and preferred stock having a present value of $370,000. The cash portion of the settlement is to be funded entirely by insurance company proceeds. The stock portion of the settlement is to be provided by the Company based on a new issue of preferred stock of the Company having an aggregate present value of $370,000, bearing an annual dividend of 7% and convertible into the Company's Common Stock (at such time as the Company's Common Stock trades at $7.00 per share or higher) at $7.00 per share.
The settlement of the Class Action Litigation is a claims made settlement, meaning that the actual amount of cash and stock to be paid out will depend on the number of persons entitled to participate in the settlement who actually file valid proofs of claim. All those who purchased Common Stock during the period from December 9, 1992 through December 2, 1994 and who held their stock through December 2, 1994, will be entitled to participate in the settlement.
B. THE DERIVATIVE LITIGATION
Beginning in December 1994, a series of six actions were commenced as derivative actions on behalf of the Company, against Harley J. Greenfield, Fred J. Love, Edward B. Seidner, Bernard Wincig, Michael J. Colnes, Michael Rosen, Al Ferarra, William M. Apfelbaum, Glenn S. Meyers, Lawrence R. Haut, Jara Enterprises, Inc., Jerome I. Silverman, Jerome I. Silverman Company, Selig Zises and BDO Seidman & Co.(1) in: (a) the United States District Court for the Eastern District of New York, entitled PHILIP E. ORBANES V. HARLEY J. GREENFIELD, ET AL., Case No. CV 94-5694 (DRH) and MEYER OKUN AND DAVID SEMEL V. AL FERRARA, ET AL., Case No. CV 95-0080 (DRH); MEYER OKUN DEFINED BENEFIT PENSION PLAN, ET AL. V. BDO SEIDMAN & CO., Case No. CV 95-1407 (DRH); and MEYER OKUN DEFINED BENEFIT PENSION PLAN V. JEROME I. SILVERMAN COMPANY, ET. AL., Case No. CV 95-3162 (DRH); (b) the Court of Chancery for the County of New Castle in the State of Delaware, entitled MASSINI V. HARLEY GREENFIELD,
- ---------- (1) Each of these individuals and entities is named as a defendant in at least one action.
ET. AL., Civil Action No. 13936 (WBC); and (c) the Supreme Court of the State of New York, County of New York, entitled MEYER OKUN DEFINED BENEFIT PENSION PLAN V. HARLEY J. GREENFIELD, ET. AL., Index No. 95-110290 (collectively, the "Derivative Litigation").
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 present and former officers and directors of the Company, including but not limited to claims relating to the matters described in the Press Release.
As described in prior filings, the Company had entered into settlement agreements as to the derivative litigation subject, in the case of certain of such agreements, to court approval of such settlement by a certain date. Such court approval was not obtained by such date, and in July 1998, the Private Company exercised its option to withdraw from the settlement. The Company and the Private Company are negotiating with respect to a new settlement. However, there can be no assurance that a settlement will be reached or as to the terms of such settlement.
C. OTHER LITIGATION
The Company is also subject, in the ordinary course of business, to a number of litigations in relation to leases for those of its stores which it has closed or relocated. Management does not believe the outcome of such litigations will be material to the Company's financial position.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable
PART II
Item 5:
Item 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The principal market for the Common Stock during the two fiscal years ended August 29, 1998 and August 30,1997 was the NASDAQ Bulletin Board. The following table sets forth, for the fiscal periods indicated, the high and low bid prices of the Common Stock on the Bulletin Board. Such quotations since April 17, 1995 reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
High Low ---- --- Fiscal Year 1997: 1st Quarter..................... $2 5/8 $1 7/8 2nd Quarter..................... 2 9/16 1 3/4 3rd Quarter..................... 2 1/2 1 3/4 4th Quarter..................... 2 15/16 2 3/16
High Low ---- --- Fiscal Year 1998: 1st Quarter..................... $2 1/2 $1 3/4 2nd Quarter..................... 2 1/2 1 13/16 3rd Quarter..................... 2 1/32 1 9/16 4th Quarter..................... 2 1/2 1 11/16
As of November 16, 1998, there were approximately 229 holders of record and approximately 1,510 beneficial owners for the Common Stock. On November 16, 1998, the closing price of the Common Stock as reported on the NASDAQ Bulletin Board was $1.79.
DIVIDEND POLICY
The Company has never paid a dividend on its Common Stock and does not anticipate paying dividends on the Common Stock at the present time. The Company currently intends to retain earnings, if any, for use in its business. There can be no assurance that the Company will ever pay dividends on its Common Stock. The Company may not pay dividends on its Common Stock unless it also pays dividends on its Series A Convertible Preferred Stock on an "as-converted" basis. The Company's dividend policy with respect to the Common Stock is within the discretion of the Board of Directors and its policy with respect to dividends in the future will depend on numerous factors, including the Company's earnings, financial requirements and general business conditions.
Item 6:
Item 6: SELECTED FINANCIAL DATA
The following table presents certain selected financial data for Jennifer Convertibles, Inc. and subsidiaries:
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE U.S. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, AS AMENDED. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS OR OUTCOMES TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO RISK FACTORS SUCH AS UNCERTAINTY AS TO THE OUTCOME OF THE LITIGATION CONCERNING THE COMPANY, FACTORS AFFECTING THE FURNITURE INDUSTRY GENERALLY, SUCH AS THE COMPETITIVE AND MARKET ENVIRONMENT, AND MATTERS WHICH MAY AFFECT THE COMPANY'S SUPPLIERS OR THE PRIVATE COMPANY. IN ADDITION TO STATEMENTS WHICH EXPLICITLY DESCRIBE SUCH RISKS AND UNCERTAINTIES, INVESTORS ARE URGED TO CONSIDER STATEMENTS LABELED WITH THE TERMS "BELIEVES," "BELIEF," "EXPECTS," "INTENDS,""PLANS" OR "ANTICIPATES" TO BE UNCERTAIN AND FORWARD-LOOKING.
OVERVIEW
The Company is the owner and licensor of sofabed specialty retail stores that specialize in the sale of a complete line of sofabeds and companion pieces such as loveseats, chairs and recliners and specialty retail stores that specialize in the sale of leather furniture.
For the fiscal years ended August 31, 1992 and August 31, 1993, the Company did not consolidate the operations of the LP's of which subsidiaries of the Company served as general partners. In November 1994, during the course of its audit, KPMG Peat Marwick, the Company's independent auditor at the time, advised the Company that its method of accounting for the LP's should be changed and would likely require a restatement of previously announced financial results. In addition, on December 2, 1994, a special committee of the Company's Board of Directors delivered a summary report which concluded that the Company had meritorious claims against three members of its management, the Private Company and others. The Company announced these matters publicly in a press release on December 2, 1994. As more fully discussed under "Legal Proceedings," the Company and certain of its management became involved in class action and derivative litigations relating to such matters and, on May 3, 1995, the Securities and Exchange Commission commenced an investigation relating to such matters. In November 1994, the Company determined that it should consolidate the operating losses of such LP's, to the extent they exceeded the capital contributions of the limited partners, in its financial statements for the fiscal year ended August 27, 1994 and the Company subsequently determined that such accounting treatment would have been the appropriate treatment for the 1993 and 1992 fiscal years as well. Accordingly, the 1994, 1995, 1996, 1997 and 1998 consolidated financial statements include the operations of such LP's in excess of capital contributed by the limited partners as well as those of the Company and its subsidiaries.
The operating losses in excess of capital contributions of the LP's that are included in the consolidated financial statements are as follows:
Fiscal Years Ended ------------------------------ (In Thousands)
8/31/96 8/30/97 8/29/98 -------- -------- -------- Total operating losses before capital contributions of LP's $(4,206) $(4,234) $(1,764) ------- ------- -------
Total capital contributions -- -- -- ------- ------- -------
Net operating losses $(4,206) $(4,234) $( 1,764) ======= ======= ========
Prior to fiscal 1996, the Company relied upon the Private Company to provide and maintain all data entry processing and other related services that support its business. Employees of the Private Company provided these services as well as other related services such as all accounts payable (non-merchandise), all payroll preparation services, inventory control reporting, certain store cash recording and initial review of cash activity and store customer service. Starting in fiscal 1996, the Company has been assuming these responsibilities.
The Company has for all fiscal years prior to September 1, 1994 engaged the accounting firm of Jerome I. Silverman Company ("JISCO") to provide general accounting and tax services. Effective September 1, 1994, the Company terminated the accounting and tax services of JISCO and hired 19 employees who had previously worked directly for JISCO. This group, under the direction of a new Executive Vice President and Chief Financial Officer hired on August 1, 1994, established the Company's general accounting offices.
RESULTS OF OPERATIONS:
FISCAL YEAR ENDED AUGUST 29, 1998 COMPARED TO FISCAL YEAR ENDED AUGUST 30, 1997:
Net sales increased by 14.1% to $111,541,000 for the fiscal year ended August 29, 1998 as compared to $97,789,000 for the fiscal year ended August 30, 1997. This increase is mainly attributable to an increase in the Jennifer Leather division's net sales of $9,447,000 or 37.9%. In the prior year the division suffered from an inability to receive merchandise due to an overseas supplier's production problems. Comparable store sales for the total Company (those open for a full year in each period) increased by 15.0%.
Cost of sales increased 10.3% to $74,054,000 for the fiscal year ended August 29, 1998 from $67,114,000 for the fiscal year ended August 30, 1997. The dollar increase of $6,940,000 is primarily attributable to higher purchases. Cost of sales as a percentage of sales was 66.4% in fiscal 1998, which declined from 68.6% in the prior year primarily because of the higher sales levels. Also included in cost of sales are charges from the Private Company for warehouse expenses of $5,576,000, fabric protection services of $2,592,000 and freight of $2,775,000. This compared with $5,021,000, $2,543,000 and $2,827,000, respectively, in the previous year.
Selling, general and administrative expenses were $35,984,000 (32.3% as a percentage of sales) for the fiscal year ended August 29, 1998 as compared to $32,904,000 (33.6% as a percentage of sales) for the fiscal year ended August 30, 1997, an increase of $3,080,000 or 9.4% from the prior year. This increase was due principally to higher salaries and related benefits of $1,876,000 principally because of the higher sales volume which generated increased commissions as well as the assumption by the Company of certain payroll expenses starting January 1, 1998 previously funded by the Private Company totaling $948,000 and new costs of $991,000 in connection with an enhanced private label credit card program that commenced in the current fiscal year. Additionally adjustments related to cancelled customer orders declined by $436,000. Advertising expenses declined by $74,000 to $10,819,000 (9.7% as a percentage of sales) as compared to $10,893,000 (11.1% as a percentage of sales) in the prior year. The prior year amount included a credit from Klaussner Furniture Industries, Inc. that totaled $1,075,000.
The Company's receivables from the Private Company ($3,166,000), the Unconsolidated Licensees (other than S.F.H.C.) ($2,302,000) and S.F.H.C. ($1,829,000) increased in the aggregate by $399,000 in the fiscal year ended August 29, 1998 to $7,297,000. In connection with the uncertainty of collectibility and the relationship between the Company, the Private Company, the Private Licensees and S.F.H.C., the Company accounts monthly for transactions with these entities on an offset basis. If the result of the offset is a receivable due from them, then such net amount will be generally recognized only at the time when cash is received from these entities. These entities have losses and/or capital deficiencies and, accordingly, the Company had fully reserved for all amounts due from the Private Company, the Private Licensees and S.F.H.C. in prior years which totalled $6,696,000 at August 29, 1998.
Interest income increased by $41,000 to $108,000 for the fiscal year ended August 29, 1998 as compared to the prior year. The increase generally reflects a new cash management program started this year with a new bank .
Net income in the fiscal year ended August 29, 1998 was $90,000 as compared to a net (loss) of $(3,061,000) in the prior year, a decrease of loss of $3,151,000. The primary reason for the significant improvement was due to higher sales which produced greater gross margin dollars and management of expenses, which was offset by lower income on customer adjustments to cancelled orders and the higher payroll costs from the Private Company, as discussed above.
FISCAL YEAR ENDED AUGUST 30, 1997 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1996:
Net sales decreased by 7.8% to $97,789,000 for the fiscal year ended August 30, 1997 as compared to $106,041,000 for the fiscal year ended August 31, 1996. This decrease is mainly attributable to the closing of three stores since the prior year period and a decline in net sales of the Jennifer Leather division of $6,366,000. This decline is partly attributable to an inability to obtain inventory due to an overseas supplier's production problems. Additionally, the current fiscal year included 52 weeks as compared to 53 weeks in the prior year. Comparable store sales (those open for a full year in each period) decreased by 5.7%.
Cost of sales decreased 7.7% to $67,114,000 for the fiscal year ended August 30, 1997 from $72,708,000 for the fiscal year ended August 31, 1996. The dollar decrease of $5,594,000 is primarily attributable to:
1) lower net sales which resulted in lower purchases for the year of approximately $3,900,000; 2) lower occupancy costs due to closed stores of $508,000; 3) higher net home delivery income of $511,000; and 4) higher costs for customer repairs were offset by vendor allowances from the Company's principal supplier of $1,166,000 which resulted in a net decline of $506,000 for total repairs.
Cost of sales as a percentage of sales was 68.6% in fiscal 1997, unchanged from the prior year because the higher costs of merchandise due to a change in the product mix offset the items described above. Additionally, warehouse expenses of $5,021,000 and fabric protection services of $2,543,000 provided by the Private Company in fiscal 1997 decreased from $5,822,000 and $2,972,000, respectively, from the previous year due to the lower sales volume in the 1997 fiscal year and reduced warehouse fee "shortfall" payments.
Selling, general and administrative expenses were $32,904,000 (33.6% as a percentage of sales) for the fiscal year ended August 30, 1997 as compared to $37,618,000 (35.5% as a percentage of sales) for the fiscal year ended August 31, 1996, a decrease of $4,714,000 or 12.6% from the prior year. This decrease was due principally to reductions in salaries and related benefits of $1,287,000 (principally because of the lower sales volume which generated lower commissions, as well as fewer stores in operation during the current fiscal year) and lower legal fees of $610,000. Legal fees were $1,275,000 in the prior year (see "Liquidity and Capital Resources" below). Accounting fees declined by $72,000 to $241,000 for the year in part as the result of improved controls installed during the current fiscal year. Additionally, during the fiscal year ended August 30, 1997, selling, general and administrative expenses were reduced for adjustments related to cancelled customer orders of $817,000, which adjustments ($344,000) in the prior year were classified in other income. Additionally, advertising expenses declined by $1,372,000 to $10,893,000 (11.1% as a percentage of sales) as compared to $12,265,000 (11.6% as a percentage of sales) in the prior year. Although the Company spent approximately the same amount on advertising in both fiscal years, the fiscal 1997 amount is net of an advertising allowance of $1,075,000 the Company received from its principal supplier.
The Company's receivables from the Private Company ($2,335,000), the Unconsolidated Licensees (other than S.F.H.C.) ($2,355,000) and S.F.H.C. ($2,208,000) decreased in the aggregate by $426,000 in the fiscal year ended August 30, 1997 to $6,898,000 which resulted in income of $426,000 from cash collections. These entities have losses and/or capital deficiencies and, accordingly, the Company had fully reserved for all amounts due from the Private Company, the Private Licensees and S.F.H.C. in prior years which totalled $7,324,000 at August 31, 1996. In connection with the uncertainty of collectibility and the relationship between the Company, the Private Company, the Private Licensees and S.F.H.C., the Company accounts for transactions with these entities on an offset basis. If the result of the offset is a receivable due from them, then such net amount will be generally recognized only at the time when cash is received from these entities.
Interest income decreased by $128,000 to $67,000 for the fiscal year ended August 30, 1997 as compared to the prior year. The decrease reflects the generally lower level of investments throughout the fiscal year.
Other income decreased to $319,000 in the fiscal year ended August 30, 1997 from $880,000 in the prior year. This decrease is primarily attributable to adjustments related to cancelled customer orders which have been offset against selling, general and administrative expenses starting in the current fiscal year (as described above).
Net (loss) in the fiscal year ended August 30, 1997 was $(3,061,000) as compared to a net (loss) of $(6,023,000) in the prior year, a decrease of loss of $2,962,000. The primary reason for the decreased loss was due to expense reductions, credits received from vendors, as discussed above, together with lower store closing costs and a recovery of amounts due from the Private Company and Unconsolidated Licensees which had previously been recorded as losses.
LIQUIDITY AND CAPITAL RESOURCES:
As of August 29, 1998, the Company had an aggregate working capital deficiency of $11,110,000 compared to a deficiency of $17,258,000 at August 30, 1997 and had available cash and cash equivalents of $4,384,000 compared to $3,405,000 at August 30, 1997.
The Company is continuing to fund the operations of the LP's which, as described above, continue to generate operating losses. All such losses have been consolidated in the Company's consolidated financial statements. The Company's receivables from the Private Company, the Unconsolidated Licensees, and S.F.H.C., had been fully reserved for in prior years. These entities have operating losses and capital deficiencies and there can be no assurance that the total reserved amount of receivables of $6,696,000 at August 29, 1998 will be collected. It is the Company's intention to continue to fund these operations in the future. Starting in 1995, the Company and the Private Company entered into offset agreements that permit the two companies to offset their current monthly obligations to each other in excess of $1,000,000 of credit extended by the Company to the Private Company. Additionally, as part of such agreements, the Private Company in November 1995 agreed to assume certain liabilities owed to the Company by the Unconsolidated Licensees, other than S.F.H.C.. Current obligations of the Private Company and the Unconsolidated Licensees have been paid.
In March 1996, the Company executed a Credit and Security Agreement ("Agreement") with its principal supplier, Klaussner which extended the payment terms for merchandise shipped from 60 days to 81 days. At various times during the current fiscal year, the Company exceeded these 60 day payment terms by no more than 14 days with such extended amounts owing totalling no more than $3,971,000. As of August 29, 1998, amounts owed to Klaussner were within these extended payment terms. On December 11, 1997, the Agreement was modified to include a late fee of .67% per month for invoices the Company pays beyond the normal 60 day terms. This provision became effective commencing with the month of January 1998. See Certain Relationships and Related Transactions. As part of the Agreement, the Company granted a security interest in all of its assets as well as assigning leasehold interests, trademarks and a licensee agreement to operate the Company's business in the event of default. Klaussner also lent $1,440,000 to the Private Company (all of which has been paid at August 29, 1998) to be used to pay down the mortgage balance on the warehouse property. This paydown also reduced the Company's guarantee to the mortgagee.
On December 11, 1997, the Company sold to Klaussner 10,000 shares of Series A Convertible Preferred Stock ("Preferred Stock"), convertible into 1,424,500 shares of the Company's Common Stock for $5,000,000. These shares are non-voting, have a liquidation preference of $5,000,000 and do not pay dividends (except if declared on the Common Stock). The Preferred Stock is not convertible until September 1, 1999, or earlier under certain circumstances (e.g. if another person or group acquires 12.5% or more of the Common Stock or there are certain changes in management or the Board of Directors), and has other rights associated with it.
In June 1996, the Private Company sold its principal New York warehouse and repaid the mortgage thereon. As a result, the Company's guaranty of a portion of such mortgage obligation was extinguished without any liability to the Company.
On November 30, 1998, the court approved a settlement of all the class actions pending against the Company. The cash portion of the settlement will be funded entirely by insurance company proceeds. Based upon the proofs of claim filed, the Company anticipates that it will not have to issue more than $250,000 in Preferred Stock and there will be no cash outlays by the Company other than legal costs.
In fiscal 1997 and 1996, the Company and the LP's closed an aggregate of 13 stores. In fiscal 1998, three additional stores were closed. Several were closed for non-performance, but a number of such closings were due to the Company's decision to combine separate Jennifer Convertibles and Jennifer Leather stores located in the same demographic areas into one store. The primary benefit of combining both operations into one store was an elimination of the real estate expenses and other expenses associated with the closed showroom. Additional benefits realized included reductions of personnel and, in a number of cases, elimination of duplicate office equipment and telephone lines. Although combining two stores into one store generally reduces sales, management believes that sales at the combined store will generate more profit due to the elimination or reduction of expenses described above.
The Company anticipates a breakeven to slight profit for fiscal 1999, with positive operating cash flow. In addition, as a result of the Credit and Security Agreement with Klaussner and the $5,000,000 sale of Preferred Stock to Klaussner on December 11, 1997, the Company, in the opinion of management, will have adequate cash flow to fund its operations for the next fiscal year.
For the fiscal years ended August 29, 1998 and August 30, 1997, the Company and the LP's spent $141,000 and $206,000, respectively, for capital expenditures. The Company currently anticipates capital expenditures totalling no more than $300,000 during fiscal 1999.
YEAR 2000
The Company recognizes the need to ensure its operations will not be adversely impacted by Year 2000 technology failures. Software failures due to processing errors potentially arising from calculations using the year 2000 date are a known risk. The Company is in the process of assessing the risk to the availability and integrity of financial systems and the reliability of operational systems. The Company is also communicating with vendors, financial institutions and others with which it does business to coordinate year 2000 conversion. The cost of achieving Year 2000 compliance, excluding in-house salaries, wages and benefits, has been estimated at approximately $15,000 for software maintenance, development and other operational systems. The Company has planned for fiscal 1999 $35,000 in capital expenditures for the enhancement of operational and financial software and hardware systems needed for current changes for achieving Year 2000 compliance on some existing software.
INFLATION:
There was no significant impact on the Company's operations as a result of inflation during the fiscal year ended August 29, 1998.
RISK FACTORS
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
All cautionary statements made in this Annual Report on Form 10-K should be read as being applicable to all related forward-looking statements wherever they appear. Investors should consider the following risk factors as well as the risks described elsewhere in this Annual Report on Form 10-K.
HISTORY OF LOSSES; NEGATIVE NET WORTH
Although the Company had a small profit in the fiscal year ended August 29, 1998, the Company has incurred net losses of $3,061,000 and $6,023,000 for the two fiscal years ended 1997 and 1996, respectively. In addition, the Company's future plans are subject to known and unknown risks and uncertainties that may cause the Company to incur losses from operations. The Company had a negative net worth of $(8,448,000) as of August 29, 1998. There can be no assurance that the Company's operations will be able to maintain profitability.
UNCERTAINTY OF PENDING LITIGATION
As described under "Legal Proceedings," the Company has recently settled the Class Action Litigation and is currently involved in the Derivative Litigation. The Company has spent a substantial amount on legal fees and other expenses in connection with such litigation. There can be no assurance that the Company will prevail in such litigation or that it will be settled on terms favorable to the Company or at all.
POTENTIAL CONFLICTS OF INTEREST
Potential conflicts of interest exist since Harley J. Greenfield (the Chairman of the Board and Chief Executive Officer of the Company) and Edward B. Seidner (Executive Vice President of the Company), two of the principal stockholders and directors of the Company, are owed over $10 million by the Private Company, which owns, controls or licenses each of the Private Stores, and Fred Love, the owner of the Private Company, is Mr. Greenfield's brother-in-law. Circumstances may arise in which the interests of the Private Stores, the Private Company or such individuals will conflict with those of the Company.
There are numerous relationships, and have been numerous transactions between the Company and the Private Company, including the New Warehousing Agreement, pursuant to which the Private Company warehouses merchandise for the Company and coordinates delivery of such merchandise and pursuant to which the Company purchases merchandise for the Private Company. The Private Company provides similar services to the Company's licensees. See "Certain Relationships and Related Transactions."
DEPENDENCE ON MANAGEMENT
The Company's future success will depend substantially upon the abilities of Harley J. Greenfield, the Company's Chairman of the Board and Chief Executive Officer and one of its principal stockholders. Mr. Greenfield is, and will continue to be, responsible for the day-to-day operations of the Company and will devote his full time to the Company. The loss of Mr. Greenfield's services could materially adversely affect the Company's business and its prospects for the future. The Company maintains key-man insurance on the life of Mr. Greenfield in the amount of $2,000,000. Mr. Greenfield derives substantial economic benefits from the Private Company.
DEPENDENCE ON SUPPLIERS; RELATIONSHIP WITH KLAUSSNER
The Company purchases a significant percentage of its merchandise from Klaussner, which also manufactures furniture under the Sealy(R) brand name. During the fiscal year ended August 29, 1998, the Company purchased approximately 70% of its merchandise from Klaussner. Since a large portion of the Company's revenues has been derived from sales of Klaussner products, the loss of this supplier could have a material adverse impact on the Company until alternative sources of supply are established. Klaussner is also a principal stockholder and creditor of the Company and the Private Company. See "Certain Relationships and Related Transactions."
ECONOMIC CONDITIONS
The furniture industry historically has been cyclical, fluctuating with general economic cycles. During economic downturns, the furniture industry tends to experience longer periods of recession and greater declines than the general economy. The Company believes that the industry is significantly influenced by economic conditions generally and particularly by consumer behavior and confidence, the level of personal discretionary spending, housing activity, interest rates, credit availability, demographics and overall consumer confidence. There can be no assurance that a prolonged economic downturn would not have a material adverse effect on the Company.
COMPETITION
The retail sofabed business is highly competitive and includes competition from traditional furniture retailers and department stores as well as numerous discount furniture outlets and retailers specializing in the sale of sofabeds. The cost of entry into the retail sofabed business is relatively low. The Company's stores may face sharp price cutting, as well as imitation and other forms of competition, and the Company cannot prevent or restrain others from utilizing a similar marketing format. Although the Company is the
largest sofabed specialty retail dealer in the United States, many of the Company's competitors have considerably greater financial and other resources, experience and customer recognition than the Company.
CONTROL OF THE COMPANY BY HARLEY J. GREENFIELD AND CURRENT MANAGEMENT
As of November 30, 1998, Harley J. Greenfield, the Chairman of the Board and Chief Executive Officer and a principal stockholder of the Company, beneficially owns approximately 13.3% of the Company's outstanding shares of Common Stock. Approximately 26.5% of the outstanding Common Stock is beneficially owned by all officers and directors as a group, including Messrs. Greenfield and Seidner. In addition, 1,200,000 shares of Common Stock issuable to JCI upon its exercise of an option, will be deposited, upon issuance, in a voting trust, of which Harley J. Greenfield is the voting trustee. Since the holders of the Common Stock do not have cumulative voting rights, such officers' and directors' ownership of Common Stock will likely enable them to exercise significant influence in matters such as the election of directors of the Company and other matters submitted for stockholder approval. Also, the relationship of the Private Company and the Private Stores to the Company could serve to perpetuate management's control.
NO DIVIDENDS
The Company has never declared or paid any cash dividends on its capital stock and does not intend to pay any cash dividends in the foreseeable future. The Company currently anticipates that it will retain all its earnings for use in the operation and expansion of its business and, therefore, does not anticipate that it will pay any cash dividends in the foreseeable future.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index immediately following the signature page
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The names and ages of the Company's directors and the Company's executive officers as of November 30, 1998 are as follows:
Position(s) with the Name Age Company - -------------------- --- -------------------------
Harley J. Greenfield 54 Chairman of the Board and Chief Executive Officer Edward G. Bohn 53 Director Kevin J. Coyle 54 Director Edward B. Seidner 46 Director and Executive Vice President Bernard Wincig 67 Director George J. Nadel 56 Executive Vice President, Chief Financial Officer and Treasurer Rami Abada 39 President, Chief Operating Officer and Director Ronald E. Rudzin 36 Senior Vice President Leslie Falchook 38 Vice President - Administration Kevin Mattler 41 Vice President - Store Operations
The Company's directors are elected at the Annual Meeting of stockholders and hold office until their successors are elected and qualified. The Company's officers are appointed by the Board of Directors and serve at the pleasure of the Board of Directors. The Company currently has no compensation or nominating committees.
The Board of Directors held three meetings during the 1998 fiscal year. None of the directors attended fewer than 75% of the number of meetings of the Board of Directors or any committee of which he is a member, held during the period in which he was a director or a committee member, as applicable.
The Board of Directors has a Stock Option Committee, which as of August 29, 1998, consisted of Messrs. Greenfield and Seidner. The Stock Option Committee had one meeting during the 1998 fiscal year. The Stock Option Committee is authorized to administer the Company's stock option plans.
The Board of Directors has an Audit Committee, which during the fiscal year ended August 29, 1998, consisted of Harley Greenfield, Bernard Wincig, Edward Bohn and Kevin Coyle. During such fiscal year, the Audit Committee held one meeting. The Audit Committee is responsible for reviewing the adequacy of the structure of the Company's financial organization and the implementation of its financial and accounting policies. In addition, the Audit Committee reviews the results of the audit performed by the Company's outside auditors before the Annual Report to Stockholders is published.
The Company also has a Monitoring Committee consisting of Edward Bohn, Kevin Coyle and Bernard Wincig to monitor transactions between the Company and the Private Company.
Set forth below is a biographical description of each director and executive officer of the Company as of November 30, 1998.
HARLEY J. GREENFIELD
Mr. Greenfield has been the Chairman of the Board and Chief Executive Officer of the Company since August 1986 and was the Company's President from August 1986 until December 1997. Mr. Greenfield has been engaged for more than 30 years in the furniture wholesale and retail business and was one of the co-founders of the Private Company which established the Jennifer Convertibles concept in 1975. Mr. Greenfield is a member of the Home Furnishings Association.
EDWARD G. BOHN
Mr. Bohn has been a director of the Company since February 1995. From March 1995 to May 1997, he was a Consultant for Borlas Sales in Avenel, New Jersey, an importer/exporter of consumer electronics. Borlas also handles the sale and installation of software. Since June 1995, he has been a Director of Nuwave Technologies, Inc. He has also operated as an Independent Consultant in financial and operational matters since September 1994 through the present. Mr. Bohn was employed by Emerson Radio Corporation, which designs and sells consumer electronics, in various capacities from January 1983 through March 1994. From March 1993 to March 1994, he was the Senior Vice President-Special Projects; he was Chief Financial Officer from March 1991 through March 1993 and Treasurer/Vice President of Finance prior to that. Emerson Radio filed in the United States Bankruptcy Court, District of New Jersey, for protection under Chapter 11 of the Federal Bankruptcy Act on September 29, 1993 and was discharged on March 31, 1994.
KEVIN J. COYLE
Mr. Coyle was appointed as a director of the Company in February 1995. Mr. Coyle is a certified public accountant specializing in litigation support. Until 1993, Mr. Coyle was President of Olde Kraft Company Ltd. ("Olde Kraft"), a retail furniture business operating seven stores in the New York Metropolitan Area. Olde Kraft filed a Chapter XI petition in bankruptcy in October 1993 and converted to a Chapter VII in October 1994. Mr. Coyle graduated from Queens College with a BS in accounting and is a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants.
EDWARD B. SEIDNER
Mr. Seidner became a director of the Company in August 1986 and an Executive Vice President of the Company in September 1994. From 1977 until November 1994, Mr. Seidner was an officer and
a director of the Private Company. Mr. Seidner has been engaged for more than 25 years in the furniture wholesale and retail business. Mr. Seidner is a member of the Home Furnishings Association.
BERNARD WINCIG
Mr. Wincig became a director of the Company in September 1986. Mr. Wincig has been an attorney in private practice since 1962. Mr. Wincig received his Juris Doctor degree from Brooklyn Law School.
GEORGE J. NADEL
Mr. Nadel joined the Company and became Executive Vice President, Chief Financial Officer and Treasurer on August 1, 1994. Prior to joining the Company, from October 1989 to July 1994, Mr. Nadel was the Senior Vice President and Chief Financial Officer of Loehmann's Inc., a retail chain specializing in ladies clothing and accessories. Mr. Nadel has over thirty years experience in various senior financial officer positions with companies in the retail industry and is a Certified Public Accountant.
RAMI ABADA
Mr. Abada became the President and a director of the Company on December 2, 1997 and has been the Chief Operating Officer since April 12, 1994. Mr. Abada was the Executive Vice President of the Company from April 12, 1994 to December 2, 1997. Prior to joining the Company, Mr. Abada had been employed by the Private Company since 1982. Mr. Abada is also a director of CCA Industries, Inc., a public company engaged in the manufacture and distribution of health and beauty aid products.
RONALD E. RUDZIN
Mr. Rudzin became Senior Vice President on April 12, 1994. Prior to joining the Company, Mr. Rudzin had been employed by the Private Company since 1979. Mr. Rudzin was, and is, in charge of directing the sales force of the Company, including the Private Stores and licensed stores.
LESLIE FALCHOOK
Mr. Falchook has been a Vice President of the Company since September 1986. Mr. Falchook is primarily involved with the internal operations of the Company. Prior to joining the Company, Mr. Falchook had been employed by the Private Company since 1982.
KEVIN MATTLER
Mr. Mattler became Vice President - Store Operations on April 12, 1994 and has been with the Company since 1988. Mr. Mattler is involved with, and supervises, the operation of the Company's stores and during his tenure with the Company Mr. Mattler has been involved in all facets of its operations. Prior to joining the Company, Mr. Mattler had been employed by the Private Company since 1982.
Certain of the directors and former officers of the Company are defendants in the litigation described under "Legal Proceedings" above. See also "Certain Relationship and Related Transactions."
Item 11.
Item 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth compensation paid for the fiscal years ended August 29, 1998, August 30, 1997 and August 31, 1996 (or such shorter period as such employees were employed by the Company) of those persons who were (i) the chief executive officer at August 29, 1998 and (ii) the four other most highly compensated executive officers of the Company at August 29, 1998 whose total annual salary and other compensation exceeded $100,000 (collectively, the "Named Executive Officers").
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(1) On May 6, 1997, Mr. Nadel was granted options to purchase 50,000 shares of Common Stock at $2.00 per share, the market value on the date of grant, in exchange for the cancellation of options to purchase 25,000 shares of Common Stock at $2.50 per share and 25,000 shares of Common Stock at $3.53 per share which were granted in 1995.
(2) On May 6, 1997, Mr. Falchook was granted options to purchase 50,000 shares of Common Stock at $2.00 per share, the market value on the date of grant, in exchange for the cancellation of options to purchase 20,000 shares of Common Stock at $13.125 per share which were granted in 1993.
(3) On December 3, 1997, Mr. Abada was granted options to purchase 100,000 shares of Common Stock at $2.44 per share, the market value on the date of grant.
(4) On May 6, 1997, Mr. Abada was granted options to purchase 100,000 shares of Common Stock at $2.00 per share, the market value on the date of grant.
(5) On May 6, 1997, Mr. Rudzin was granted options to purchase 100,000 shares of Common Stock at $2.00 per share, the market value on the date of grant.
Non-employee directors currently receive a fee of $10,000 per year, plus $500 per meeting attended (an aggregate of $72,000 in fiscal 1998). Directors are reimbursed for out-of-pocket expenses incurred in connection with their services as such.
STOCK OPTION PLANS
The Company has Incentive and Non-Qualified Stock Option Plans (the "Plans"), pursuant to which, as of August 29, 1998, options to purchase an aggregate of 820,047 shares of Common Stock were outstanding and under which options to purchase an aggregate of 26,953 shares of Common Stock were available for grant. In addition, options granted outside of the Plans to purchase an additional 535,000 shares of Common Stock (not including options to purchase 1,200,000 shares of Common Stock owned by JCI Consultants, L.P.) were outstanding as of August 29, 1998. The Plans are administered by a Stock Option Committee (the "Committee") consisting of two persons appointed by the Board of Directors. As of August 29, 1998, the Committee consisted of Harley Greenfield and Edward B. Seidner. The Committee has full and final authority (a) to determine the persons to be granted options, (b) to determine the number of shares subject to each option and whether or not options shall be incentive stock options or non-qualified stock options, (c) to determine the exercise price per share of the options (which, in the case of incentive stock options, may not be less per share than 100% of the fair market value per share of the Common Stock on the date the option is granted or, in the case of a stockholder owning more than 10% of the stock of the Company, not less per share than 110% of the fair market value per share of the Common Stock on the date the option is granted), (d) to determine the time or times when each option shall be granted and become exercisable and (e) to make all other determinations deemed necessary or advisable in the administration of the Plans. In determining persons who are to receive options and the number of shares to be covered by each option, the Committee considers the person's position, responsibilities, service, accomplishments, present and future value to the Company, the anticipated length of his future service and other relevant factors. Members of the Committee are not eligible to receive options under the Plans or otherwise during the period of time they serve on the Committee and for one year prior thereto, but may receive options after their term on the Committee is over. Officers and directors, other than members of the Committee, may receive options under the Plans. The exercise price of all options granted under or outside of the Plans equaled or exceeded the market value of the underlying shares on the date of grant.
1997 STOCK OPTION PLAN
On May 6, 1997 the Board of Directors adopted the 1997 Stock Option Plan (the "1997 Plan").
The purpose of the 1997 Plan is to attract and retain the services or advice of selected employees, directors, agents, consultants and independent contractors of the Company or any parent or subsidiary. The
1997 Plan provides for the grant of options to acquire a maximum of 500,000 shares of the Common Stock, and permits the granting of qualified incentive stock options ("ISOs") or nonqualified stock options ("NSOs"), at the discretion of the administrator of the 1997 Plan (the "Plan Administrator"). The Board of Directors has appointed the Committee as the Plan Administrator. Subject to the terms of the 1997 Plan, the Plan Administrator determines the terms and conditions of options granted under the 1997 Plan. Options granted under the 1997 Plan are evidenced by written agreements which contain such terms, conditions, limitations and restrictions as the Plan Administrator deems advisable and which are not inconsistent with the 1997 Plan.
ISOs may be granted to individuals who, at the time of grant, are employees of the Company or its affiliates. NSOs may be granted to directors, employees, consultants, agents or other independent contractors of the Company or its affiliates.
The 1997 Plan provides that the Plan Administrator must establish an exercise price for ISOs that is not less than the fair market value per share of the Common Stock at the date of grant and an exercise price for NSOs of not less than the par value per share of the Common Stock at the date of grant. Each ISO must expire within ten years of the date of grant. However, if ISOs are granted to persons owning more than 10% of the voting stock of the Company, the 1997 Plan provides that the exercise price may not be less than 110% of the fair market value per share at the date of grant and that the term of such ISOs may not exceed five years. Unless otherwise provided by the Plan Administrator, options granted under the 1997 Plan vest at a rate of 25% per year over a four-year period, but vesting is accelerated in the event of a change of control.
An optionee whose relationship with the Company or any related corporation ceases for any reason (other than termination for cause, death or total disability, as such terms are defined in the 1997 Plan) may exercise options in the three-month period following such cessation (unless such options terminate or expire sooner by their terms), or in such longer period determined by the Plan Administrator in the case of NSOs. Unexercised options granted under the 1997 Plan terminate upon a merger (other than a stock merger), reorganization or liquidation of the Company; however, immediately prior to such a transaction, optionees may exercise such options without regard to whether the vesting requirements have been satisfied.
The option exercise price must be paid in full at the time the notice of exercise of the option is delivered to the Company and must be tendered in cash, by bank certified or cashier's check or by personal check. Options may also be exercised in "cashless exercises" (delivery of such shares of stock of the Company having a fair market value equal to the exercise price). Unless otherwise provided by the Plan Administrator, options are nontransferable. The Board of Directors has certain rights to suspend, amend or terminate the 1997 Plan provided shareholder approval is obtained.
OPTION GRANTS IN LAST FISCAL YEAR
In December 1997, in connection with his appointment as President and a director of the Company, Mr. Abada received options under the 1997 Plan to purchase 100,000 shares of Common Stock at $2.44 per share, the market value of the Common Stock on the date of grant.
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(1) ALL OPTIONS WERE GRANTED AT AN EXERCISE PRICE EQUAL TO THE FAIR MARKET VALUE OF THE COMMON STOCK ON THE DATE OF GRANT.
- ------------ (1) AMOUNT REFLECTS THE MARKET VALUE OF THE UNDERLYING SHARES OF COMMON STOCK AS REPORTED ON THE BULLETIN BOARD ON AUGUST 29, 1998 (a closing price of $2.06) LESS THE EXERCISE PRICE OF EACH OPTION.
(2) INCLUDES (i) 122,047 OPTIONS GRANTED ON SEPTEMBER 17, 1991 AT AN EXERCISE PRICE OF $4.88 PER SHARE, (ii) 150,000 OPTIONS GRANTED ON APRIL 6, 1992, AT AN EXERCISE PRICE OF $8.375 PER SHARE, IN
CONNECTION WITH MR. GREEDFIELD'S EMPLOYMENT AGREEMENT, (III)25,000 OPTIONS GRANTED ON JANUARY 25, 1993 AT AN EXERCISE PRICE OF $ 13.125 PER SHARE.
(3) INCLUDES 50,000 OPTIONS GRANTED ON MAY 6, 1997 TO MR. NADEL AT AN EXERCISE PRICE OF $2.00 PER SHARE IN EXCHANGE FOR CANCELLATION OF 25,000 OPTIONS PREVIOUSLY GRANTED ON AUGUST 1, 1995 AT AN EXERCISE PRICE OF $2.50 PER SHARE AND 25,000 OPTIONS GRANTED ON FEBRUARY 1, 1995 AT AN EXERCISE PRICE OF $3.53 PER SHARE.
(4) ALL OPTIONS WERE GRANTED AT AN EXERCISE PRICE EQUAL TO THE MARKET VALUE OF THE UNDERLYING COMMON STOCK ON THE DATE OF GRANT.
(5) INCLUDES 50,000 OPTIONS GRANTED ON MAY 6, 1997 TO MR. FALCHOOK AT AN EXERCISE PRICE OF $2.00 PER SHARE IN EXCHANGE FOR THE CANCELLATION OF 20,000 OPTIONS GRANTED ON JANUARY 25, 1993 TO MR. FALCHOOK AT AN EXERCISE PRICE OF $13.125 PER SHARE.
(6) INCLUDES 100,000 OPTIONS GRANTED ON MAY 6, 1997 TO MR. ABADA AT AN EXERCISE PRICE OF $2.00 PER SHARE AND 100,000 OPTIONS GRANTED ON DECEMBER 3, 1997 TO MR. ABADA AT AN EXERCISE PRICE OF $2.44 PER SHARE.
(7) INCLUDES 100,000 OPTIONS GRANTED ON MAY 6, 1997 TO MR. RUDZIN AT AN EXERCISE PRICE OF $2.00 PER SHARE.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of November 30, 1998, information regarding the beneficial ownership of the Company's Common Stock by (i) each person who is known to the Company to be the owner of more than five percent of the Company's Common Stock, (ii) each of the Company's directors, (iii) each of the Named Executive Officers (as defined in Item 11) and (iv) by all directors and executive officers of the Company as a group. Information as to David A. Belford, the Pacchia, Grossman, Shaked, Wexford Group and Hans J. Klaussner and Klaussner is based on Schedules 13D filed by such person and groups:
Amount and Nature Percent (%) of Class of Beneficial Outstanding as of Beneficial Owner Ownership(1) November 30, 1998 ---------------- ------------ -----------------
Harley J. Greenfield 835,336 (2)(3) 13.3% Fred J. Love 585,662 (2)(5)(6) 10.3 Edward B. Seidner 553,914 (2)(4) 9.7 Jara Enterprises, Inc. ("Jara") 343,579 (6) 6.0 JCI Consultants, L.P 1,200,000 (3)(7) 17.4 David A. Belford 394,000 (8) 6.9 Pacchia, Grossman, Shaked, Wexford Group 482,100 (9) 8.5 Bernard Wincig 145,905 (10) 2.5 Edward G. Bohn 25,000 (11) 0.4 Kevin J. Coyle 26,250 (11) 0.5 Leslie Falchook 44,266 (12) 0.8 George J. Nadel 16,666 (13) 0.3 Rami Abada 86,332 (14) 1.5 Ronald E. Rudzin 45,832 (15) 0.8 Hans J. Klaussner and Klaussner 1,424,500 (17) 19.9
All directors and executive 1,796,167(2)(3)(4)(5)(6) 26.5 officers as a group (10)(11)(12)(13)(14) (ten (10) persons) (15)(16)
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(1) All of such shares are owned directly with sole voting and investment power, unless otherwise noted below.
(2) The address of Messrs. Greenfield and Seidner is c/o Jennifer Convertibles, 419 Crossways Park Drive, Woodbury, New York 11797. The address of Fred J. Love is One Ames Court, Plainview,
New York 11803. Mr. Greenfield and Mr. Love are brothers-in-law. See "Certain Relationships and Related Transactions."
(3) Includes (a) 292,831 shares underlying options granted to Mr Greenfield by Mr. Love (the Greenfield Option"), over which Mr. Greenfield has no voting power but has shared dispositive power, as such shares may not be disposed of without the consent of Mr. Greenfield, and (b) 297,047 shares of Common Stock underlying vested options granted to Mr. Greenfield by the Company, with respect to which shares Mr. Greenfield would have sole voting and dispositive power upon exercise of such options. See "Executive Compensation." Does not include 1,200,000 shares of Common Stock underlying options which became exercisable on April 1, 1996 and which are owned by JCI Consultant, L.P. ("JCI"). Mr. Greenfield does not have the power to cause the exercise of such options by JCI. However, Mr. Greenfield would be the voting trustee for the shares of Common Stock upon exercise of such options and would have, subject to certain exceptions, the right to vote the shares issued upon such exercise. See "Certain Relationships and Related Transactions."
(4) Includes 292,831 shares underlying the options granted to Mr. Seidner by Mr. Love and the Private Company (the "Seidner Option"), over which Mr. Seidner has no voting power but has shared dispositive power, as such shares may not be disposed of without the consent of Mr. Seidner.
(5) Includes 343,579 shares of Common Stock owned by the Private Company, over which Mr. Love has sole voting and dispositive power, which are subject to the Greenfield Option and the Seidner Option (the "Options") granted to Messrs. Greenfield and Seidner, respectively (the "Optionees"), and which may not be disposed of without the consent of the relevant Optionee.
(6) All of such shares are beneficially owned by Mr. Love, the sole stockholder of Jara. Includes shares of Common Stock owned by three of Jara's wholly-owned subsidiaries. Jara's address is One Ames Court, Plainview, New York 11803. Mr. Love has sole voting and shared dispositive power over such shares, as such shares are subject to the Options and may not be disposed of without the consent of the relevant Optionee.
(7) Represents 1,200,000 shares of Common Stock underlying exercisable options referred to in footnote (3).
(8) The address of David A. Belford is 2097 S. Hamilton Road, Suite 200, Columbus, Ohio 43232.
(9) Represents the shares of Common Stock owned by a group which was formed to object to the proposed settlement of the derivative litigation referred to in "Legal Proceedings." The group consists of the following persons and entities, each of which has the sole and shared power to vote and dispose, and total beneficial ownership, of the shares of Common Stock set forth opposite such persons' or entity's
name: (1) Anthony J. Pacchia ("Pacchia") - sole 11,000, shared 20,700, total 31,700; (2) F&Co., Inc. as Custodian for Pacchia under IRA Account - sole 16,000, shared 15,700, total 31,700; (3) Anthony J. Pacchia, P.C., (Money Purchase) fbo Pacchia - sole 2,500, shared 29,200, total 31,700; (4) Sandra Pacchia Custodian for Lee Pacchia - sole 1,100, shared 30,600, total 31,700; (5) Sandra Pacchia Custodian for Tom Pacchia - sole 1,100, shared 30,600, total 31,700; (6) Anthony T. Pacchia and Gloria Pacchia - sole 1,000, shared 15,000, total 16,000; (7) Anthony T. Pacchia, IRA Rollover - sole 15,000, shared 1,000, total 16,000; (8) Kenneth S. Grossman Trustee, Profit Sharing Plan DLJSC - Custodian fbo Kenneth S. Grossman sole 96,400, shared 3,500, total 99,900; (9) Kenneth S. Grossman - 3,500, sole 96,400 shared, total 99,900; (10) IRA fbo Patricia Berger, DLJSC as custodian - sole 3,500, shared 0, total 3,500, (11) Ellen Grossman, Custodian for Andrew Grossman UGMA/ NY - sole 5,000, shared 0, total 5,000; (12) IRA fbo Howard Berger, DLJSC as custodian - sole 3,500, shared 0, total 3,500; (13) IRA fbo Jill Berger, DLJSC as custodian, Rollover Account - sole 3,500, shared 0, total 3,500; (14) IRA fbo Herbert Berger, DLJSC as custodian - sole 5,000, shared 0, total 5,000; (15) Marilyn Levy - sole 5,000, shared 0, total 5,000; (16) Ellen Grossman, Custodian for Joshua Grossman UGMA/NY - sole 5,000, shared 0, total 5,000; (17) Amir Shaked ("Shaked") - sole 37,700, shared 1,300, total 39,000; (18) IRA fbo Shaked - sole 1,300, shared 37,700, total 39,000; (19) Wexford Special Situations 1996, L.P. - sole 0, shared 142,783, total 142,783; (20) Wexford Special Situations 1996 Institutional L.P. - sole 0, shared 25,764, total 25,764; (21) Wexford Special Situations 1996 Limited - sole 0, shared 7,859, total 7,859; (22) Wexford-Euris Special Situations 1996, L.P. -sole 0, shared 36,094, total 36,094; (23) Wexford Management LLC - sole 0, shared 212,500, total 212,500; (24) IRA fbo Zachery Goldwyn - sole 52,500, shared 0, total 52,500. The address for group members (a) 1-5 is 602 Orchard Street, Cranford, New Jersey 07106, (b) 6 and 7 is 31 Center Board Drive, Bayville, New Jersey 08721, (c) 8-9, 11, 16, 17 and 18 is 620 Fifth Avenue, 7th Floor, New York, New York 10020, (d) 10 and 14 is 31 Wisconsin Avenue, N. Massapequa, New York 11578, (e) 12 and 13 is 58 Alpine Way, Dix Hills, New York 11746, (f) 15 is 155 East 76th Street, New York, New York 10022, (g) 19-21 and 23-24 is 411 West Putnam Avenue, Greenwich, Connecticut 06830, and (h) 22 is c/o Hemisphere Fund Managers Ltd., Harbour Centre, Georgetown, Grand Cayman Islands, B.W.I.
(10) Includes 8,800 shares of Common Stock owned by Mr. Wincig's wife and 26,332 shares of Common Stock underlying exercisable options. Does not include 2,668 shares of Common Stock underlying options which have not yet vested.
(11) Includes, as to each individual, 25,000 shares of Common Stock underlying exercisable options.
(12) Includes 16,666 shares of Common Stock underlying exercisable options, but does not include 33,334 shares of Common Stock underlying options which are not currently exercisable.
(13) Includes 16,666 shares of Common Stock underlying exercisable options, but does not include 33,334 shares of Common Stock underlying options which are not currently exercisable.
(14) Includes 33,332 shares of Common Stock underlying exercisable options, but does not include 166,668 shares of Common Stock underlying options which are not currently exercisable.
(15) Includes 33,332 shares of Common Stock underlying exercisable options, but does not include 66,668 shares of Common Stock underlying options which are not currently exercisable.
(16) Includes 16,666 shares of Common Stock underlying exercisable options, but does not include 33,334 shares of Common Stock underlying options granted to an officer of the Company other than a Named Executive Officer, which options are not yet vested.
(17) Represents 1,424,500 shares underlying convertible preferred stock issued to Klaussner in connection with the Klaussner Investment. The preferred stock is not convertible until September 1, 1999, except that such convertibility will be accelerated upon the occurrence of certain events, including acquisitions of 12.5% or more of the Company's voting stock by third parties, commencement of a proxy solicitation or tender offer, mergers, asset sales, certain changes in the constitution of the Company's Board of Directors or if Harley Greenfield is no longer the Company's Chief Executive Officer and similar events. See "Certain Relationships and Related Transactions." Based on information contained in the Schedule 13D filed by Hans J. Klaussner and Klaussner, Hans J. Klaussner is the sole stockholder of the parent of Klaussner and, accordingly, may be deemed the beneficial owner of shares owned by Klaussner. The principal address of Klaussner is 405 Lewallen Street, Asheboro, North Carolina 27203. Hans J. Klaussner's address is 7614 Gegenbach, Germany.
Based on the Company's review of reports filed by directors, executive officers and 10% shareholders of the Company on Forms 3, 4 and 5 pursuant to Section 16 of the Securities and Exchange Act of 1934, all such reports were filed on a timely basis during fiscal year 1998.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
THE PRIVATE COMPANY
Until November 1994 when Messrs. Greenfield and Seidner sold their interests in the Private Company for a long-term note (the "Jara Notes") and options to purchase the Common Stock owned by Mr. Love, Mr. Greenfield's brother-in-law and the Private Company, Harley J. Greenfield (the Chairman of the Board, Chief Executive Officer, President and a principal stockholder of the Company), Fred J. Love (a director of the Company until August 10, 1995 and principal stockholder of the Company as of August 29, 1998) and Edward B. Seidner (a director, officer and principal stockholder of the Company)
each owned 33-1/3% of Jara, which, together with its subsidiaries, comprises the Private Company, which owns or licenses the Private Stores. Following such sale, Mr. Love beneficially owns 100% of the Private Company. The Private Company is responsible for the warehousing and data processing services for the Company-owned stores, the Company's licensed stores and the Private Stores, and leases and operates the Warehouse Facilities. Until December 31, 1993, the Private Company was also responsible for the purchasing and for certain advertising and promotional activities for the Company-owned stores, the Company's licensed stores and the Private Stores. Effective January 1, 1994, the Company assumed the responsibility for purchasing and advertising for itself, its licensees, and the Private Stores. The Private Company is responsible for a share of all advertising production costs and costs of publication of promotional material within the New York area. Until October 28, 1993, a corporation of which Messrs. Greenfield, Seidner and Love each owned 33-1/3% (the "Licensor") owned the trademarks "Jennifer Convertibles(R)" and "With a Jennifer Sofabed, There's Always a Place to Stay(R)" (collectively the "Marks"). On October 28, 1993, the Marks were assigned to the Company from the Licensor for nominal consideration, and the Company agreed to license such Marks to Jara in New York, as described below. Mr. Love is, and until November 1994, Mr. Seidner was, an executive officer and director of Jara and the Licensor. During the fiscal year ended August 29, 1998, Mr. Greenfield and Mr. Seidner each received approximately $310,000 of interest on the Jara Notes from the Private Company. Beginning in April 1997, each of Mr. Greenfield and Mr. Seidner agreed to a $10,000 a month deferral of the amounts paid to them under the Jara Notes. The shares of Common Stock owned by Messrs. Greenfield, Love, and Seidner and Jara were pledged to Klaussner as part of the Klaussner transaction. In November 1994, Mr. Greenfield and Mr. Seidner sold their interests in the Private Company in exchange for the Jara Notes and options (the "Buy-Out Options") to purchase the Common Stock owned by Mr. Love and the Private Company. The Jara Notes are $10,273,204 in aggregate principal amount ($5,136,602 owned by Mr. Greenfield and $5,136,602 owned by Mr. Seidner), bear interest at a rate of 7.5% per annum (although, as described above, a portion of such interest is being deferred on a month-to-month basis) and are due in December 2023. Only interest is payable on the Jara Notes until December 1, 2001 and, thereafter principal is payable monthly through the maturity date. The Jara Notes are secured by (i) a security interest in the Private Company's personal property, (ii) Mr. Love's personal guarantee of the Private Company's performance under the Jara Notes, and (iii) a stock pledge by Mr. Love of his stock in the Private Company to secure his obligations under the guarantees. The Buy-Out Options are exercisable for an aggregate of 585,662 shares of Common Stock (292,831 by Mr. Greenfield and 292,831 by Mr. Seidner) at a price of $15.00 per share until they expire on November 7, 2004. In addition, Mr. Greenfield and Mr. Seidner each owe $1,300,000 to the Private Company.
THE LICENSE
Pursuant to a license agreement between the Company and Jara, Jara has the perpetual, royalty-free right to use, and to sublicense and franchise the use of, the Marks in the State of New York. The license is exclusive in such territory, subject to certain exceptions.
THE PURCHASING AND WAREHOUSING AGREEMENT
Prior to January 1, 1994, the Private Company and the Company were parties to a Warehousing and Purchasing Agreement (the "Original Warehousing Agreement") pursuant to which the Private Company was obligated to make merchandise available to the Company on the same basis as such merchandise was made available to the Private Stores and was obligated to promptly order merchandise requested by the Company to fill special orders. The Original Warehousing Agreement provided that the Private Company would sell such merchandise to the Company at the Private Company's cost. Additionally, the Private Company was obligated to provide certain warehousing and handling services to the Company for up to 100 Company-owned stores and 200 Company licensed stores. In return, the Company paid the Private Company a fee equal to 5% of the retail selling price of all merchandise (including the retail selling price of any related services, such as fabric protection) delivered to customers of the Company's stores from the warehouse facilities operated by the Private Company, plus 5% of the retail selling price of all merchandise delivered from such warehouse facilities to Company-owned stores for display purposes. Effective January 1, 1994, the Company assumed the responsibility for purchasing for itself, its licensees and the Private Company on substantially the same terms as it was receiving from the Private Company prior to 1994. However, the Private Company continued to provide warehousing and handling services as described above. During the fiscal year ended August 29, 1998 the Company and the LPS paid warehouse fees under the Offset Agreement (as defined below) to the Private Company aggregating $5,576,000. During the fiscal year ended August 29, 1998, the Private Company purchased from the Company $11,745,000 of merchandise (net of discounts and allowances), which was paid under the Offset Agreement. Under the terms of the Warehousing Agreement, however, the Company was not obligated to use the Private Company's warehouse facilities.
As set forth in "Business-Warehousing," the Private Company also provides certain other services at the Warehouse Facilities, including arranging for goods to be delivered to the Warehouse Facilities and customers and providing fabric protection and warranty services. The Private Company is reimbursed by the Company and its licensees for freight charges on deliveries to the Warehouse Facilities at predetermined freight rates. The Private Company provides data processing services for the Company, the Company's licensed stores and the private stores. The Private Company also provides fabric protection services, including a life-time warranty, to customers of the Company and its licensees. The Company retains approximately 2/3 of the revenues from fabric protection and the warranty. During the fiscal year ended August 29, 1998, the Company and the LPS paid under the Offset Agreement $2,775,000 for freight charges and $2,592,000 for fabric protection to the Private Company.
THE OFFSET AGREEMENT
By agreement dated November 1, 1995, the Private Company and the Company acknowledged that as of August 26, 1995 the Private Company owed the Company $9,267,962, certain licensees (consisting of the Unconsolidated Licensees other than S.F.H.C. and hereinafter referred to as the "Private Licensees") owed the Company $2,117,616 for merchandise purchased (of which $1,865,813 was past due) and the Company owed the Private Company $11,459,677. In addition, the Private Company agreed to assume the obligations of the Private Licensees referred to above and to offset the amounts owed to the Company by the Private Company against the amounts owed to the Private Company by the Company. By agreement dated March 1, 1996 (the "Offset Agreement"), the Private Company and the Company agreed to continue to offset, on a monthly basis, amounts owed by the Private Company and the Private Licensees to the Company for purchasing, advertising, and other services and matters against amounts owed by the Company to the Private Company for warehousing services, fabric protection, freight and other services and matters. In contemplation of a settlement, the parties are currently operating under an agreement which provides for monthly cash payments of current amounts due in excess of $1,000,000 owed to the Company. In addition, the Company paid the Private Company $650,000 in additional warehouse fees for the two fiscal years ended August 30, 1997 and since January 1, 1998 has assumed certain payroll expenses previously funded by the Private Company which totaled $948,000 in the fiscal year ended August 29, 1998. Such payroll expenses aggregate approximately $1,400,000 on an annual basis.
The Private Company paid for all current charges under the Offset Agreement during fiscal 1998. Amounts owed by the Private Company and certain licensees to the Company as of August 29, 1998 (consisting of unpaid amounts from fiscal 1996 and prior years totaling $5,468,000) are reserved against in the accompanying consolidated financial statements due to uncertain collectibility. As of August 29, 1998, the Private Company owed $601,000 to the Company under the Offset Agreement, which has since been fully paid. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
THE ADVERTISING AGREEMENT
Under the advertising agreement with the Private Company, the Private Company bears a share of all advertising production costs and costs of publication of promotional advertising material within the New York area. During the fiscal year ended August 29, 1998, the Company charged the Private Company $1,800,000 in respect to the Private Company and the Private Licensees, which has been paid under the Offset Agreement, and charged S.F.H.C. $339,000.
JENNIFER LIVING ROOMS
In September 1996, the Company, opened two test "Jennifer Living Rooms" stores in St. Louis, Missouri. As part of its license with the Private Company, the Private Company also has the royalty free right to open "Jennifer Living Rooms" stores in New York. In October 1996, the Private Company began operating a test store in New York under the name "Jennifer Living Rooms."
OTHER MATTERS
As described under the heading "The Committee" below, a committee of the Board of Directors consisting of Michael Colnes concluded that the Company had claims against Messrs. Greenfield, Love, Seidner and the Private Company. During fiscal 1998, the Company paid legal fees for Harley J. Greenfield of $3,500 in connection with these matters.
JCI
Related parties of JCI, which is the holder of options to purchase 1,200,000 shares of Common Stock, also own the limited partnership interest in Jennifer Chicago, L.P. (the "Chicago Partnership"), an LP which operates, pursuant to a license agreement with the Company, 14 Jennifer Convertibles stores in the Chicago, Illinois area, and, until the Company purchased it as of September 1, 1994, Jennifer L.P. II ("L.P. II"), an LP which operated, pursuant to a license agreement with the Company, 21 Jennifer Convertible stores in the Detroit, St. Louis, Indianapolis, Milwaukee and Kansas City metropolitan areas. During the fiscal year ended August 29, 1998, the Company earned $506,000 of royalties from the Chicago Partnership, which are not separately shown in the financial statements due to the consolidation of the LPS for financial statement purposes.
OTHER MATTERS
Rami Abada, the Company's President and Chief Operating Officer, owns two corporations which each own a licensed Jennifer Convertibles store. During the year ended August 29, 1998, such corporations purchased $699,000 of merchandise and incurred royalties of $73,000 from the Company, all of which were paid in full under the Offset Agreement. Such corporations have received financing from the Private Company (with a balance of $413,092 as of August 29, 1998) and, by a letter agreement dated March 14, 1997 among the Private Company, the Company and the two corporations, all amounts owed by the two corporations to the Company incurred subsequent to September 1, 1996 were paid through the allocation of amounts to be credited to the Private Company under the Offset Agreement.
During the fiscal year ended August 29, 1998, Mr. Abada received $330,000 of salary, severance pay, distributions and other payments from such licensees and the Private Company.
Ronald Rudzin, the Company's Senior Vice President, owns one licensed Jennifer Convertibles store and his mother owns two licensed Jennifer Convertibles stores. As of August 29, 1998, all amounts owed by the three corporations to the Company incurred subsequent to September 1, 1996 were paid through the allocation of amounts to be credited to the Private Company under the Offset Agreement. During the year ended August 29, 1998, such corporations purchased $1,473,000 of merchandise and incurred $142,000 from the Company, all of which were paid in full under the Offset Agreement. During the fiscal year ended August 29, 1998, Mr. Rudzin received approximately $214,983 of salary, distributions and other payments from such licensees and the Private Company.
Amounts owed to the Company by the corporate licensees referred to above, (each of which is a Private Licensee) have been fully reserved against in the accompanying financial statements for the 1996, 1997 and 1998 fiscal years due to uncertain collectibility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
The Company uses and the Private Company from time to time, also uses Wincig & Wincig, a law firm of which Bernard Wincig, a director of the Company and a stockholder, is a partner. Mr. Wincig and his firm received $153,827 of legal fees from the Company and the LPS and $19,023 from the Private Company during the fiscal year ended August 29, 1998.
On December 11, 1997, Klaussner purchased 10,000 shares of the Company's Series A Convertible Preferred Stock (the "Preferred Stock") for $5,000,000. In connection with such purchase, Klaussner waived any defaults under the Credit and Security Agreement and approximately $2,965,650 of the proceeds of such investment were used to pay all balances due to Klaussner which had been billed and outstanding for more than 60 days. The Preferred Stock is non-voting and is convertible, commencing on September 1, 1999 (subject to acceleration as described below), into 1,424,500 shares of Common Stock (an effective conversion price of $3.51 per share), subject to adjustment for stock splits, stock dividends and similar events. The Preferred Stock has a liquidation preference of $5,000,000. No cash dividends are to be paid on the Common Stock unless the holders of the Preferred Stock receive the same dividend on the Preferred Stock on an "as-converted" basis. The convertibility of the Preferred Stock can be accelerated under certain circumstances, including (i) if any person or group (other than Harley J. Greenfield, Edward B. Seidner, Fred Love or Jara Enterprises, Inc.) becomes the beneficial owner of 12.5% or more of the Company's voting stock, (ii) the execution of an agreement providing for the acquisition of the Company or substantially all of its assets or the acquisition of a subsidiary or subsidiaries which generate in excess of 10% of the Company's revenues, (iii) if Harley Greenfield is no longer the Company's Chief Executive Officer or if the Continuing Directors (as defined) do not constitute a majority of the Board of Directors, (iv) the commencement by a third party of a tender or exchange offer for the Common Stock, (v) the adoption of a plan of liquidation, or (vi) if any person commences a proxy solicitation without the approval of the
Company's Board of Directors. In connection with the Klaussner Investment, Klaussner received the right of first refusal (the "Right"), if the Company sells Common Stock or Common Stock equivalents (such as options or convertible securities) at a price (or an effective price in the case of equivalents) of less than $3.51 per share to purchase Common Stock (or equivalents such as options or convertible securities). Klaussner will have the Right so long as it owns at least 10% of the outstanding Common Stock (on an "as converted" basis). Klaussner also received certain demand registration rights to require the Company, at the Company's expense, to register the shares of Common Stock underlying the Preferred Stock and any shares it acquires upon exercise of the Right.
In connection with the Klaussner Investment, the Credit and Security Agreement was modified to provide a late payment fee at a rate of .67% per month for invoices the Company pays beyond the normal 60 days terms.
In fiscal 1998, Klaussner gave the Company $1,694,000 of vendor allowances for a repair program and in December 1997, Klaussner made the Klaussner Investment. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and also see "Business- Sources of Supply" for other transactions with Klaussner.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements. See the Index immediately following the signature page.
(b) Reports on Form 8-K.
During the quarter ended August 29, 1998, the Company did not file any Current Reports on Form 8-K.
(c) EXHIBITS.
3.1 - Certificate of Incorporation of the Company (Incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement -File Nos. 33-22214 and 33-10800 (the "Registration Statement")).
3.2 - Certificate of Designations, Preferences and Rights of Series A Preferred Stock.(Incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended August 30, 1997)
3.3 - Certificate of Designations, Preferences and Rights of Series B Preferred Stock.
3.4 - By-Laws of the Company. (Incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended August 26, 1995).
4.1 - Form of Underwriter's Warrant for the purchase of shares of Common Stock (Incorporated herein by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-2 - File No. 33-47871 (the "Registration Statement on Form S-2")).
10.1 - Incentive and Non-Qualified Stock Option Plan, as amended (Incorporated herein by reference to Exhibit 10.4 to the Registration Statement).
10.2 - Stock Option Agreement, dated March 21, 1991, between Jennifer Convertibles, Inc. and JCI Consultant L.P. (Incorporated herein by reference to Exhibit 2 to the Company's Current Report on Form 8-K dated March 21, 1991).
10.3 - Voting Trust Agreement, dated March 21, 1991, between Harley J. Greenfield, Jennifer Convertibles, Inc. and JCI Consultant L.P. (Incorporated herein by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated March 31, 1991).
10.4 - Registration and Sales Agreement, dated March 21, 1991, between Jennifer Convertibles, Inc. JCI Consultant, L.P., Harley J. Greenfield, Fred J. Love, Edward B. Seidner and Jara Enterprises, Inc. (Incorporated herein by reference to Exhibit 4 to the Company's Current Report on Form 8-K dated March 21, 1991).
10.5 - Agreement of Limited Partnership of Jennifer Chicago, L.P. (the "Partnership"), dated July 24, 1991 (Incorporated herein by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated July 24, 1991 - related to series of agreements related to Limited Partnership of Jennifer Chicago L.P.).
10.6 - Purchase Option Agreement, dated July 24, 1991, between Jennifer Convertibles, Inc. and the limited partner of the Partnership (Incorporated herein by reference to Exhibit 2 to the Company's Current Report on Form 8-K dated July 24, 1991).
10.7 - Omnibus Agreement, dated July 24, 1991, between Jennifer Convertibles, Inc. and the Partnership (Incorporated herein by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated July 24, 1991).
10.8 - Warehousing and Purchasing Agreement, dated July 24, 1991, between Jennifer Convertibles Inc., and the Partnership (Incorporated herein by reference to Exhibit 4 to the Company's Current Report on Form 8-K dated July 24, 1991).
10.9 - Amended and restated 1991 Incentive and Non-Qualified Stock Option Plan (Incorporated herein by reference to Exhibit 10.29 to the Registration Statement on Form S-2).
10.10 - Amendment to Stock Option Agreement dated February 25, 1992 between the Company and JCI (Incorporated herein by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated February 25, 1992).
10.11 - Letter Agreement dated February 25, 1992 among the Company, JCI and Harley J. Greenfield, amending a Voting Trust Agreement (Incorporated herein by reference to Exhibit 2 to the Company's Current Report on Form 8-K dated February 25, 1992).
10.12 - Amended and Restated Registration and Sale Agreement dated as of February 25, 1992 among the Company, JCI, Harley J. Greenfield, Fred J. Love, Edward B. Seidner and Jara (Incorporated herein by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated February 25, 1992).
10.13 - Warehousing Agreement, dated as of December 31, 1993, between Jennifer Convertibles, Inc. and Jennifer Warehousing, Inc. (Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ending February 26, 1994).
10.14 - Purchasing Agreement, dated as of December 31, 1993, between Jennifer Convertibles, Inc. and Jara Enterprises, Inc. (Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ending February 26, 1994).
10.15 - Advertising Agreement, dated as of December 31, 1993, between Jennifer Convertibles, Inc. and Jara Enterprises, Inc. (Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ending February 26, 1994).
10.16 - Amendment No. 1 to Warehousing Agreement, dated as of May 28, 1994, amending the Warehousing Agreement referred to in 10.29 and the related Rebate Note. (Incorporated herein by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended August 27, 1994).
10.17 - Amendment No. 1 to Purchasing Agreement, dated as of May 28, 1994, amending the Purchasing Agreement referred to in 10.30. (Incorporated herein by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K for the fiscal year ended August 27, 1994).
10.18 - License Agreement, dated as of October 28, 1993, among Jennifer Convertibles Licensing Corp. and Jara Enterprises, Inc. (Incorporated herein by reference to Exhibit 2 to the Company's Current Report on Form 8-K dated November 30, 1993).
10.19 - Letter Agreement with JCI Consultant, L.P. (Incorporated herein by reference to the Company's Current Report on Form 8-K dated August 1, 1994).
10.20 - Agreement, dated as of May 19, 1995, among Jennifer Convertibles, Inc., Jennifer Purchasing Corp., Jara Enterprises, Inc. and the licensees signatory thereto. (Incorporated herein by reference to Exhibit 10.38 to the Company's Annual Report on Form 10-K for the fiscal year ended August 26, 1995.)
10.21 - Agreement, dated as of November 1, 1995, among Jennifer Convertibles, Inc., Jennifer Purchasing Corp., Jara Enterprises, Inc. and the licensees signatory thereto. (Incorporated herein by reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K the for fiscal year ended August 26, 1995.)
10.22 - [DELIBERATELY OMITTED]
10.23 - [DELIBERATELY OMITTED]
10.24 - [DELIBERATELY OMITTED]
10.25 - Form of Note, dated November 1994, made by Jara Enterprises, Inc. to Harley J. Greenfield and Edward B. Seidner. (Incorporated herein by reference to Exhibit 10.43 to the Company's Annual Report on Form 10-K for the fiscal year ended August 26, 1995.)
10.26 - Form of Option, dated November 7, 1994 to purchase Common Stock from Fred Love, Jara Enterprises, Inc. and certain subsidiaries to Harley J. Greenfield and Fred Love. (Incorporated herein by reference to Exhibit 10.44 to the Company's Annual Report on Form 10-K for the fiscal year ended August 26, 1995.)
10.27 - Form of Subordination Agreement, dated as of August 9, 1996, by Harley J. Greenfield and Edward B. Seidner. (Incorporated herein by reference to Exhibit 10.45 to the Company's Annual Report on Form 10-K for the fiscal year ended August 26, 1995.)
10.28 - Credit and Security Agreement, dated as of March 1, 1996, among Klaussner Furniture Industries, Inc. ("Klaussner") and Jennifer Convertibles, Inc. and the other signatories thereto (Incorporated by reference to Exhibit 4 to the Company's Current Report on Form 8-K dated March 18, 1996).
10.29 - 1997 Stock Option Plan (Incorporated herein by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended August 30, 1997.)
10.30 - Stock Purchase Agreement, dated December 11, 1997, between Klaussner and the Company. (Incorporated herein by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended August 30, 1997.)
10.31 - Registration Rights Agreement, dated December 11, 1997, between Klaussner and the Company.(Incorporated herein by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended August 30, 1997.)
10.32 - Waiver and Modification Agreement, dated December 11, 1997, between Klaussner and related entities and Jennifer Purchasing Corp., Jennifer Convertibles, Inc., Jennifer Convertibles Licensing Corp., and Jennifer L.P. III.(Incorporated herein by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended August 30, 1997.)
22.1 - Subsidiaries of the Company. (Incorporated herein by reference to Exhibit 22.1 on the Company's Annual Report on Form 10-K for fiscal year ended August 27, 1994.)
(d) Financial Statement Schedules.
All Schedules are omitted for the reason that they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
JENNIFER CONVERTIBLES, INC.
By: /s/ HARLEY J. GREENFIELD ----------------------------------- Harley J. Greenfield, Chairman of the Board, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated below.
NAME POSITION DATE ---- -------- ----
/s/ HARLEY J. GREENFIELD Chairman of the Board and December 10, 1998 ------------------------ Chief Executive Officer Harley J. Greenfield (Principal Executive Officer)
/s/ GEORGE J. NADEL Executive Vice President, Chief December 10, 1998 ------------------------ Financial Officer and Treasurer George J. Nadel (Principal Financial Officer and Principal Accounting Officer)
/s/ EDWARD B. SEIDNER Director December 10, 1998 ------------------------ Edward B. Seidner
/s/ BERNARD WINCIG Director December 10, 1998 ------------------------ Bernard Wincig
/s/ EDWARD BOHN Director December 10, 1998 ------------------------ Edward Bohn
/s/ KEVIN J. COYLE Director December 10, 1998 ------------------------ Kevin J. Coyle
/s/ RAMI ABADA President and Director December 10, 1998 ------------------------ Rami Abada
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Independent Auditors' Report.........................................F1
Consolidated Balance Sheets at August 29, 1998 and August 30, 1997 ...................................................F2
Consolidated Statements of Operations for the years ended August 29, 1998, August 30, 1997 and August 31, 1996.................F3
Consolidated Statements of (Capital Deficiency) for the years ended August 29, 1998, August 30, 1997, and August 31, 1996 .................................................F4
Consolidated Statements of Cash Flows for the years ended August 29, 1998, August 30, 1997 and August 31, 1996.................F5
Notes to the Consolidated Financial Statements.......................F6
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Jennifer Convertibles, Inc. Woodbury, New York
We have audited the accompanying consolidated balance sheets of Jennifer Convertibles, Inc. (the "Company") and subsidiaries as of August 29, 1998 and August 30, 1997, and the related consolidated statements of operations, capital deficiency and cash flows for each of the three years in the period ended August 29, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 3, the Company has significant transactions with related parties.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jennifer Convertibles, Inc. and subsidiaries as of August 29, 1998 and August 30, 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended August 29, 1998, in conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York November 25, 1998
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except for share data)
See Notes to the Consolidated Financial Statements.
See Notes to the Consolidated Financial Statements.
See Note 9 - Commitments, Contingencies and other Matters
See Notes to the Consolidated Financial Statements.
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements August 29, 1998, August 30, 1997 and August 31, 1996 (In thousands except for share amounts)
(1) Business and Basis of Preparation ---------------------------------
The consolidated financial statements include the accounts of Jennifer Convertibles, Inc. and subsidiaries (the "Company") and as described below, certain licensees. The Company is the owner and licensor of domestic sofabed specialty retail stores that specialize in the sale of a complete line of sofabeds and companion pieces such as loveseats, chairs and recliners and specialty retail stores that specialize in the sale of leather furniture. As at August 29, 1998 and August 30, 1997, 82 and 84 Company-owned stores operated under the Jennifer Convertibles, Jennifer Leather and Jennifer Living Rooms names.
Commencing in the latter part of the fiscal year ended August 31, 1992, the Company began licensing stores to limited partnerships ("LP's") of which a subsidiary of the Company is the general partner. The Company's subsidiary made nominal capital contributions to the LP's and the limited partners contributed approximately $6,660. All of the LP's have had losses since inception and the Company has made advances to them to fund such losses. The Company has control of the LP's and, as a result, consolidates the accounts of the LP's in its financial statements. Included in the Company's Consolidated Statement of Operations are the losses of the LP's in excess of the limited partners' capital contributions. As at August 29, 1998 and August 30, 1997, the LP's operated 62 and 63 stores under the Jennifer Convertibles name.
The Company has also licensed stores to parties which may be deemed affiliates ("Unconsolidated Licensees"). Under the applicable license agreements, the Company is entitled to a royalty of 5% of sales. As at August 29, 1998 and August 30, 1997, 11 stores were operated by such Unconsolidated Licensees and the results of their operations are not included in the consolidated financial statements (See Notes 3 and 9).
Also not included in the consolidated financial statements are the results of operations of 22 stores in the New York Metropolitan Area which are owned by a company (the "Private Company") which, until November 1994, was owned by three of the officers/directors/principal stockholders of the Company. In November 1994, the Private Company redeemed the stock in the Private Company of two of the principal stockholders (Harley Greenfield and Edward Seidner) for a note in the amount of $10,273 collateralized by the assets of the Private Company and due in 2023 (See Note 9). In connection with such transaction, Fred Love, the remaining principal stockholder, granted Messrs. Greenfield and Seidner options expiring in November 2004 to purchase the 585,662 shares of the Company's Common Stock owned by him and the Private Company for $15.00 per share.
The Company, the LP's, the Private Company and the Unconsolidated Licensees have had numerous transactions with each other as more fully discussed in Note 3. Further, the Company had made advances to the Private Company and the Unconsolidated Licensees which have been substantially reserved for. Because of
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements - (Continued) August 29, 1998, August 30, 1997 and August 31, 1996 (In thousands except for share amounts)
the numerous related party transactions, the results of operations are not necessarily indicative of what they would be if all transactions were with independent parties.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company had a small profit in the fiscal year ended August 29, 1998 and incurred net losses in the two prior fiscal years. In addition, at August 29, 1998, the Company has both a working capital deficiency of $11,110 and a capital deficiency of $8,448. As more fully discussed in Note 9, the Company is involved in the following unresolved matters which may have a significant impact on the Company's operations and financial condition:
a) Potential claims by the Company to recover damages recommended in a report by an independent committee of the Board of Directors appointed to investigate a complaint relating to transactions between the Company and the Private Company.
b) Litigation consisting of 11 class action complaints and six derivative action lawsuits.
Management has addressed certain of the aforementioned issues, as follows:
o As discussed in Note 9, on November 20, 1998 final court approval of all class action litigation against the Company was received, the cash portion of which will be funded entirely by the Company's insurance carriers.
o Approximately 16 unprofitable stores have been closed from 1996 through 1998 and expense reduction plans have been implemented throughout all operational areas of the Company.
o As discussed in Note 5, the Company has entered into a credit and security agreement with its largest supplier, Klaussner Furniture Industries, Inc. ("Klaussner") (which accounts for approximately 70% of the Company's purchases of merchandise) which, based on current terms, effectively extended the payment terms for merchandise shipped from 60 days to 81 days. Additionally, allowances of $1,694 and $2,241 were obtained from Klaussner for the two fiscal years ended August 29, 1998 of which $1,694 and $1,166, respectively, reduced cost of goods sold and in fiscal 1997, $1,075 reduced selling, general and administrative expenses.
o As discussed in Note 12, the Company sold to (In thousands except for share amounts) Klaussner 10,000 shares of convertible preferred stock for $5,000.
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued) August 29, 1998, August 30, 1997 and August 31, 1996
(2) Summary of Significant Accounting Policies Principles of Consolidation ----------------------------------------------------------------------
The consolidated financial statements include the accounts of Jennifer Convertibles, Inc., its subsidiaries and the LP's. A subsidiary of the Company is the general partner of each of the LP's.
Fiscal Year -----------
The Company has adopted a fiscal year ending on the last Saturday in August which would be either 52 or 53 weeks long.
Cash and Cash Equivalents -------------------------
The Company considers all short-term, highly liquid instruments with a maturity of three months or less to be cash equivalents.
Merchandise Inventories -----------------------
Merchandise inventories are stated at the lower of cost (determined on the first-in, first-out method) or market and are physically located, as follows:
8/29/98 8/30/97 ------- ------- Showrooms $ 4,113 $ 4,271 Warehouses 5,905 3,672 ------- ------- $10,018 $ 7,943 ======= =======
Vendor discounts and allowances in respect to merchandise purchased by the Company are included as a reduction of inventory and cost of sales.
Store Fixtures, Equipment and Leasehold Improvements ----------------------------------------------------
Store fixtures and equipment, including property under capital leases, are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over estimated useful lives or, when applicable, the life of the lease, whatever is shorter. Betterments and major remodeling costs are capitalized. Leasehold improvements are capitalized and amortized over the shorter of their estimated useful lives or the terms of the respective leases.
Goodwill --------
Goodwill consists of the excess of cost of the Company's investments in certain subsidiaries over the fair value of net assets acquired. Impairment is assessed based on cash flows of the related stores. Goodwill is being amortized over forty years from the acquisition date using the straight-line method. Accumulated amortization at August 29, 1998 and August 30, 1997 amounted to $592 and $574, respectively.
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued) August 29, 1998, August 30, 1997 and August 31, 1996
(In thousands except for share amounts)
Deferred Lease and Other Intangible Costs -----------------------------------------
Deferred lease costs, consisting primarily of lease commissions and payments made to assume existing leases are deferred and amortized over the term of the lease.
Deferred Rent and Allowances ----------------------------
Pursuant to certain of the Company's leases, rent expense charged to operations differs from rent paid because of the effect of free rent periods and work allowances granted by the landlord. Rent expense is calculated by allocating total rental payments, including those attributable to scheduled rent increases reduced by work allowances granted, on a straight-line basis, over the respective lease term. Accordingly, the Company has recorded deferred rent and allowances of $5,497 and $5,712 at August 29, 1998 and August 30, 1997, respectively.
Revenue Recognition -------------------
Sales are recognized upon delivery of the merchandise to the customer. A minimum deposit of 50% is typically required upon placing a non-financed sales order. The Company also sells financed receivables on a non-recourse basis to a finance company. Fees paid to the finance company are included in selling, general and administrative expenses.
Earnings (Loss) Per Share -------------------------
The Company calculates its income (loss) per share under the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FASB 128"). FASB 128 requires dual presentation of "basic" and "diluted" income (loss) per share. Basic income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding during each period. Diluted income per share gives effect to Convertible Preferred Stock, options and warrants in periods where they are dilutive. The effect of these securities are excluded from diluted (loss) per share in the year ended August 30, 1997 and August 31, 1996 because they are anti-dilutive.
Advertising -----------
Advertising costs are expensed as incurred.
Warranties ----------
Estimated warranty costs are expensed in the same period that sales are recognized.
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued) August 29, 1998, August 30, 1997 and August 31, 1996
(In thousands except for share amounts)
Concentration of Risks ----------------------
The Company purchases 85% of its inventory from two suppliers (70% and 15%, respectively) under normal or extended trade terms. The larger supplier, Klaussner, has executed a Credit and Security Agreement with the Company and has purchased Series A Convertible Preferred Stock (See Notes 5 and 12).
The Company utilizes many local banks as depositories for cash receipts received at its showrooms. Such funds are transferred weekly to concentration accounts maintained at one commercial bank. At August 29, 1998 and August 30, 1997, amounts on deposit with this one bank totalled 82% and 76% of total cash, respectively.
Use of Estimates ----------------
The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments -----------------------------------
Financial instruments include accounts receivable, accounts payable and customer deposits. The carrying amount of these instruments approximate fair value due to their short-term nature.
Recently Issued Accounting Pronouncements ------------------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 requires publicly-held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by the chief operating decision maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. The Company is reviewing the impact of SFAS No. 131 which is effective for the year ending August 28, 1999.
In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities" which requires costs of start-up activities to be expensed as incurred. SOP 98-5, is effective for the year ending August 26, 2000. As of August 29, 1998 there are no unamortized pre-opening costs.
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued) August 29, 1998, August 30, 1997 and August 31, 1996
(In thousands except for share amounts)
(3) Related Party Transactions --------------------------
Prior to January 1, 1994, merchandise was purchased and warehoused for the Company and the LP's by the Private Company under a 15-year Warehousing Agreement dated November 3, 1986. In connection with this agreement, the Private Company also provided services relating to purchasing, distribution, customer service, data entry processing and other related services. All such services have been transferred to the direct control of the Company's management except for distribution, inventory control reporting and its data processing. The Company and LP's pay a monthly warehousing fee (unchanged since 1986) based on 5% of the retail sales prices and a portion of fabric protection revenue collected from customers. Additionally, the Private Company provides fabric protection, warranty services and freight services at pre-determined rates. The Company's cost of sales includes these charges. Revenue from customers for fabric protection services is included in net sales.
Indicated below are the amounts charged by the Private Company:
Year Ended ------------------------- 8/29/98 8/30/97 8/31/96 ------- ------- ------- Included in Cost of Sales: Freight $ 2,775 $ 2,827 $ 3,042 Fabric protection services 2,592 2,543 2,972 Warehousing fees at 5% 5,576 4,890 5,302 Additional warehouse fees (See below) - 130 520 ------- ------- ------- $10,943 $10,390 $11,836 ======= ======= =======
Effective January 1, 1994, the Company assumed the responsibility from the Private Company for purchasing merchandise for itself, the LP's, the Unconsolidated Licensees and the Private Company. During the years ended August 29, 1998, August 30, 1997 and August 31, 1996, approximately $11,745, $10,671, and $10,471, respectively, of inventory at cost (before rebates) was purchased by the Private Company through the Company and $2,172, $1,883 and $1,900, respectively, of inventory at cost (before rebates) was purchased by the Unconsolidated Licensees (excluding S.F.H.C.) through the Company. In addition, effective January 1, 1994, the Private Company transferred to the Company the right to receive the benefit of any vendor discounts and allowances in respect to merchandise purchased by the Company on behalf of the LP's and certain other licensees. The Company had always been entitled to the benefit of such discounts in respect to merchandise purchased by the Company for its stores. To evidence its obligation for certain accrued discounts, the Private Company executed a promissory note in the amount of $1,000. This note, which bore interest at 8% per annum, was payable in equal monthly installments over three years commencing August 1, 1994 and was repaid in full in the year ended August 30, 1997. In addition, the Private Company retained the right to receive the benefit of any discounts refunded or credited by suppliers in respect of merchandise purchased by the Private Company through the Company. For the year ended August 31, 1996, $583 was credited to the Private Company on account of discounts for such year, $590 was credited for the year ended August 30, 1997 and $628 was credited for the year ended August 29, 1998.
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued) August 29, 1998, August 30, 1997 and August 31, 1996
(In thousands except for share amounts)
Prior to January 1, 1994, the Company was party to Advertising Agreements with the Private Company. Effective January 1, 1994, the Company assumed the responsibility of advertising for itself, the LP's, the Unconsolidated Licensees and the Private Company. Under the new arrangement, the Private Company, Unconsolidated Licensees and S.F.H.C. are charged a share of advertising costs. Such charges aggregated $2,139, $2,218 and $2,374 for the years ended August 29, 1998, August 30, 1997 and August 31, 1996, respectively.
Two executive officers of the Company own interests in certain Unconsolidated Licensee stores. Rami Abada, President and Chief Operating Officer of the Company, owned a 20% interest (until October 1996) in Southeastern Florida Holding Corp. ("S.F.H.C.") which owns six licensed stores. During the years ended August 29, 1998, August 30, 1997 and August 31, 1996, S.F.H.C. incurred approximately $176, $166 and $160 respectively, in royalty expense to the Company. The same executive also owned (until October 1996) a 20% interest in two other corporations that are also part of the Unconsolidated Licensees. During the years ended August 29, 1998, August 30, 1997 and August 31, 1996, such corporations incurred approximately $73, $74 and $81, respectively, in royalty expense to the Company. Ronald Rudzin, Senior Vice President, owns one licensed store and his mother owns two licensed stores which, during the years ended August 29, 1998, August 30, 1997 and August 31, 1996 incurred royalty expense aggregating approximately $142, $131 and $134, respectively, to the Company (See Note 10).
In October 1996, Rami Abada transferred his 20% interest in S.F.H.C. to individuals who were also limited partners in LP's III, IV and V (see Note 11). In turn, he received the remaining 80% equity interest in the two corporate Unconsolidated Licensees, described in the preceding paragraph, that were owned by such individuals.
By agreement (the "Offset Agreement") dated November 1, 1995, the Private Company and the Company acknowledged that as of August 26, 1995 the Private Company owed the Company $9,268, certain Unconsolidated Licensees owed the Company $2,118 for merchandise purchased (of which $1,866 was past due) and the Company owed the Private Company $11,455 for warehousing fees, freight and fabric protection services. In addition, the Private Company agreed to assume the obligations of certain Unconsolidated Licensees in the amount of $1,866 and to offset the amounts owed to the Company by the Private Company and such licensees against the amounts owed to the Private Company by the Company.
By agreement dated March 1, 1996, the Private Company and the Company agreed to continue to offset, on a monthly basis, amounts owed by the Private Company and certain Unconsolidated Licensees to the Company for purchasing, advertising and other services and matters against amounts owed by the Company to the Private Company for warehousing services, fabric protection, freight and other services and matters. To the extent that either party owes the other an amount in excess of $1,000 for current obligations, such excess is to be paid in cash to either party. Since the inception of this agreement, the Private Company has paid current obligations in excess of $1,000. At August 29, 1998, amounts owed under the offset agreement totaled $601 which was fully paid by October 15, 1998.
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued) August 29, 1998, August 30, 1997 and August 31, 1996
(In thousands except for share amounts)
In connection with the uncertainty of collectibility and in consideration of the potential additional financial support that the Company may provide to the Private Company and the Unconsolidated Licensees, the Company accounts for transactions with these entities on an offset basis. However, if the result of the offset is a receivable due, then such net amount will be recognized only at the time when cash is received from these entities.
All other amounts previously due from the Private Company and Unconsolidated Licensees have been fully reserved in the consolidated financial statements since these entities have losses and/or capital deficiencies, as follows:
Unconsolidated Licensees Private (Other Than Company S.F.H.C.) S.F.H.C. Totals ------- --------- -------- ------ At August 29, 1998: - ------------------ Gross amount due $ 3,166 $ 2,302 $ 1,829 $ 7,297 Reserves (2,565) (2,302) (1,829) (6,696) -------- ------- ------- ------- Net Amount $ 601 $ -0- $ -0- $ 601 ======== ======= ======= =======
At August 30, 1997: - ------------------ Gross amount due $ 2,335 $ 2,355 $ 2,208 $ 6,898 Reserves (2,335) (2,355) (2,208) (6,898) -------- ------- ------- ------- Net Amount $ -0- $ -0- $ -0- $ -0- ======== ======= ======= =======
At August 31, 1996: - ------------------ Gross amount due $ 2,486 $ 2,537 $ 2,301 $ 7,324 Reserves (2,486) (2,537) (2,301) (7,324) -------- ------- ------- -------- Net Amount $ -0- $ -0- $ -0- $ -0- ======== ======= ======= ========
Pursuant to a proposed settlement agreement with the Private Company that was never completed, the Company entered into the monthly offset agreement on March 1, 1996 (described above) which extended a $1,000 line of credit to the Private Company. In addition, the Company paid the Private Company $650 in additional warehouse fees for the two fiscal years ended August 30, 1997 and since January 1, 1998 has assumed certain payroll expenses previously funded by the Private Company which totaled $948 in the fiscal year ended August 29, 1998. Such payroll expenses aggregate approximately $1,400 on an annual basis.
The Private Company has stated that, if a settlement is not consummated, it may assert claims of approximately $1,200 against the Company for various additional amounts owed from prior years. The Company believes the claims are either without merit or would be exceeded by the amount of counter-claims the Company would make under such circumstances. Accordingly, the Company has not provided for any losses that may occur as a result of this assertion.
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued) August 29, 1998, August 30, 1997 and August 31, 1996
(In thousands except for share amounts)
Until October 28, 1993, the Private Company owned certain trademarks and had granted the Company a royalty-free license to use and to sublicense and franchise the use of such trademarks throughout the world, except New York State. On October 28, 1993, the licensor, for nominal consideration, assigned these trademarks to the Company. The Company then granted the Private Company a perpetual, royalty-free license to use and to sublicense and franchise the use of such trademarks in the State of New York. The license is exclusive in such territory, subject to certain exceptions.
Effective September 1, 1994, Harley Greenfield, who at that time was the President and Chief Executive Officer, and Edward Seidner, who became an Executive Vice President on such date, began receiving a salary of $400 and $300 per annum, respectively, from the Company. Such amounts were reduced, effective February 1, 1996 to $320 and $240 per annum, respectively. In addition, they receive substantial economic benefits from the Private Company (see Note 3).
Effective January 1, 1994, Rami Abada, who at that time was Executive Vice President (now President) and Chief Operating Officer, and Ronald Rudzin, Senior Vice President, each began receiving a salary of $150 per annum from the Company. Such amounts were reduced, effective February 1, 1996 to $120 each per annum. In addition, they receive substantial economic benefits from the Private Company and certain Unconsolidated Licensees.
Another director (and stockholder) of the Company received approximately $154, $164 and $188 in legal fees in the fiscal years ended in 1998, 1997 and 1996, respectively. Further, he owned, until May 1995, a 20% interest in each of two Private Company stores and receives economic benefits from the Private Company.
See Notes 1 and 5 for transactions with Klaussner.
(4) Store Fixtures, Equipment and Leasehold Improvements ----------------------------------------------------
August 29, August 30, 1998 1997 --------- -------- Automobiles $ 58 $ 68 Store fixtures and furniture 6,047 6,097 Leasehold improvements 6,325 6,498 Computer equipment 1,476 1,446 --------- -------- 13,906 14,109 Less: Accumulated depreciation and amortization (7,759) (6,440) --------- -------- $ 6,147 $ 7,669 ========= ========
At August 29, 1998 and August 30, 1997, equipment cost includes $1,289 and $1,286, and accumulated depreciation and amortization includes $794 and $608, respectively, on equipment under capital leases.
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued) August 29, 1998, August 30, 1997 and August 31, 1996
(In thousands except for share amounts)
(5) Credit and Security Agreement with Klaussner: ---------------------------------------------
On March 5, 1996, the Company and Klaussner executed a Credit and Security Agreement that provides that Klaussner effectively extended the payment terms for merchandise shipped from 60 days to 81 days and was provided with security interest in all the Company's assets including accounts receivable, inventory, store fixtures and equipment, as well as the assignment of leaseholds, trademarks and a license agreement to operate the Company's business in the event of default and non-payment.
At August 30, 1997, the Company owed Klaussner $10,677, of which $1,990 exceedED the extended payments terms referred to above. On December 11, 1997, Klaussner formally waived the default at that date and the Company agreed to pay a late payment fee of .67% times the sum of all outstanding invoices outstanding for more than 60 days at each month end commencing with the month of January 1998. At August 29, 1998, the Company owed $10,078 of which $3,971 exceeded the 60 day payment terms and was subject to a late payment fee.
In addition, Klaussner loaned $1,440 to the Private Company. The $1,440 was used to pay down the mortgage obligation on the warehouse owned by the Private Company. The $1,440 (all of which has been paid at August 30, 1997) is in addition to $3,500 (all of which has been paid at August 29, 1998) loaned to the Private Company by Klaussner prior to January 1, 1994.
(6) Income Taxes ------------
Components of income tax expense are as follows:
Year Ended ------------------------------- 8/29/98 8/30/97 8/31/96 ------- ------- ------- Current: Federal $ -- $ -- $ -- State 120 95 146
Deferred: Federal -- -- -- State -- -- -- ------- ------- -------
$ 120 $ 95 $ 146 ======= ======= =======
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued) August 29, 1998, August 30, 1997 and August 31, 1996
(In thousands except for share amounts)
Expected tax expense (benefit) based on the statutory rate is reconciled with actual tax expense (benefit) as follows:
Percent of Pre-Tax Earnings (Loss) Year Ended ---------------------------------- 8/29/98 8/30/97 8/31/96 ------- ------- ------- "Expected" tax expense (benefit) 34.0 % (34.0)% (34.0)% Increase (reduction) in taxes resulting from: State income tax, net of federal income tax benefit 36.8 % 2.0 % 1.6 % Non-deductible items 25.5 % 1.7 % 1.0 % Disallowances pursuant to: Revenue Agents Report 90.6 % -- --
Other 1.3 % 2.0 % (2.7)% (Decrease)increase in valuation allowance (131.1)% 31.3 % 36.6 % -------- ------- --------
57.1 % 3.0 % 2.5 % ======== ======= ========
The principal components of deferred tax assets, liabilities and the valuation allowance are as follows:
August 29, 1998 August 30, 1997 --------------- --------------- Deferred tax assets:
Federal and state net operating loss carryforwards $ 5,200 $ 4,800
Reserve for losses on loans and advances 2,341 2,347
Accrued partnership losses 997 1,420
Deferred rent expense 1,221 1,235
Inventory capitalization 267 198
Other expenses for financial reporting, not yet deductible for taxes 540 656 -------- -------- Total deferred tax assets, before valuation allowance 10,566 10,656
Less: Valuation allowance (9,019) (9,301) -------- -------- Total deferred tax assets $ 1,547 $ 1,355 ======== ========
Deferred tax liabilities:
Difference in book and tax basis of fixed assets $ 1,470 $ 1,295
Other 77 60 -------- --------
Total deferred tax liabilities 1,547 1,355 -------- --------
Net deferred tax assets $ -0- $ -0- ======== ========
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued) August 29, 1998, August 30, 1997 and August 31, 1996
(In thousands except for share amounts)
The Company's deferred tax asset has been fully reserved since it is considered more likely than not that the amount will not be realized. During the years ended August 29, 1998, August 30, 1997 and August 31, 1996, the valuation allowance (decreased) increased by ($282), $960 and $2,144, respectively.
As of August 29, 1998, the Company has a net operating loss carryforward of approximately $13,000, expiring $4,000 in the year 2010, $7,000 in the year 2011, $1,000 in the year 2012 and $1,000 in the year 2018.
(7) Warrants --------
In the fiscal year ended August 27, 1994, under the terms of the limited partnership agreements for LP III, LP IV and LP V (see Note 11), the three limited partners each purchased for $170 five-year warrants to purchase 60,000 shares of the Company's Common Stock at an exercise price of $15.625 per share. Each of the limited partners paid approximately $70 in 1994 and issued a $100 term note to the Company as payment for the warrants. These notes bear interest at a rate of 7.12% per annum and are payable over ten years (with 10% of principal due annually). For each annual principal payment which is not made, 10,564 of the warrants shall be cancelled. No payments have been received during the three fiscal years ended August 29, 1998. The notes receivable from warrant holders are recorded in (Capital Deficiency).
(8) Stock Options Plans -------------------
In November 1986, the Company adopted an Incentive and Non-Qualified Stock Option Plan (the "1986 Plan") under which 150,000 shares of Common Stock were reserved for issuance to selected management and other key employees of the Company. The Amended and Restated 1991 Incentive and Non-Qualified Stock Option Plan (the "1991 Plan" and together with the 1986 Plan hereinafter referred to as the "Plans") was adopted by the Company in September 1991 and amended in April 1992. Under the 1991 Plan, 700,000 shares of Common Stock were reserved for issuance to selected management and other key employees of the Company. The terms of both Plans are substantially similar. The exercise price with respect to qualified incentive options may not be less than 100% of the fair market value of the Common Stock at the date of grant.
From time to time, the Company grants additional stock options outside of the Plans to individuals or entities in recognition of contributions made to the Company.
Additional information with respect to the Company's stock options under and outside the Plans is as follows:
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued) August 29, 1998, August 30, 1997 and August 31, 1996
(In thousands except for share amounts)
Options Exercisable Options ------------------------ -------------------- Weighted Weighted Average Average Exercise Exercise Number of Price Number of Price Shares Per Share Shares Per Share ------ --------- ------ ---------
Outstanding at 8/26/95 836,547 $ 6.89 628,051 $ 7.01 ======= ====== Cancelled (25,000) $ 2.75 ---------- ------ Outstanding at 8/31/96 811,547 $ 6.80 706,883 $ 7.07 ======= ======
Granted 732,000 $ 2.00 Cancelled (264,500) $ 8.00 Expired (50,000) $ 2.75 ---------- ------ Outstanding at 8/30/97 1,229,047 $ 3.99 480,381 $ 7.07 ======= ======
Granted 143,000 $ 2.31 Cancelled (17,000) $ 2.00 ---------- ------ Outstanding at 8/29/98 1,355,047 $ 3.84 735,337 $ 5.33 ========== ====== ======= ======
See Note 11 with respect to options outstanding held by JCI to purchase 1,200,000 shares of Common Stock of the Company.
The number of shares of Common Stock reserved for options available for grant under the Plans was 26,953 at August 29, 1998. The weighted average remaining contractual life of the outstanding options is 6.7 years.
In May 1997, the Company adopted the 1997 Stock Option Plan (the "1997 Plan") under which 500,000 shares of common stock were reserved for issuance. The 1997 Plan is subject to shareholder approval.
The Company applies APB No. 25 in accounting for its stock option plan, which requires the recognition of compensation expense for the difference between the fair value of the underlying common stock and the grant price of the option at the grant date. Had the compensation expense been determined based
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued) August 29, 1998, August 30, 1997 and August 31, 1996
(In thousands except for share amounts)
upon the fair value at the grant date, as prescribed under SFAS No. 123, the Company's net income for the year ended August 29, 1998 would have been as follows:
1998 1997 ---- ---- Net Income (Loss):
As reported $ 90 $ (3,061) Pro forma under SFAS 123 $(181) $ (3,141)
Basic income (loss) per share: As reported $ 0.02 $ (.54) Pro forma under SFAS 123 $(0.03) $ (.55)
The fair value of each option granted is estimated at $1.03 in 1998 and $1.22 in 1997 on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
1998 1997 ---- ----
Risk-free interest rate 5.76% 6.95%
Expected life of options 5 5
Expected stock price volatility 44% 69%
Expected dividend yield 0% 0
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.
(9) Commitments, Contingencies and Other Matters --------------------------------------------
Leases ------
The Company and LP's lease retail store locations under operating leases for varying periods through 2013 which generally are renewable at the option of the lessee. Certain leases contain provisions for additional rental payments based on increases in certain indexes. Future minimum lease payments and future minimum sublease rentals for all noncancelable leases with initial terms of one year or more consisted of the following at August 29, 1998:
Year Ending August ------------------------------------ 1999.........................$11,897 2000......................... 11,452 2001......................... 10,707 2002......................... 9,890 2003......................... 8,019 Thereafter................... 13,694 ------- $65,659 =======
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued) August 29, 1998, August 30, 1997 and August 31, 1996
(In thousands except for share amounts)
Rental expense for all operating leases amounted to approximately $13,559, $13,657 and $14,166 net of sublease income of $222, $166 and $170 for the years ended August 29, 1998, August 30, 1997 and August 31, 1996, respectively.
The Company and LP's have long-term capital leases for certain equipment. The leases are for periods of three to five years with an option to purchase at the end of the lease periods for a nominal price.
The following is a schedule of future lease payments for the capital leases at August 29, 1998:
Year Ending August ---------------------------------------- 1999..............................$ 262 2000.............................. 50 ------ Amount representing interest..... (6) ------ Present value of minimum lease payments.................. 306 Less: Current portion........... (257) ------- $ 49 =======
Letters of Credit -----------------
During the fiscal year ended August 29, 1998, the Company opened letters of credit in favor of an Italian supplier of leather furniture which aggregated $1,350 at its peak by depositing funds into an interest bearing money market account. The supplier had drawn down on these letters of credit as shipments were made. As of August 29, 1998, $500 of standby letters of credit remain which expire on December 31, 1998.
Accrued Expenses and Other Current Liabilities ----------------------------------------------
The components of accrued expenses and other current liabilities are:
8/29/98 8/30/97 ------- -------
Advertising $1,334 $1,419 Payroll 859 809 Legal 93 162 Accounting 260 217 Store closings 279 248 Settlement costs 500 500 Sales tax 542 424 Warranty 304 204 Other 1,021 794 ------ ------ $5,192 $4,777 ====== ======
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued) August 29, 1998, August 30, 1997 and August 31, 1996
(In thousands except for share amounts)
Advertising Expense -------------------
Advertising expense for the years ended August 29, 1998, August 30, 1997 and August 31, 1996 aggregated $10,819, $10,893 and $12,265, respectively.
Other -----
Conclusions of the Independent Committee ----------------------------------------
A draft complaint ("Complaint") on behalf of an unnamed plaintiff was delivered to the Company in March 1994. The Complaint raised certain issues and potential causes of action that may exist in favor of the Company against the Private Company and others. The Company's President advised the Board of Directors that, in his view, the Complaint was without merit. The Board appointed an independent committee (the "Committee") consisting of one director to investigate the allegations in the Complaint and certain other matters.
On November 22, 1994, the same director who was on the Committee submitted a letter to the President of the Company which contained information relevant to the (1) Funding of S.F.H.C. (See Note 11) and (2) the funding of Limited Partnerships (LP's) III through V (See Note 11). The letter essentially detailed the flow of funds from the Private Company, certain Unconsolidated Licensees and the Company to S.F.H.C. and its subsidiary ("Summit"). Additionally, it disclosed that as of August 27, 1994, S.F.H.C. had a receivable from officers of $1,861. It asserted that neither (a) the payment to fund S.F.H.C.'s purchase of the stock of Summit nor (b) the capital contributions to LP's III through V were obtained from sources outside the Company or the Private Company.
On December 2, 1994, the Board of Directors of the Company received the Summary Report of Counsel to the Independent Committee which, amongst other matters, concluded that it "has reviewed many significant related party transactions and recommends to the Board that the Company assert claims to recover damages for harm caused the Company". On January 26, 1995, the Board of Directors received the "Final Report of Counsel to the Independent Committee of the Board of Directors" which reached the same conclusions and recommendations.
On March 10, 1995, the Board of Directors received the "Response of Harley Greenfield to the January 26, 1995 Final Report of Counsel to the Independent Committee" that asserted that there were no valid claims. On April 3, 1995, it received a similar response from a financial consultant to the Company to the letter dated November 22, 1994 from Michael Colnes to Harley Greenfield that asserted that there was nothing improper.
Class Action and Derivative Action Lawsuits -------------------------------------------
Between December 6, 1994 and January 5, 1995, the Company was served with eleven class action complaints and six derivative action lawsuits which deal with losses suffered as a result of the decline in market value of the Company's stock as well as the Company having "issued false and misleading statements regarding future growth prospects, sales, revenues and net income".
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued) August 29, 1998, August 30, 1997 and August 31, 1996
(In thousands except for share amounts)
Settlement of Class Action Litigation -------------------------------------
On November 20, 1998 the court approved the settlement of the class action litigation. The settlement provides for the payment to certain members of the class and their attorneys of an aggregate maximum amount of $7,000 in cash and Preferred Stock having a value of $370 (See Note 12). The cash portion of the settlement will be funded entirely by insurance company proceeds. In accordance with FASB Statement No. 5, the $370 value of the Preferred Stock had been accrued in the fiscal year ended August 26, 1995.
The settlement of the class action litigation is a claims made settlement. All claimants who purchased the Company's Common Stock during the period from December 9, 1992 through December 2, 1994 and who held their stock through December 2, 1994, will be entitled to participate in the settlement. Based upon valid proofs of claim actually filed, the Company anticipates that it will not have to issue more than $260 in Preferred Stock.
Proposed Settlement of Derivative Litigation --------------------------------------------
As described in prior filings with the Securities and Exchange Commission, the Company had entered into settlement agreements as to the derivative litigation, subject, in the case of certain of such agreements, to court approval of such settlement by a certain date. Such court approval was not obtained by such date. The Company and the Private Company are negotiating with respect to a new settlement. There can be no assurance that a settlement will be reached or as to the terms of such settlement. The ultimate outcome of these matters is not presently determinable.
A group of shareholders claiming to own approximately 8.5% of the outstanding shares of the Company have filed (as a group) objections to the fairness of the previously proposed settlement agreements. The group has requested deposition and document discovery in advance of any hearing on the fairness of any settlement, and the Company has provided some document and deposition discovery voluntarily. However, the group of objectors has made a motion for additional discovery which the Company has opposed. The motion is still pending.
Securities and Exchange Commission Investigation ------------------------------------------------
On December 9, 1994, the Company was advised that the Securities and Exchange Commission (SEC) was conducting an inquiry of the Company's affairs "to determine whether there have been violations of the federal securities laws". On May 3, 1995 the SEC commenced a formal investigation into the affairs of the Company. On September 23, 1998, the Company was advised by the SEC that the formal investigation had been terminated and that no enforcement action had been recommended.
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued) August 29, 1998, August 30, 1997 and August 31, 1996
(In thousands except for share amounts)
(10) Sale of Subsidiaries --------------------
In September 1990, the Company sold two of its stores to a licensee of a New York store, and effective December 27, 1990, the Company sold four of its stores for the assumption of certain liabilities and $10 in cash per store to the same licensee. During the fiscal year ended August 27, 1994, one of the purchasers of such stores, formerly an employee of the Private Company, became an executive officer of the Company. The Company also entered into a ten-year license agreement with the purchasers pursuant to which such stores pay the Company a royalty of 5% of their sales for the right to use the "Jennifer Convertibles" name (See Note 3).
The purchasers assumed the liabilities owed by such stores, including liabilities owed to the Company, in the form of six ten-year, non-interest bearing promissory notes with aggregate annual payments of approximately $150, with additional payments required based upon sales in excess of certain minimum amounts. The balance of the notes, net of imputed interest at the rate of 8%, which have been reserved for in full in the consolidated financial statements, are as follows:
August 29, August 30, 1998 1997 --------- ----------
Notes receivable $ 343 $ 434 Less: imputed interest (29) (67) ----- ----- Notes receivable, net $ 314 $ 367 ===== =====
(11) Other Agreements ----------------
JCI Consulting Agreement ------------------------
On July 29, 1994, the Company reached an agreement with JCI Consultant, L.P. ("JCI") to terminate a February 25, 1992 consulting agreement with JCI pursuant to which, among other things, JCI rendered advice on the establishment and financing of Company-owned and licensed stores.
JCI has retained all rights in and to the options to purchase 1,200,000 shares of Common Stock at $8.00 per share which were previously granted to JCI. Such options terminate on March 21, 2001 and became exercisable on April 1, 1996. Under a ten-year Voting Trust Agreement expiring March 21, 2001, the Chief Executive Officer and President of the Company will be the voting trustee for the shares of Common Stock which may be received by JCI upon the exercise of the option. Furthermore, in connection with the termination of the Consulting Agreement, JCI agreed that, except for the aforementioned option shares, it would not at any time acquire, directly or indirectly, more than 5% of the issued and outstanding shares of Common Stock of the Company for a period ending July 29, 2000.
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued) August 29, 1998, August 30, 1997 and August 31, 1996
(In thousands except for share amounts)
Contemporaneous with the granting of the options to JCI, the Company, JCI, the Principal Stockholders and the Private Company entered into a registration and sale agreement (the "Registration Agreement") pursuant to which JCI has certain demand and "piggy-back" registration rights. Subject to certain exceptions, the Registration Agreement grants a right of first refusal to the Company to purchase all option shares which are proposed to be sold. If the Company declines to exercise such right of first refusal, the Principal Stockholders and the Private Company will have the right of first refusal.
Chicago Partnership Agreement -----------------------------
In July, 1991, the Company entered into agreements pursuant to which a limited partnership, Jennifer Chicago, L.P. (the "Chicago Partnership"), was established for the purpose of operating Jennifer Convertibles stores in the Chicago, Illinois metropolitan area. Pursuant to a 20-year License Agreement, the Company receives a royalty of 5% of sales from the Chicago Partnership's stores and has given the Chicago Partnership the exclusive right to open Jennifer Convertibles stores in the defined territory.
Pursuant to the Partnership Agreement, the limited partner (a party related to JCI) contributed $990 to the Partnership and agreed to make additional capital contributions of up to $100. The Company, as general partner, made a capital contribution of $10. Under the Partnership Agreement, allocations and distributions shall, subject to certain exceptions, be made 99% to the limited partner and 1% to the General Partner. The Company has consolidated and recorded the operating losses of the Partnership in excess of the limited partner's capital contributions in the Consolidated Statements of Operations (see Note 1). Under a Purchase Option Agreement, the Company has the right to purchase all the limited partners' interests in the Partnership for a price equal to the fair market value thereof, as determined by one or more investment bankers selected by the Company and the limited partners. Also, the limited partner can put its interest to the Private Company if certain executives of the Company and the Private Company own less than 700,000 shares of the Company's common stock.
LP III, LP IV and LP V ----------------------
In 1992, the Company entered into three additional Limited Partnership Agreements (the "Agreements") establishing LP's III, IV and V which required the limited partners to invest $1,000 in each partnership. The Agreements called for the opening of 25 Jennifer Convertible stores in each partnership. Under the terms of the Agreements, the Company was to receive a fee of $10 per store, plus a royalty of 5% of the partnership's sales. The Company has recorded the operating losses of the LP's in excess of the limited partners capital
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued) August 29, 1998, August 30, 1997 and August 31, 1996
(In thousands except for share amounts)
contributions in the Consolidated Statements of Operations (see Note 1). As part of the Agreements, the Company received options to purchase the limited partners' interest commencing January 1999 at a price of five times the partnership's earnings before income taxes for the prior year, as defined. Also, pursuant to the agreement, the limited partners can put their interest to the Company for either 100,000 shares of stock of the Company or $1,000 compounded at 25% if there is a change in management, as defined, through the year 2002. The investors have also purchased, for approximately $510, warrants ("Original Warrants") exercisable between June 1994 and June 1998 to purchase 180,000 shares of the Company's Common Stock at an exercise price of $15.625 per share. As of August 29, 1998, the limited partners had paid approximately $210 and signed ten year notes to pay $300 as payment for these warrants. No payments have been received by the Company for these notes. (See Note 7).
On December 31, 1996, the Private Company acquired the limited partners' interests in these partnerships.
(12) Sale of Preferred Stock -----------------------
On December 11, 1997, the Company sold to Klaussner 10,000 shares of Series A Preferred Stock ("Preferred Stock"), convertible into 1,424,500 shares of the Company's common stock for $5,000. These shares are non-voting, have a liquidation preference of $5,000 and do not pay dividends (except if declared on the common stock). The preferred stock is not convertible until September 1, 1999, or earlier under certain circumstances (e.g. if another person or group acquires 12.5% or more of the common stock or there are certain changes in management or the Board of Directors), and has other rights associated with it.