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Jennifer Convertibles 10-K 2008
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0001206774-08-001939.txt : 20081126
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20081126172041
ACCESSION NUMBER: 0001206774-08-001939
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 10
CONFORMED PERIOD OF REPORT: 20080830
FILED AS OF DATE: 20081126
DATE AS OF CHANGE: 20081126

FILER:

COMPANY DATA:
COMPANY CONFORMED NAME: JENNIFER CONVERTIBLES INC
CENTRAL INDEX KEY: 0000806817
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FURNITURE STORES [5712]
IRS NUMBER: 112824646
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0830

FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-09681
FILM NUMBER: 081218877

BUSINESS ADDRESS:
STREET 1: 419 CROSSWAYS PK DR
CITY: WOODBURY
STATE: NY
ZIP: 11797
BUSINESS PHONE: 5164961900

MAIL ADDRESS:
STREET 1: 419 CROSSWAYS PARK DR
STREET 2: 419 CROSSWAYS PARK DR
CITY: WOODBURY
STATE: NY
ZIP: 11797


10-K
1
jenniferconvertibles_10k.htm
ANNUAL REPORT









UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K


[ X ] Annual Report Pursuant to Section
13 or 15(d) of
the Securities Exchange Act of 1934


OR


Transition Report Pursuant to Section 13
or 15(d) of
the Securities Exchange Act of 1934
for the Transition Period
from ______ to  ______









For the fiscal
year ended
 
Commission File
number 1-9681
 
August 30,
2008
 
 








JENNIFER CONVERTIBLES, INC.
(Exact name
of registrant as specified in its charter)
 
















Delaware    11-2824646 
(State or
other jurisdiction
 
  (I.R.S.
Employer
 
of
incorporation or organization)
 
Identification
No.)
 










417 Crossways Park
Drive
Woodbury, New York 11797
(Address of
principal executive office)
 


Registrant’s telephone number,
including area code
(516)
496-1900


Securities registered pursuant to
Section 12(b) of the Act:












Title of class    Name of each exchange on which
registered 
Common Stock,
Par Value $0.01 
  American Stock
Exchange 

Securities registered pursuant to
Section 12(g) of the Act: NONE


     Indicate by check mark if the
Registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.


Yes  o                 No
x


     Indicate by check mark if the
Registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.


Yes  o                 No
x


     Indicate by
check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes  x                 No
o


     Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K.
   o


     Indicate by check
mark whether the Registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer,” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):













     

Large accelerated
filer
     o 
Accelerated
filer
     o 
Non- accelerated
filer     x
 
Smaller Reporting
Company
     o 


     Indicate by check mark whether the
Registrant is a shell company (as defined in Rule 12b-2 of the Act).


Yes  o                 No
x


     The aggregate market value of the
common stock held by non-affiliates as of November 24, 2008 was
$1,194,621.


     The number of shares outstanding of
common stock, as of November 24, 2008 was 7,073,466
.


     The
Registrant’s proxy or information statement relating to its Annual Meeting of
Stockholders to be held on February 17, 2009 is incorporated by reference into
Part III of this Annual Report on Form 10-K


 





PART I


Item 1. Business.


     Unless
otherwise set forth herein, when we use the term ‘we’ or any derivation thereof,
we mean Jennifer Convertibles Inc., a Delaware corporation, and its direct or
indirect subsidiaries.


Business Overview


     Jennifer Convertibles, Inc. was
incorporated in 1986 and began operations with a single retail store in Paramus,
New Jersey.


     Currently, we are the owner and licensor of the largest group of sofabed
specialty retail stores and leather specialty retail stores in the United
States, with stores located throughout the Eastern seaboard, in the Midwest, on
the West Coast and in the Southwest. As of August 30, 2008, our stores included
157 Jennifer Convertibles® stores and 14 Jennifer Leather stores. Of these 171
stores, we owned 149 and licensed 22, including 21 owned and operated by a
related private company, “the related company”, and one owned by a third party
operated by the related company. During fiscal 2007, we opened our first full
line home furnishings store under a licensing agreement, as Ashley Furniture
HomeStore®. As of August 30, 2008, we operate two Ashley Furniture HomeStores.


     Our
operations are classified into two operating segments organized by product line:
Jennifer and Ashley. The Jennifer segment owns and licenses the sofabed
specialty retail stores. The Ashley segment is a big box, full line home
furniture retail store. These operating segments enable us to more effectively
offer diverse home furnishings and accessories and expand our reach to a broader
consumer base. For certain financial information regarding our operating
segments, see Note 13 to the Consolidated Financial Statements included under
Item 8 of this Annual Report and incorporated herein by reference.


Operating Segments


Jennifer


General


     Jennifer
Convertibles® stores specialize in the retail sale of a complete line of
sofabeds. The stores also sell companion pieces such as sofas, loveseats, chairs
and ottomans. In most cases they are accessorized with tables, lamps and rugs
which we also sell. Jennifer Leather® stores specialize in the sale of leather
livingroom furniture and offer the same compliment of companion pieces and
accessories. Our products are manufactured by several manufacturers and range
from med-high end to relatively inexpensive models. We are the largest dealer of
Sealy® sofabeds as well as the largest dealer of Simmons® sofabeds. In order to
generate sales, our licensees and we rely on aggressive pricing, the attractive
image of our stores, extensive advertising and prompt delivery.


     We
believe that the image presented by our stores is an important factor in our
overall marketing strategy. Accordingly, stores are designed to display our
merchandise in an attractive setting designed to show the merchandise, as it
would appear in a customer’s home. All of our stores have a similar clearly
defined style, are designed as showrooms for the merchandise and are carpeted,
well lit and well maintained. Inventories for delivery are maintained in
separate warehouses. We display a variety of sofabeds, sofas and companion
pieces at each Jennifer Convertibles and Jennifer Leather retail location with
tables and lamps. In contrast to certain of our competitors that primarily
target particular segments of the market, we attempt to attract customers
covering the broadest socio-economic range of the market and, accordingly, offer
a complete line of sofabeds and sofas made by a number of manufacturers in a
variety of styles at prices currently ranging from approximately $299 to
$2,200.


     Although
each style of sofabed, loveseat, sofa, chair and recliner is generally displayed
at Jennifer Convertibles stores in one color and fabric, samples of the other
available colors and fabrics or leathers are available on selected merchandise.
Up to 500 different colors and fabrics are available for an additional charge.
To maximize the use of our real estate and offer customers greater selection and
value, we, as is common in the mattress industry, sell various sizes of sofabeds
with various sizes of mattresses but display only one size of sofabed at our
stores. We display leather furniture in a number of different grades of leathers
as well as offer a selection in various high fashion blended leathers and
constructions. We generate additional revenue by selling tables and offering
related services, such as lifetime fabric protection. The lifetime fabric
protection services are provided by the related company.


     The
related company operates 22 Jennifer Convertibles stores, 21 of which it owns
and one of which it manages. We do not own or collect any royalties from 19
related company owned stores, which are located in New York. However, the
related company operates these stores in substantially the same way as we
operate our stores and we are currently managing certain aspects of such stores.
Fred Love, who passed away in October 2004, co-founded the related company. Mr.
Love was one of our principal stockholders and also the brother-in-law of Harley
J. Greenfield, our Chairman of the Board, Chief Executive Officer, director and
principal stockholder. Jane Love, Mr. Greenfield’s sister, is currently acting
as the interim President of the related company. Jonathan Warner has been
appointed as the trustee of Mr. Love’s estate. See “Agreements and Transactions
with Related Company” (Note 3) and “Certain Relationships and Related
Transactions” in our Proxy Statement to be furnished in connection with our
Annual Meeting of Stockholders to be held February 17, 2009, which is hereby
incorporated by reference.


2





     Merchandise ordered from inventory is generally available to be delivered
within two weeks. Customers who place special orders for items, colors or
fabrics not in inventory must generally wait four to six weeks for delivery,
except for special order merchandise arriving from China, which may take up to
20 weeks. We believe that our ability to offer quick delivery of merchandise
represents a competitive advantage.


Operations


     Generally, our stores are open seven days per week. They are typically
staffed by a manager, one full-time salesperson and in some cases, one or more
part-time salespersons, as dictated by the sales volume and customer traffic of
each particular store. In some cases, where sales volume and customer traffic so
warrant, stores may be staffed with one to three additional full-time
salespersons. Our licensed stores are substantially similar in appearance and
operation to our other stores.


     Our
licensees and we have district managers throughout the United States. The
district managers supervise store management and monitor stores within their
assigned district to ensure compliance with operating procedures. District
managers report to and coordinate operations in their district with our
executive management.


     An
inventory of approximately 85% of the items displayed in the stores, in the
colors and fabrics displayed, is usually stocked at our warehouse facilities,
which are described below. Our licensees and we typically, except in the case of
financed sales, require a minimum cash, check or credit card deposit of 50% of
the purchase price when a sales order is given, with the balance, if any,
payable in cash or by bank check, certified or official check, upon delivery of
the merchandise. The independent trucker making the delivery collects the
balance of the purchase price.


Marketing


     We
advertise in newspapers and on television in an attempt to capitalize on our
marketplaces. Our approach to advertising requires us to establish a number of
stores in each area in which we enter. This concentration of stores enables
area-advertising expenses to be spread over a larger revenue base and to
increase the prominence of the local advertising program.


     We create
advertising campaigns for use by our stores, which also may be used by the
related company stores. The related company bears a share of advertisement costs
in New York. However, we also advertise independently of the related company
outside of the New York metropolitan area. We are entitled to reimbursement from
most of our licensees, which are responsible for their respective costs of
advertising; however, the approach and format of such advertising is usually
substantially the same for our licensees and us. We also have the right to
approve the content of all licensees advertising. See “Certain Relationships and
Related Transactions” in our Proxy Statement to be furnished in connection with
our Annual Meeting of Stockholders to be held February 17, 2009, which is hereby
incorporated by reference.


     In order
to further understand our markets, we carefully monitor our sales and obtain
other information reflecting trends in the furniture industry and changes in
customer preferences. We also review industry publications, attend trade shows
and maintain close contact with our suppliers to aid in identifying trends and
changes in the industry.


Leasing Strategy and Current
Locations


     Obtaining
attractive, high-traffic store locations is critical to the success of our
stores. We also select sites and negotiate leases on behalf of the related
company. The site selection process involves numerous steps, beginning with the
identification of territories capable of sustaining a number of stores
sufficient to enable such stores to enjoy significant economies of scale,
particularly in advertising, management and distribution. Significant factors in
choosing a territory include market demographics and the availability of
newspapers and other advertising media to efficiently provide an advertising
umbrella in the new territory.


     Once a
territory is selected, we choose the specific locations within such territory.
Although a real estate broker typically screens sites within a territory and
engages in preliminary lease negotiations, we are responsible for selection of
each location. The leased locations are generally in close proximity to heavily
populated areas, shopping malls, and other competing retail operations that are
on or near major highways or major thoroughfares, are easily accessible by car
or other forms of transportation and provide convenient parking.


     The
locations currently leased by our licensees and us generally range in size from
approximately 2,000 square feet to a little over 13
,000 square feet. We anticipate that
stores opened in the future will range from approximately 2,000 square feet to
4,000 square feet. Stores may be freestanding or part of a strip shopping
center.


3





     In fiscal
2008, we closed ten stores and combined two stores. We plan to open additional
stores when attractive opportunities present themselves and we will selectively
close stores where economics so dictate. We do not anticipate opening any
additional Jennifer Convertibles® or Jennifer Leather stores during fiscal 2009.
We closed one store as of October 30, 2008 and anticipate closing 2 to 5
additional stores during fiscal 2009.


Sources of
Supply


     We
currently purchase merchandise for our stores, and the stores of our licensees
and the related company, from a variety of domestic manufacturers generally on
30 to 75 day terms. We also purchase from overseas manufacturers on similar
terms. Our purchasing power combined with the purchasing power of our licensees
and of the related company enables us to receive the right, in some instances,
to exclusively market certain products, fabrics and styles. See “Certain
Relationships and Related Transactions” in our Proxy Statement to be furnished
in connection with our Annual Meeting of Stockholders to be held February 17,
2009, which is hereby incorporated by reference.


     Our
principal suppliers of sofabeds and sofas are Caye Upholstery LLC and Klaussner
Furniture Industries, Inc. Caye manufactures furniture under the Simmons® brand
name. Klaussner manufactures sofabeds under the Sealy® brand name. Both the
Sealy and Simmons names are by far the most recognized mattress brands. We are
the largest retailer of both Sealy® sofabeds and Simmons® sofabeds in the United
States. Our leather furniture is purchased primarily from Caye, Ashley and
Klaussner.


     On July
11, 2005, we entered into a Credit Agreement and a Security Agreement with Caye.
Under the amended Credit Agreement, Caye agrees to make available to us a credit
facility of up to $13.5 million, effectively extending Caye’s payment terms for
merchandise shipped to us from 75 days to 105 days after receipt of goods. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” for a more detailed description of these transactions.


     As
described more fully elsewhere, we have obtained a waiver expiring on August 29,
2009, for breach of the fixed charge coverage ratio in the Credit Agreement with
Caye. Caye has advised us that, as a result of current economic conditions and
conditions in the credit market, it may substantially decrease the amount of
inventory it supplies us. Caye has indicated that it expects to continue to
supply us at least through the end of March 2009 but it is uncertain whether it
will continue after such date to take orders from us, except for orders to its
domestic factories, which represent approximately 5% of our business with Caye.
Given the time lag between the taking of orders and delivery, that means that
after June 2009, we may need to get substantially all of our inventory from
other sources.


     The
Chinese company which currently manufactures approximately 95% of what we order
through Caye, has given us a letter agreement to the effect that if Caye stops
supplying us prior to November 12, 2009, it will, for at least a year
thereafter, supply us with goods and provide us 75 days to pay for those goods
without interest or penalty and an additional 30 days grace period on amounts
over 75 days at a per annum rate of 0.75% over prime, provided that in no event
will the amount payable by us exceed $10 million. This arrangement is
substantially the same as our current arrangement with Caye except that under
the Caye agreement we can owe up to $13.5 million.


     In
December 1997, Klaussner purchased $5,000,000 of our convertible preferred
stock. During May 2006, Klaussner voluntarily converted 3,510 shares of Series A
Preferred Stock into 500,000 shares of the Company’s common stock. The remaining
6,490 shares of Series A Preferred Stock are convertible into 924,500 shares of
the Company’s common stock. In fiscal 2006, 2007, and 2008, Klaussner gave us
certain vendor credits for repairs. See “Certain Relationships and Related
Transactions” in our Proxy Statement to be furnished in connection with our
Annual Meeting of Stockholders to be held February 17, 2009, which is hereby
incorporated by reference and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” for a more detailed description of these
transactions, Klaussner’s $5,000,000 investment and other transactions with
Klaussner.


Warehousing and Related
Services


     Our
warehousing and distribution facilities consist of warehouses in North Carolina,
New Jersey and California. We also maintain satellite warehouses in California,
Florida, Georgia, Massachusetts, Washington D.C, Michigan, Missouri and
Illinois. These warehouse facilities service both our stores and related
company’s stores.


Competition


     We
compete with other furniture specialty stores, major department stores,
individual furniture stores and regional furniture chains, some of which have
been established for a long time in the same geographic areas as our stores (or
areas where we or our licensees may open stores). We believe that the principal
areas of competition with respect to our business are store image, price,
delivery time, selection and service. We believe that we compete effectively
with such retailers because our stores offer a broader assortment of convertible
sofabeds and leather upholstery than most of our competitors and, as a result of
volume purchasing, we are able to offer our merchandise at attractive
prices.


4





Ashley


General


     During
fiscal 2007, we opened our first Ashley Furniture HomeStore®. On May 7, 2008, we
opened our second store. The aim of the Ashley Furniture HomeStore® is to make
beautiful home furnishings affordable. Our showrooms feature one of the most
complete home furnishing lines available, including furniture and
accessories
for the living / family room, bedroom, dining room (both casual and formal),
home theater and home office. Our Carle Place, NY location has an Ashley Sleep
Center, which
offers a complete line of Sealy mattresses at exceptional
prices. We also generate additional revenue by selling fabric protection
services to our Ashley store customers, which are provided by an unaffiliated
company.


Operations


     Our Ashley stores are open seven
days per week. A manager, full-time salespersons, part-time salespersons and
cashiers staff them.


     By
selling only furniture that is made by Ashley Furniture Industries, (“Ashley
Furniture”), or Ashley Furniture approved vendors the largest home furnishings
manufacturer in the United States and the #1 selling brand in North America, we
are able to deliver quality and value everyday. Due to the large quantity of
furniture produced by Ashley Furniture, we do not take custom orders. However,
we do have a wide variety of styles in our dynamic product line. The merchandise
displayed at the store, in the colors and fabrics displayed, is not stocked at
our warehouse facility, which is described below. Merchandise is ordered from
Ashley Furniture at point of sale.


     We typically, except in the case of
financed sales, require 100% of the purchase price when the sales order is
written.


Marketing


     We
advertise in newspapers and on television in an attempt to capitalize on our
marketplace. In addition, we participate in a co-op advertising program with
Ashley Furniture. In order to further understand our market, we carefully
monitor our sales and obtain other information reflecting trends in the
furniture industry and changes in customer preferences. We also review industry
publications, attend trade shows and maintain close contact with our supplier to
aid in identifying trends and changes in the industry.


     We can be
located on the worldwide web at www.ashleyhomestores.com. The website is
designed to showcase a wide variety of the Ashley Furniture dynamic product
line, provide customers decorating tips, a room planner and the ability to apply
for financing.


Leasing Strategy and Current
Locations


     Obtaining
attractive, high-traffic store locations is critical to the success of our
Ashley stores. Although a real estate broker typically screens sites and engages
in preliminary lease negotiations, we are responsible for selection of each
location. The leased locations are generally in close proximity to heavily
populated areas, shopping malls, and other competing retail operations that are
on or near major highways or major thoroughfares, are easily accessible by car
or other forms of transportation and provide convenient parking.


     We have a
freestanding 40,000 square foot building located in Carle Place, New York and an
approximate freestanding 20,000 square foot building located in Patchogue, New
York. We anticipate opening one additional store in fiscal 2009.


Sources of
Supply


     Under a
Trademark Usage Agreement, more fully described below, Ashley Furniture is the
exclusive supplier of product, except for accessories and mattresses. The Ashley
Furniture team includes a full time design group that is dedicated to creating
furniture styles that will complement any decorating style for any room. Ashley
Furniture production teams then carefully build each piece, ensuring quality
construction and workmanship, in one of six manufacturing facilities in the
United States. The furniture is then carefully shipped to Ashley Furniture
HomeStore® locations using its own transportation fleet.


Licensing
Arrangements


     On October 27, 2006, our
wholly-owned subsidiary, Hartsdale Convertibles, Inc. (“Hartsdale”), entered
into the Ashley Homestores, Ltd. Trademark Usage Agreement (the “Trademark Usage
Agreement”) with Ashley Homestores, Ltd. (“Ashley”), pursuant to which Hartsdale
was granted a 5-year nonexclusive, limited sublicense to use the image,
technique, design, concept, trademarks and business methods developed by Ashley
for the retail sale of Ashley products and accessories. During the 5-year term
of the agreement, Hartsdale will use its best efforts to solicit sales of Ashley
products and accessories at the authorized location, and in consultation with
Ashley, develop annual sales goals and marketing objectives reasonably designed
to assure maximum sales and market penetration of the Ashley products and
accessories in the licensed territory. We have guaranteed the obligations of
Hartsdale under the Trademark Usage Agreement.


5





Warehousing and Related
Services


     We
contract with an independent trucking company that provides warehouse and
distribution services. The warehouse is located in Syosset, New
York.


Competition


     We
believe that the principal areas of competition with respect to our business are
store image, price, delivery time, selection and service. We further believe
that we effectively compete on the basis of each of these factors, particularly
in selection by providing our consumers with complete home furnishing lines,
including furniture and

accessories. In addition, because the Ashley
Furniture Industries team controls all processes from design to delivery, we are
able to reduce our costs and pass these savings on to our customers with
exclusive Ashley Furniture HomeStore® pricing and merchandise.


Trademarks


     The
trademarks, Jennifer Convertibles®, Jennifer Leather®, Jennifer House®, With a
Jennifer Sofabed, There’s Always a Place to Stay®, Jenni-Pedic®, Elegant
Living®, Jennifer’s Worryfree Guarantee®, Jennifer Living Rooms®, Bellissimo
Collection®, and Jennifer Sofas®, are registered with the U.S. Patent and
Trademark Office and are now owned by us. The related company, as licensee, was
granted a perpetual royalty-free license to use and sublicense these proprietary
marks (other than the ones related to Jennifer Leather) in the State of New
York, subject to certain exceptions, including six
stores currently owned by us and
operating in New York and 12 more which the related company agreed we may open
on a royalty-free basis. Pursuant to the Settlement Agreement, we now have the
right to open an unlimited number of stores in New York for a royalty of
$400,000 per year, provided however, that on November 18, 2004, the Management
Agreement and License pursuant to which we are required to make such royalty
payments to the related company was amended such that the related company agreed
to waive its rights to receive from us such annual royalty payment during the
period commencing January 1, 2005 through April 30, 2005, the date on which
court approval was granted. See “Certain Relationships and Related Transactions”
in our Proxy Statement to be furnished in connection with our Annual Meeting of
Stockholders to be held February 17, 2009, which is hereby incorporated by
reference.


Employees


     As of
August 30, 2008, we employed 472 people, including five executive officers. We
have 377 employees in our Jennifer segment, 48 employees in our Ashley segment
and 47 corporate employees. We train personnel to meet our expansion needs by
having our most effective managers and salespersons train others and evaluate
their progress and potential for us. We believe that our employee relations are
satisfactory. None of our employees are represented by a collective bargaining
unit. We have never experienced a strike or other material labor dispute.


Available Information


     We make
available, free of charge via our website, all Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other
information filed with, or furnished to, the Securities and Exchange Commission
(the “SEC” or the “Commission”), including amendments to such reports. This
information is available at www.investors.jenniferfurniture.com as soon as
reasonably practicable after it is electronically filed with, or furnished to,
the SEC. In addition, the SEC maintains a website that contains reports, proxy
and information statements, and other information regarding companies that file
electronically with the Commission. This information is available at
www.sec.gov.


Item 1A. Risk Factors.


Cautionary Statements Regarding
Forward-Looking Statements.


     This
annual report contains certain forward-looking statements based on current
expectations that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of many factors, including the risk factors set forth below and
elsewhere in this report. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial may also impair our business
operations. If any of these risks actually occur, our business, financial
condition and operating results could be materially adversely affected. The
cautionary statements made in this Annual Report on Form 10-K should be read as
being applicable to all forward-looking statements wherever they appear in this
Annual Report on Form 10-K.


6





There is no assurance we will
operate profitably.


     We
incurred net (loss) income of ($3,329,000), $3,971,000 and $5,220,000, in the
fiscal years ended August 30, 2008, August 25, 2007 and August 26, 2006,
respectively. The furniture business is cyclical and we have been impacted in
the past and will continue to be affected by changes in such cycles, by losses
from new stores, the overall economic and political climate, by changes in
consumer preferences or demographics or unknown risks and uncertainties that may
cause us to incur losses from operations.


Our company could suffer from
potential conflicts of interest.


     Potential
conflicts of interest exist since Harley J. Greenfield, our Chairman of the
Board and Chief Executive Officer, and Edward B. Seidner, our Executive Vice
President, and a former director, are owed, as of August 30, 2008, approximately
$8.4 million, representing the remaining balance of approximately $10.3 million
of notes issued by the related company, which owns, controls or licenses the
related company stores. Accordingly, such persons derive substantial economic
benefits from the related company. In addition, Fred Love, the co-founder of the
related company, was Mr. Greenfield’s brother-in-law. Mr. Love passed away in
October 2004 and Jane Love, Mr. Greenfield’s sister, is currently acting as the
interim President of the related company. Circumstances may arise in which the
interest of the related company stores, of the related company or of Mr.
Greenfield and Mr. Seidner will conflict with our interests. There are also
numerous relationships, and have been numerous transactions, between us and the
related company, including an agreement under which we warehouse and purchase
merchandise for the related company, manage its stores and provide it other
services. See “Certain Relationships and Related Transactions” in our Proxy
Statement to be furnished in connection with our Annual Meeting of Stockholders
to be held February 17, 2009, which is hereby incorporated by reference.


We heavily depend on three
suppliers.


     During
the fiscal year ended August 30, 2008, we purchased approximately 12% of our
merchandise from Klaussner, 69% of our merchandise from Caye and 16% from
Ashley. Since a large portion of our revenues have been derived from sales of
Klaussner, Caye and Ashley products, the loss of these suppliers could have a
material adverse impact on us until alternative sources of supply are
established. Our obligations to Caye are secured by substantially all of our
assets. Klaussner is also a principal stockholder and creditor of ours.
Klaussner’s and Caye’s position as significant creditors could potentially
result in a temporary or permanent loss of our principal supply of merchandise,
if, for example, Klaussner and Caye halted supply because we defaulted on or
were late in making our payments to them. See “Certain Relationships and Related
Transactions” in our Proxy Statement to be furnished in connection with our
Annual Meeting of Stockholders to be held February 17, 2009, which is hereby
incorporated by reference.


Caye has indicated that they may no
longer supply us.


     We have
obtained a waiver expiring on August 29, 2009, for breach of the fixed charge
coverage ratio in the Credit Agreement with Caye. Based on current economic
conditions it is uncertain we will be in compliance when the waiver expires. If
Caye does not extend the waiver, Caye will be entitled to stop supplying us
credit and to accelerate all amounts currently due to Caye. Caye has advised us
that, as a result of current economic conditions and conditions in the credit
market, it may substantially decrease the amount of inventory it supplies us.
Caye has indicated that it expects to continue to supply us at least through the
end of March 2009 but it is uncertain whether it will continue after such date
to take orders from us, except for orders from its domestic factories, which
represent approximately 5% of our business with Caye. Given the time lag between
the taking of orders and delivery, that means that after June 2009, we may need
to get substantially all of our inventory from other sources.


Economic conditions could adversely
affect our suppliers, which could harm our business.


     The
current global general economic uncertainty, the potential for further economic
dislocations, the potential impact of a recession, the potential for failures or
realignments of financial institutions and the related impact on available
credit may materially and adversely affect our suppliers. These and other
factors potentially affecting our suppliers, our access to merchandise and
merchandise prices could lead to delays in order fulfillment, higher costs and
decreased sales of our products, which could substantially harm our business.


Economic conditions could adversely
affect companies we transact with, which could harm our business.


     We assume
that like other retailers and us, the related company has been adversely
affected by the economy. If the related company were unable to pay the amounts
due to us, it would have a material adverse effect on our cash flow and
financial condition. The related company also provides fabric protection
services to our customers and, if the related company were unable to provide
such services, we would have to find an alternative provider in order to sell
those services to our customers in the future and would, as a matter of customer
relations, likely have to pay for such provider to supply services with respect
to previously sold fabric protection services.


     The
credit card companies have, for the past several years, paid us shortly after
credit card purchases by our customers. However, they have indicated to us that
in light of current economic and credit conditions they are reexamining their
payment policies. Extensions of the time they take to pay us would adversely
affect our cash flow. In this connection, we have entered into an agreement with
one of our credit card companies for the interim period ending December 17,
2008, pursuant to which there will be a $500,000 reserve established as, in
effect, a performance bond against delivery by us of the merchandise ordered by
their credit card customers.


7





     Current
economic conditions could also affect other parties we do business with and, in
some cases, we may not have any advance warning of the difficulties affecting
those parties or the ability to plan for such difficulties if they impact us.


The cyclical nature of the furniture
industry combined with changes in global and local economic conditions may
adversely affect consumer demand and spending.


     The
furniture industry has been historically cyclical, fluctuating with general
economic cycles and uncertainty in future economic prospects. During economic
downturns, the furniture industry tends to experience longer periods of
recession and greater declines than the general economy. The slowdown in the
U.S. economy and other national, regional or global economic conditions
affecting disposable consumer income, such as employment levels, inflation,
business conditions, fuel and energy costs, consumer debt levels, lack of
available consumer or commercial credit, uncertainty in future economic
prospects, interest rates, and tax rates, may adversely affect our business by
reducing overall consumer spending or by causing customers to shift their
spending to products other than those sold by us or to products sold by us that
are less profitable than other product choices. These factors could have a
material adverse effect on demand for our products and on our financial
condition and operating results.


Competition in the furniture
industry could cost us sales and cause us to reduce prices.


     The
retail specialty furniture business is highly competitive and includes
competition from traditional furniture retailers and department stores as well
as numerous discount furniture outlets. Our stores may face sharp price-cutting,
as well as imitation and other forms of competition, and we cannot prevent or
restrain others from utilizing a similar marketing format. Although we are the
largest sofabed specialty retail dealer and specialty leather retailer in the
United States, many of our competitors have considerably greater financial
resources.


A number of our store leases are
month-to-month and accordingly the stores may need to halt operations on short
notice.


     A number
of our store leases are month-to-month. Accordingly, if, at the end of a monthly
lease period, we are unable to negotiate favorable terms for the new lease
period or unable to renew such lease, we may need to halt operations at such
location on short notice, which may have a material adverse effect on our
results of operations.


We may have difficulty obtaining
additional financing.


     Our
ability to expand and support our business may depend upon our ability to obtain
additional financing. We may have difficulty obtaining debt or equity financing.
We are currently a party to an amended Credit Agreement and a Security Agreement
with Caye (the “Caye Credit Facility”), pursuant to which Caye agreed to provide
us with $13.5 million of debt financing. As indicated above, Caye has indicated
that it may discontinue supplying us after March 2009.


     As of
August 30, 2008, we owed Caye approximately $9,050,000. Most of our assets are
pledged to Caye as security for the amounts we owe under the Caye Credit
Facility. From time to time, our financial position has made it difficult for us
to obtain third party consumer financing.


     Based on
the current level of operations at our stores, and after giving effect to cost
cutting programs we intend to implement and recently amended arrangements with
the related company, we anticipate that we will have the capital resources to
operate for at least the next 12 months. However, if current economic and credit
conditions prevail beyond the next year or worsen, there would be significant
doubt as to whether we could continue to operate significantly beyond that time
without an infusion of capital or other measures, the availability of which
there can be no assurance. An inability to secure financing may also adversely
affect sales.


Substantially all of our assets have
been pledged to Caye pursuant to our credit facility.


     Pursuant
to the terms of the Caye Credit Facility, substantially all of our assets have
been pledged to Caye as security for any amounts we owe under the Caye Credit
Facility. In the event of any bankruptcy, liquidation, dissolution,
reorganization or similar proceeding against us, the assets that are pledged as
collateral securing any unpaid amounts must first be used to pay such amounts,
as well as any other obligation secured by the pledged assets pursuant to the
terms of the Caye Credit Facility, in full, before making any distributions to
stockholders. In such event, you could lose all or a part of your investment.


     On July
7, 2007, the Company entered into the Third Amendment to the Credit Agreement
and Second Amendment to Security Agreement with Caye, pursuant to which such
agreements were amended to (1) increase the Caye Credit Facility from $11.5
million to $13.5 million and (2) reduce the amount required to be maintained in
deposit accounts to no less than $1 million.


8





     On April
3, 2008, the Company entered into the Fourth Amendment to the Credit Agreement
and Third Amendment to Security Agreement to (1) expand the scope of the Caye
Credit Facility to include Ashley stores in additional New York metropolitan
areas and (2) increase the amount of capital expenditures allowable in certain
New York metropolitan areas.


     As
described more fully elsewhere, we have obtained a waiver expiring on August 29,
2009, for breach of the fixed charge coverage ratio in the Credit Agreement with
Caye. Based on current economic conditions it is uncertain we will be in
compliance when the waiver expires. If Caye does not extend the waiver, Caye
will be entitled to stop supplying us credit and to accelerate all amounts
currently due to Caye.


Harley J. Greenfield and current
management are likely to retain control.


     As of
November 21, 2008, Harley J. Greenfield, our Chairman of the Board and Chief
Executive Officer and principal stockholder, beneficially owns approximately
19.1% of our outstanding shares of common stock. Approximately 37.2% of the
outstanding common stock is beneficially owned by all officers and directors as
a group, including Messrs. Greenfield and Seidner
. Since the holders of our common stock do
not have cumulative voting rights, such officers’ and directors’ ownership of
our common stock will likely enable them to exercise significant influence in
matters such as the election of our directors and other matters submitted for
stockholder approval. Also, the relationship of such persons to the related
company could serve to perpetuate management’s control in light of the related
company’s relationship to us.


Our future success depends heavily
on two executives.


     Our
future success will depend substantially upon the abilities of Harley J.
Greenfield, our Chairman of the Board and Chief Executive Officer and one of our
principal stockholders, as well as Rami Abada, our President, Chief Operating
Officer and Chief Financial Officer. The loss of Mr. Greenfield’s and/or Mr.
Abada’s services could materially adversely affect our business and our
prospects for the future. We do not have key man insurance on the lives of such
individuals.


We are prohibited from paying
dividends on common stock.


     Under the
terms of the Caye Credit Facility, we are prohibited from paying any dividends
on our common stock. We have never declared or paid any cash dividends on our
common stock and do not intend to pay any cash dividends in the foreseeable
future. We currently anticipate that we will retain any earnings for use in the
operation and expansion of our business.


The American Stock Exchange may
delist our securities from quotation on its exchange, which could limit
investors’ ability to make transactions in our securities and subject us to
additional trading restrictions.


     Our share
price is currently trading at less than a dollar. We cannot assure you that our
share price will rise above a dollar or that our securities will continue to be
listed on the American Stock Exchange in the future. If the American Stock
Exchange delists our securities from trading on its exchange, we could face
significant material adverse consequences, including:



  • a limited availability of market quotations for
    our securities;

  • a determination that our ordinary shares are a
    ‘‘penny stock’’ which will require brokers trading in our ordinary shares to
    adhere to
    more stringent rules, possibly
    resulting in a reduced level of trading activity in the secondary trading
    market for our ordinary shares;

  • a limited amount of news and analyst coverage for
    our company; and

  • a decreased ability to issue additional securities
    or obtain additional financing in the future.

Item 1B. Unresolved Staff Comments.


     None.


Item 2. Properties.


     We maintain our executive offices in
Woodbury, New York pursuant to a lease, which expires in the year
2018
.


     As of
August 30, 2008, we lease substantially all of our store and warehouse locations
pursuant to leases, which expire between 2008 and 2018. During fiscal 2009, 39
leases will expire, although we, as lessee, have the option to renew 12 of those
leases. We also have ten leases that are month-to-month. We anticipate remaining
in most of these locations, subject, in the case of the leases that expire, to
negotiating acceptable renewals with the landlords. The leases are usually for a
base term of at least five years. For additional information concerning the
leases, see Note 14 of “Notes to Consolidated Financial Statements.”


Item 3. Legal Proceedings.


     None. 


Item 4. Submission of Matters to a Vote of Security Holders.


     No matters were submitted to our
security holders during the fourth quarter of fiscal 2008.


9





PART II


Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.


     The
principal market for our common stock, which was traded under the symbol JENN,
through June 9, 2003 was the Over the Counter Bulletin Board. On June 10, 2003,
during the fourth quarter of fiscal 2003, trading for our common stock began on
the American Stock Exchange under the symbol JEN. The following table sets
forth, for the fiscal periods indicated, the high and low sales prices of our
common stock on the American Stock Exchange.






















































































High           Low
Fiscal Year 2007:
1st
Quarter
 
$ 7.44 $ 5.25
2nd Quarter    5.57   4.42
3rd
Quarter
 
5.37   4.44
4th Quarter  5.25 4.14
    
High Low
Fiscal Year 2008:
1st
Quarter
 
$ 4.55 $ 3.70
2nd Quarter  5.04 2.47
3rd
Quarter
 
2.77 1.75
4th Quarter  1.80 1.05


     As of
November 24, 2008, there were approximately 286 holders of record and
approximately 1,000 beneficial owners of our common stock. On November 24, 2008,
the closing sales price of our common stock as reported on the American Stock
Exchange was $.26


Dividend Policy


     We have
never paid a dividend on our common stock and we do not anticipate paying
dividends on the common stock at the present time. We currently intend to retain
earnings, if any, for use in our business. There can be no assurance that we
will ever pay dividends on our common stock. Our dividend policy with respect to
the common stock is within the discretion of the Board of Directors and its
policy with respect to dividends in the future will depend on numerous factors,
including our earnings, financial requirements and general business conditions.
In addition, under the terms of the Caye Credit Facility, we are prohibited from
paying dividends on our common stock.


Equity Compensation Plan Information


     The
following table provides information about shares of our common stock that may
be issued upon the exercise of options under all of our existing compensation
plans as of August 30, 2008.
























































































































Number of securities
remaining available for
Number of securities to Weighted-average future issuance under
be
issued upon exercise
exercise
price of
equity compensation plans
of
outstanding options,
outstanding
options,
(excluding securities
     warrants and rights      warrants and
rights
     reflected in column (a))
Plan category   (a) (b)   (c)
Equity compensation plans  
     approved by
security holders (1)
550,995   $3.13 600,000  
Equity
compensation plans not
       
     approved by security holders
(2)
1,802,730   $3.60
Totals  2,353,725   $3.49 600,000
____________________
 














(1)       Reflects aggregate options
outstanding under our 1986, 1991 and 2003 Incentive and Non-Qualified
Stock Option Plans and 2006 Equity Incentive Plan. Although the 1986 and
1991 plans have expired, there are issued and unexercised stock options
that remain outstanding pursuant to those plans.
 
(2) Reflects aggregate options outstanding
outside our Incentive and Non-Qualified Stock Option Plans that were
issued pursuant to individual stock option
agreements.

On November 11, 2004, we issued options
to purchase an aggregate of 233,333 shares of our common stock at an exercise
price of $3.52 per share to one of our directors.


On February 9, 2005, we issued options
to purchase an aggregate of 150,000 shares of our common stock at an exercise
price of $3.52 per share to certain of our directors.


10





Performance Graph


     The graph
below matches Jennifer Convertibles, Inc.'s cumulative 5-year total shareholder
return on common stock with the cumulative total returns of the NASDAQ Composite
index, and the S&P Home Furnishings SuperCap index. The graph tracks the
performance of a $100 investment in our common stock and in each index (with the
reinvestment of all dividends) from 8/31/2003 to 8/31/2008.




























































          8/03      8/04      8/05      8/06      8/07      8/08
Jennifer Convertibles, Inc. 100.00 71.25 56.02 149.88 107.37 31.94
NASDAQ
Composite
  100.00
103.10
  120.73
  125.87
  149.70
  135.02
S&P Home Furnishings SuperCap 100.00   103.89 102.69 95.30 96.49 87.60


The stock price performance included
in this graph is not necessarily indicative of future stock price
performance
.


11





Item 6. Selected Financial Data


The following table presents certain
selected financial data for Jennifer Convertibles, Inc. and
subsidiaries.








































































































































































































































































































































































































































































































































































































































































































































































































































































     (In thousands, except for share
data)
 
Operations Data:    Year Ended     Year Ended     Year Ended     Year Ended     Year Ended 
  8/30/2008  8/25/2007  8/26/2006  8/27/2005  8/28/2004 
          (a)   (a)    (a)   (a) 
Revenue  $  120,965   $  133,952   $  137,127   $  118,368   $  125,272  
 
Cost of sales, including store occupancy,                     
     warehousing, delivery
and service costs
 
  85,503     92,045     93,711     84,485     88,327  
Selling, general
and administrative expenses
 
  38,009     37,452     37,460     36,423     38,118  
Impairment of goodwill                146      
Depreciation and
amortization
 
  1,008     902     804     859     1,429  
Recovery of prior year receivables and other amounts
due
 
                   
     from Related
Company
 
              (2,600 )     
    124,520     130,399     131,975     119,313     127,874  
 
Operating (loss) income    (3,555 )    3,553     5,152     (945 )    (2,602 ) 
Gain on sale of
lease
 
                  220  
Interest income    521     736     402     136     111  
Interest
expense
 
  (16 )    (14 )    (26 )    (2 )    (3 ) 
 
(Loss) income before income taxes    (3,050 )    4,275     5,528     (811 )    (2,274 ) 
Income tax
expense
 
  10     124     321     1,869     973  
 
(Loss) income from continuing operations    (3,060 )    4,151     5,207     (2,680 )    (3,247 ) 
 
(Loss) income from discontinued operations    (269 )    (180 )    13     (1,190 )    (895 ) 
 
Net (loss) income  $  (3,329 )  $  3,971   $  5,220   $  (3,870 )  $  (4,142 ) 
 
Basic (loss) income per share                     
          Continuing operations  $  (0.43 )  $  0.53   $  0.71   $  (0.47 )  $  (0.57 ) 
         
Discontinued operations 
  (0.04 )    (0.02 )    0.00     (0.20 )    (0.16 ) 
          Net (loss) income  $  (0.47 )  $  0.51   $  0.71   $  (0.67 )  $  (0.73 ) 
 
Diluted (loss) income per share                     
          Continuing operations  $  (0.43 )  $  0.47   $  0.62   $  (0.47 )  $  (0.57 ) 
         
Discontinued operations 
  (0.04 )    (0.02 )    0.00     (0.20 )    (0.16 ) 
          Net (loss) income  $  (0.47 )  $  0.45   $  0.62   $  (0.67 )  $  (0.73 ) 
 
Weighted average common shares outstanding    7,073,466     6,910,523     6,043,157     5,773,707     5,713,058  
 
Weighted average common shares issuable on conversion
of
 
                   
         
outstanding Series A participating preferred
stock
 
      924,500     1,292,269          
 
Total weighted average common shares outstanding
basic
 
  7,073,466     7,835,023     7,335,426     5,773,707     5,713,058  
Effect of
potential common shares issuances:
 
                   
         
Stock options 
      847,359     886,152          
          Warrants        81,635     70,497          
         
Series B convertible preferred
stock
 
      54,265     57,915            
Weighted average
common shares outstanding diluted
 
  7,073,466       8,818,282       8,349,990     5,773,707       5,713,058  
 
Cash dividends and other distributions on Series B
convertible
 
                   
         
preferred stock 
$     $   53   $   50   $     $    


12































































































































































































































































































































































































































Store
Data:
      8/30/2008      8/25/2007      8/26/2006      8/27/2005      8/28/2004 
Company-owned specialty retail stores open at end of
period
 
149   160   167   170   141  
Consolidated licensed specialty retail stores open at end of
period
 
          48  
 
Consolidated licensed full line retail store open at the
end of the period
 
2   1        
Licensed stores not consolidated open at the end of the
period
 
1   1   1   1   3  
Total stores open at end of period  152   162   168   171   192  
 
Company-owned specialty retail stores at beginning of
year
 
160   167   170   141   138  
     Company-owned specialty retail stores
opened during the year
 
  1     1   5  
     Company-owned specialty
retail stores closed during the year
 
(10 )  (8 )  (3 )  (20 )  (2 ) 
     Company-owned specialty
retail store combined during the year
 
(1 )         
     Consolidated licensed
specialty retail stores acquired
 
         
         
during the year
 
      48    
Company-owned stores at the end of the year:  149   160   167   170   141  
  
Balance Sheet
Data:
   8/30/2008   8/25/2007   8/26/2006   8/27/2005   8/28/2004 
Working capital (deficiency)  $   2,818   $   7,359   $   2,693     $   (3,307 )  $   (1,036 ) 
Total
assets
 
  34,112       44,799   40,007   33,215     31,522  
Long-term obligations  139   119     145      
Total
liabilities
 
27,395   34,774   34,448   34,063   28,708  
Stockholders equity (Capital deficiency)  6,717   10,025   5,559   (848 )  2,814  
Stockholders equity (Capital deficiency) per outstanding common
share (b)
 
$   0.46   $   0.92   $   0.28   $   (1.06 )  $   (0.43 ) 
____________________
 













(a)      

Restated to include discontinued
operations consisting of 6 stores closed during the year ended
8/30/08.

 
(b)

Computed by dividing
stockholder's equity, reduced for liquidation preferences of preferred
stock, by outstanding common shares at the balance sheet
date.


13





Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations


     Except
for historical information contained herein, this “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” contains
forward-looking statements within the meaning of the U.S. Private Securities
Litigation Reform Act of 1995, as amended. These statements involve known and
unknown risks and uncertainties that may cause our actual results or outcomes to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Factors that might
cause such differences include, but are not limited to risk factors, including
those under the caption “Risk Factors” herein, such as uncertainty as to the
outcome of the litigation concerning us, factors affecting the furniture
industry generally, such as the competitive and market environment, continued
volatility and further deterioration of the capital markets; the commercial and
consumer credit environment, and other matters of national, regional and global
scale, including those of a political, economic, business and competitive nature
which may affect our suppliers or the related company. In addition to
statements, which explicitly describe such risks and uncertainties, investors
are urged to consider statements labeled with the terms “believes,” “belief,”
“expects,” “intends,” “plans” or “anticipates” to be uncertain and
forward-looking.


Overview


     We are
the owner and licensor of sofabed specialty retail stores that specialize in the
sale of a complete line of sofa beds and companion pieces such as loveseats,
chairs and recliners. We also have specialty retail stores that specialize in
the sale of leather furniture. In addition, we have stores that sell both fabric
and leather furniture. During May 2008 and May 2007, we opened full line home
furniture retail stores that sell products and accessories of Ashley Homestores,
Ltd. We have determined that we have two reportable segments organized by
product line: Jennifer – sofabed specialty retail stores – and Ashley – big box,
full line home furniture retail stores.


Results of Operations


     The
following table sets forth, for the periods indicated, the percentage of total
revenue from continuing operations contributed by each category:


























































































  August 30, August 25, August 26,
        2008       2007       2006
Merchandise Sales - net  79.2 %  78.7 %  80.5 % 
Home Delivery
Income
 
10.8 %  10.3 % 
8.9 % 
Charges to the Related Company    4.1 %    4.5 %    3.8 % 
     Net Sales  94.1 %  93.5 % 
93.2 % 
 
Revenue from Service Contracts  5.9 %  6.5 %  6.8 % 
 
     Total Revenue  100.0 %  100.0 %  100.0 % 


Fiscal year ended August 30, 2008
compared to fiscal year ended August 25, 2007


Revenue


     Net sales
from continuing operations were $113,851,000 and $125,300,000 for the fiscal
years ended August 30, 2008 and August 25, 2007, respectively. Net sales from
continuing operations decreased by 9.1%, or $11,449,000 for the fiscal year
ended August 30, 2008 compared to the fiscal year ended August 25, 2007. The
decrease in net sales is attributable to a decline in overall demand within the
furniture industry sector due to a poor housing market and an overall weak U.S
economy.


     Revenue
from service contracts from continuing operations decreased by 17.8% for the
fiscal year ended August 30, 2008 to $7,114,000 from $8,652,000 for the fiscal
year ended August 25, 2007. The decrease was primarily attributable to fewer
merchandise sales during the fiscal year ended August 30, 2008, compared to
fiscal year ended August 25, 2007.


     Same
store sales from continuing operations for the Jennifer segment (sales at those
stores open for the entire current and prior comparable periods) decreased by
16.8% for the fiscal year ended August 30, 2008 as compared to August 25, 2007.
Not included in same store sales are two stores that combined through an
expansion during the thirteen weeks ended May 24, 2008. These two combined
stores did not have a material change in square footage. Total square footage
leased for the Jennifer segment decreased approximately 1.21% during the fiscal
year ended August 30, 2008, as a result of three closed stores and one relocated
store. We increased our Ashley segment square footage by 20,000 square feet or
33.3%.


14





Cost of Sales


     Cost of
sales, as a percentage of revenue for the fiscal year ended August 30, 2008, was
70.7 % compared to 68.7 % for the same period ended August 25, 2007. Cost of
sales from continuing operations decreased to $85,503,000 for the fiscal year
ended August 30, 2008, from $92,045,000 for the fiscal year ended August 25,
2007.


     Cost of
sales is comprised of five categories: Cost of merchandise, occupancy costs,
warehouse expenses, home delivery expenses and warranty costs.


     The
increase in the percentage of cost of sales is due to warehouse expenses and
occupancy costs being spread over a decreased revenue base. In addition, cost of
sales for the fiscal year ended August 30, 2008 includes an increase of $662,000
in occupancy costs related to our new Ashley operating segment.


Selling, general and
administrative expenses


     Selling,
general and administrative expenses from continuing operations were $38,009,000
(31.4% as a percentage of revenue) and $37,452,000 (28.0% as a percentage of
revenue) during the fiscal year ended August 30, 2008 and August 25, 2007,
respectively.


     Selling,
general and administrative expenses are comprised of four categories:
Compensation, advertising, finance fees and other administrative costs.
Compensation is primarily comprised of compensation of executives, finance,
customer service, information systems, merchandising, sales associates and sales
management. Advertising expenses are primarily comprised of newspaper/magazines,
circulars, television and other soft costs. Finance fees are comprised of fees
paid to credit card and third party finance companies. Administrative expenses
are comprised of professional fees, utilities, insurance, supplies, permits and
licenses, property taxes, repairs and maintenance, and other general
administrative costs.


     Compensation expense increased $102,000 during the fiscal year ended
August 30, 2008 compared to the same period ended August 25, 2007. Compensation
expense decreased by $635,000 for the Jennifer segment, increased $1,000,000 for
the Ashley segment and decreased by $263,000 for corporate. The decrease in the
Jennifer segment was primarily attributable to lower sales volume, which
resulted in lower compensation expense to salespersons in the form of
commissions and bonuses. The increase for the Ashley segment is largely due to
53 weeks of compensation expense during fiscal 2008 compared to 13 weeks in
fiscal 2007 and the opening of a second store during May 2008. Corporate
compensation decreased due to no executive bonuses for fiscal 2008.


     Advertising expense increased $765,000 during the fiscal year ended
August 30, 2008 compared to the same period ended August 25, 2007. Advertising
expense decreased by $125,000 for the Jennifer segment and increased by $890,000
for the Ashley segment. The increase from the Ashley segment is primarily
attributable to 53 weeks of costs during fiscal 2008 compared to 13 weeks in
fiscal 2007 and the opening of a second store during May 2008. The decrease from
the Jennifer segment is largely attributable to a decrease in regional
advertising costs in Ohio resulting from the closing of stores in that
territory.


     Finance
fees decreased $193,000 during the fiscal year ended August 30, 2008 compared to
the same period ended August 25, 2007. The decrease corresponds to the decrease
in net sales from continuing operations.


     Other
administrative costs decreased $117,000 during the fiscal year ended August 30,
2008 compared to the same period ended August 25, 2007.


     Selling,
general and administrative expenses for the fiscal year ended August 30, 2008
includes an increase of $2,232,000, consisting of compensation, advertising,
finance fees and other administrative costs related to our Ashley operating
segment, a decrease of $1,222,000 for the Jennifer segment and a decrease of
$453,000 related to corporate activities.


Interest
Income


     Interest
income decreased by $215,000 to $521,000 for the fiscal year ended August 30,
2008, as compared to $736,000 during the prior year. The decrease is due
principally to less cash available for investing purposes and lower market
interest rates during the current fiscal year.


Income Tax
Expense


     We
reported income tax expense of $10,000 and $124,000 in fiscal 2008 and 2007,
respectively. Current minimum taxes are included in selling, general and
administrative expenses for 2008 and there were no federal income taxes due to a
net operating loss. The expense for 2007 consists principally of current state
income taxes since federal income taxes were substantially eliminated by
utilization of net operating loss carry forwards.


15





Income from Continuing
Operations


     The
(loss) income from continuing operations was ($3,060,000) and $4,151,000 for the
fiscal year ended August 30, 2008 and August 25, 2007, respectively. The (loss)
income from continuing operations for fiscal 2008 and 2007 includes income
(loss) of $903,000 and ($679,000), respectively, related to our Ashley segment.


     During
fiscal 2008, we closed ten stores of which six were reported as discontinued
operations. During fiscal 2007, we closed eight stores of which two were
reported as discontinued operations. The operating results of these eight stores
were reported as discontinued operations for fiscal 2008 and 2007. Loss from
discontinued operations amounted to $269,000 and $180,000 for the fiscal year
ended August 30, 2008 and August 25, 2007, respectively.


Fiscal year ended August 25, 2007
compared to fiscal year ended August 26, 2006:


Revenue


     Net sales
from continuing operations were $125,300,000 and $127,875,000 for the fiscal
years ended August 25, 2007 and August 26, 2006, respectively. Net sales from
continuing operations decreased by 2.0%, or $2,575,000 for the fiscal year ended
August 25, 2007 compared to the fiscal year ended August 26, 2006. The decrease
in net sales is attributable to a decline in overall demand within the furniture
industry sector due to a poor housing market.


     Revenue
from service contracts from continuing operations decreased by 6.5% for the
fiscal year ended August 25, 2007 to $8,652,000, from $9,252,000 for the fiscal
year ended August 26, 2006. The decrease was primarily attributable to fewer
merchandise sales during the fiscal year ended August 25, 2007, compared to
fiscal year ended August 26, 2006.


     Same
store sales from continuing operations (sales at those stores open for the
entire current and prior comparable periods) decreased by 4.8% for the fiscal
year ended August 25, 2007 as compared to August 26, 2006. Total square footage
leased increased approximately 0.7% as a result of two relocated stores. Also,
we expanded our square footage in one of our existing stores during the fiscal
year ended August 25, 2007.


Cost of Sales


     Cost of
sales, as a percentage of revenue for the fiscal year ended August 25, 2007, was
68.7% compared to 68.3% for the same period ended August 26, 2006. Cost of sales
from continuing operations decreased to $92,045,000 for the fiscal year ended
August 25, 2007, from $93,711,000 for the fiscal year ended August 26,
2006.


     Cost of
sales is comprised of five categories: Cost of merchandise, occupancy costs,
warehouse expenses, home delivery expenses and warranty costs.


     The
increase in the percentage of cost of sales is due to warehouse expenses and
occupancy costs being spread over a decreased revenue base. In addition, cost of
sales for the fiscal year ended August 25, 2007 included $573,000 of occupancy
costs related to our new Ashley operating segment.


Selling, general and
administrative expenses


     Selling,
general and administrative expenses from continuing operations were $37,452,000
(28.0% as a percentage of revenue) and $37,460,000 (27.3% as a percentage of
revenue) during the fiscal year ended August 25, 2007 and August 26, 2006,
respectively.


     Selling,
general and administrative expenses are comprised of four categories:
Compensation, advertising, finance fees and other administrative costs.
Compensation is primarily comprised of compensation of executives, finance,
customer service, information systems, merchandising, sales associates and sales
management. Advertising expenses are primarily comprised of newspaper/magazines,
circulars, television and other soft costs. Finance fees are comprised of fees
paid to credit card and third party finance companies. Administrative expenses
are comprised of professional fees, utilities, insurance, supplies, permits and
licenses, property taxes, repairs and maintenance, and other general
administrative costs.


16





     Compensation expense decreased $219,000 during the fiscal year ended
August 25, 2007 compared to the same period ended August 26, 2006. This decrease
was primarily attributable to lower sales volume, which resulted in lower
compensation expense to salespersons in the form of commissions and
bonuses.


     Advertising expense decreased $197,000 during the fiscal year ended
August 25, 2007 compared to the same period ended August 26, 2006. Advertising
expense decreased by $601,000 for the Jennifer segment and includes $404,000 for
the Ashley segment. The decrease for the Jennifer segment was a result of a
reduction in marketing due to unfavorable advertising rates.


     Finance
fees increased $14,000 during the fiscal year ended August 25, 2007 compared to
the same period ended August 26, 2006.


     Other
administrative costs increased $394,000 during the fiscal year ended August 25,
2007 compared to the same period ended August 26, 2006.


     Selling,
general and administrative expenses for the fiscal year ended August 25, 2007
includes an increase of $885,000 consisting of compensation, advertising,
finance fees and other administrative costs related to our Ashley operating
segment, a decrease of $1,453,000 for the Jennifer segment and an increase of
$560,000 related to corporate activities.


Interest
Income


     Interest
income increased by $334,000 to $736,000 for the fiscal year ended August 25,
2007, as compared to $402,000 during the prior year. The increase is due
principally to more cash available for investing purposes and higher market
interest rates during the current fiscal year.


Income Tax
Expense


     We
reported income tax expense of $124,000 and $321,000 in fiscal 2007 and 2006,
respectively. The expense for 2007 consists principally of current state income
taxes since federal income taxes were substantially eliminated by utilization of
net operating loss carryforwards.


Income from Continuing
Operations


     The
income from continuing operations was $4,151,000 and $5,207,000 for the fiscal
year ended August 25, 2007 and August 26, 2006, respectively. The decline in
continuing operations is primarily attributable to $679,000 loss related to our
Ashley operating segment.


     During
fiscal 2007, we closed eight stores of which two were reported as discontinued
operations. During fiscal 2006, we closed three stores, of which all three were
reported as discontinued operations. The operating results of these 5 stores
were reported as discontinued operations for fiscal 2007 and 2006. Income (loss)
from discontinued operations, restated for store closings reported as
discontinued operations during fiscal 2008, amounted to $180,000 and ($13,000)
for the fiscal year ended August 25, 2007 and August 26, 2006,
respectively.


Liquidity and Capital Resources


     As of
August 30, 2008, we had an aggregate working capital of $2,818,000 compared to
an aggregate working capital of $7,359,000 at August 25, 2007 and had available
cash and cash equivalents of $9,057,000 at August 30, 2008 compared to
$8,375,000 at August 25, 2007. In addition, we had $1,400,000 available in
marketable securities at August 30, 2008 compared to $8,300,000 at August 25,
2007.


     The weighted average interest rate
over the term of our short-term borrowings is 8.65%.


     All
obligations of the related company and the unconsolidated licensees due as of
August 30, 2008, were paid based on the payment terms of 85 days from end of
month. However, at any given time, the related company owes us approximately $4
million for the services and goods we provide to it. We assume that like other
retailers and us, the related company has been adversely affected by the
economy. If the related company were unable to pay the amounts due to us, it
would have a material adverse effect on our cash flow and financial condition.
The related company also provides fabric protection services to our Jennifer
segment customers and, if the related company were unable to provide such
services, we would have to find an alternative provider in order to sell those
services to our customers in the future and would, as a matter of customer
relations, likely have to pay for such provider to supply services with respect
to previously sold fabric protection services.


17





     On July 11,
2005, we entered into a Credit Agreement (the “Credit Agreement) and a Security
Agreement (the “Security Agreement”) with Caye Home Furnishings, LLC (“Agent”),
Caye Upholstery, LLC and Caye International Furnishings, LLC
(collectively, “Caye”). Under the Credit Agreement, Caye agrees to make
available to us a credit facility (the “Caye Credit Facility”) of up to $10.0
million, effectively extending Caye’s payment terms for merchandise shipped to
us from 75 days to 105 days after receipt of goods. The amount available under
this facility may be reduced in the event that we do not maintain a specified
level of eligible accounts receivable, eligible inventory and cash in deposit
accounts. We must pay each extension of credit under the Credit Agreement within
105 days after receipt of goods. For the period between 75 and 105 days after
receipt of goods, the annual interest rate will be the prime rate plus 0.75%. If
the borrowings are not repaid after 105 days the interest rate increases to
prime plus 2.75%. On April 7, 2006, we amended the Credit Agreement. Under the
amendment to the Credit Agreement, Caye agreed to increase the Caye Credit
Facility from $10.0 million to $11.5 million.


     The
Credit Agreement contains various negative covenants restricting our ability to
enter into a merger or sale, make guarantees, pay dividends to common
stockholders, incur debt or take other actions, without the consent of the
Agent. In addition, the Credit Agreement provides for the following: a fixed
charge coverage ratio; a cross-default with certain other of our debt; appraisal
rights; periodic reporting requirements; and other customary terms. We may
terminate the Credit Agreement at any time, so long as all outstanding amounts
have been paid in full. We may also terminate the Credit Agreement if we have
(i) maintained a tangible net worth of at least $3.0 million for 180 days and
(ii) adjusted net earnings from continuing operations of at least $2.0 million
for four fiscal quarters.


     Pursuant
to the Security Agreement, so long as amounts are outstanding under the Credit
Agreement, Caye will have a first priority security interest in all of our
assets and properties, including inventory, accounts receivable and equipment,
as well as a license to our intellectual property in the event of a default.


     On
October 27, 2006, we entered into the Second Amendment to the Credit Agreement
and First Amendment to Security Agreement with Caye, pursuant to which such
agreements were amended to permit us to open and operate several licensed Ashley
Furniture HomeStores in New York.


     On July
7, 2007 we entered into the Third Amendment to the Credit Agreement and Second
Amendment to Security Agreement with Caye, pursuant to which such agreements
were amended to (1) increase the Caye Credit Facility from $11.5 million to
$13.5 million and (2) reduce the amount we are required by us to maintain in the
deposit account to a balance no less at all times from $2 million to $1 million
in the restricted deposit account.


     On April
3, 2008, the Company entered into the Fourth Amendment to the Credit Agreement
and Third Amendment to Security Agreement to (1) expand the scope of the Caye
Credit Facility to include Ashley stores in additional New York metropolitan
areas and (2) increase the amount of capital expenditures allowable in certain
New York metropolitan areas.


     As of August 30, 2008, we owed Caye
approximately $9,050,000, no portion of which exceeded the 75-day payment
terms.


      We have
obtained a waiver expiring on August 29, 2009, for breach of the
fixed charge coverage ratio in the Credit Agreement with Caye. Based on current
economic conditions it is uncertain we will be in compliance when the waiver
expires. If Caye does not extend the waiver, Caye will be entitled to stop
supplying us credit and to accelarate all amounts currently due to Caye. Caye
has advised us that, as a result of current economic conditions and conditions
in the credit market, it may substantially decrease the amount of inventory it
supplies us. Caye has indicated that it expects to continue to supply us at
least through the end of March 2009 but it is uncertain whether it will continue
after such date to take orders from us, except for orders from its domestic
factories, which represent approximately 5% of our business with Caye. Given the
time lag between the taking of orders and delivery, that means that after June
2009, we may need to get substantially all of our inventory from other
sources.


     The
Chinese company which currently manufactures approximately 95% of what we order
through Caye, has given us a letter agreement to the effect that if Caye stops
supplying us prior to November 12, 2009, it will, for at least a year
thereafter, supply us with goods and provide us 75 days to pay for those goods
without interest or penalty and an additional 30 days grace period on amounts
over 75 days at a per annum rate of 0.75% over prime, provided that in no event
will the amount payable by us exceed $10 million. This arrangement is
substantially the same as our current arrangement with Caye except that under
the Caye agreement we can owe up to $13.5 million.


     Settlement Agreements between us and the related company impact our
liquidity, capital resources and operations in a number of ways as more fully
discussed under “Certain Relationships and Related Transactions” in our Proxy
Statement to be furnished in connection with our Annual Meeting of Stockholders
to be held February 17, 2009, which is hereby incorporated by reference.


     The
transactions with the related company, including our assumption of the
warehousing responsibilities, adversely affected our operating results by
$617,000 in fiscal 2008 and improved our operating results by $759,000 in fiscal
2007 and $667,000 in fiscal 2006, compared to the results we would have achieved
based on the same sales levels under the agreements effective prior to the
Initial Operating Agreement as more fully described under the caption “Certain
Relationships and Related Transactions” in our Proxy Statement to be furnished
in connection with our Annual Meeting of Stockholders to be held February 17,
2009, which is hereby incorporated by reference.


18





     On
November 24, 2008, we entered into a fifth amendment to the warehousing
agreement with the related company which provides that effective January 2009,
the warehousing fee will be raised from 2.5% to 7.5% on the net sales price of
goods sold by the related company for a one-year period. Based on related
company delivered sales during the fiscal month end of January 2008 to the
fiscal month end of August 2008, this change would have equated to an additional
$826,000
of
income during our fiscal year ended August 30, 2008. We are assuming, however,
that the related company 's sales, like ours, may be lower than last year due to
current economic conditions and, therefore, the benefit for the fiscal year
ending August 29, 2009 may be less than $826,000.


     On
November 24, 2008, we entered into a fifth amendment to the management agreement
and license, pursuant to which the related company also agreed, for a one year
period commencing January 2009, to increase its advertising contribution from
$125,750 per month to $150,000 per month, an increase of $291,000 per year, and
to contribute an additional $180,000, in three monthly installments of $60,000,
beginning on January 15, 2009, for a planned television advertising campaign. In
addition, we eliminated the reductions to the related company's share of the
advertising costs, which reductions were tied to shortfalls in the related
company’s net delivered sales.


     The
credit card companies have, for the past several years, paid us shortly after
credit card purchases by our customers. However, they have indicated to us that
in light of current economic and credit conditions they are reexamining their
payment policies. Extensions of the time they take to pay us would adversely
affect our cash flow. In this connection, we have entered into an agreement with
one of our credit card companies for the interim period ending December 17,
2008, pursuant to which there will be a $500,000 reserve established as, in
effect, a performance bond against delivery by us of the merchandise ordered by
their credit card customers.


     Based on
the current level of operations at our stores, and after giving effect to cost
cutting programs we intend to implement, and the recently amended arrangements
with the related company described above, we anticipate that we will have the
capital resources to operate for at least the next 12 months. However, if
current economic and credit conditions prevail beyond the next year or worsen,
there would be significant doubt as whether we could continue to operate
significantly beyond that time without an infusion of capital or other measures,
the availability of which there can be no assurance.


Contractual Obligations and
Commitments


     The
following table sets forth our future contractual obligations in total, for each
of the next five years and thereafter, as of August 30, 2008. Such obligations
include the retail store and warehouse leases, the lease for the executive
office, written employment contracts for two of our executive officers, and
agreements to pay the related company royalties.



































































































































































































































(Dollars in
thousands)
       2009      2010      2011      2012      2013      Thereafter      Total
Operating leases for retail stores,
 
   warehouses and executive
office
  $ 17,549 $ 13,962 $ 10,983 $ 8,438 $ 5,996 $ 16,527 $ 73,455
Capital leases for equipment 54 54 44 26 17 24 219
Royalty payments to the related      
     company
(1)
400   400 400   400 400   4,667 6,667
Employment contracts   900             900
Fabric protection fees to the related          
     company
  600                 600
Total
contractual obligations
$ 19,503 $ 14,416 $ 11,427 $ 8,864 $ 6,413 $ 21,218 $ 81,841
____________________
 






(1)       The obligation to make these
payments terminates on the earliest of (i) the closing of the asset
acquisition following an exercise by us of our option to purchase
substantially all of the assets of the related company under the Option
Agreement; (ii) April 30, 2025, unless the parties extend the License
Term, in which case the date shall be December 31, 2049; (iii) the
termination of Manager’s role as manager under the Agreement; or (iv) on
such date as is determined by an arbitrator or a court. For purposes of
calculating the amount we have assumed the license will run out on April
30, 2025

     For the
fiscal years ended August 30, 2008 and August 25, 2007 we had $835,000 and
$1,635,000, respectively, in capital expenditures from continuing operations. We
currently anticipate capital expenditures of approximately $400,000 during
fiscal 2009 to open a third Ashley HomeStore and to refurbish existing
facilities. We do not anticipate needing outside financing for such capital
expenditures.


19





Critical Accounting Policies


     Our
consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles. Preparation of financial statements
requires us to make estimates and assumptions affecting the reported amounts of
assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities. We use our historical experience and other relevant
factors when developing our estimates and assumptions, which we continually
evaluate. Note 2, Summary of Significant Accounting Policies, of the Notes to
Consolidated Financial Statements, included in Item 8, Financial Statements and
Supplementary Data, of this Annual Report on Form 10-K includes a discussion of
our significant accounting policies. The following accounting policies are those
we consider critical to an understanding of the consolidated financial
statements because their application places the most significant demands on our
judgment. Our financial results might have been different if other assumptions
had been used or other conditions had prevailed.


Calculation of the Liability for
Lease Termination Costs


     When
leased properties are no longer used for operating purposes, we recognize a
liability for the difference between our future lease payments and related costs
from the date of closure through the end of the remaining lease term, net of
contractual or estimated sublease rental income. Inherent in the calculation of
accrued lease termination costs are significant management judgments and
estimates, including estimates of the amount and timing of future sublease
revenues and the timing and duration of future vacancy periods. We review these
judgments and estimates on a quarterly basis and make appropriate revisions.
Fluctuations in the economy and in the marketplace demand for commercial
properties can result in material changes in the liability for lease termination
costs.


Goodwill and Other Identified
Intangible Assets


     We review
goodwill for impairment annually during the fourth quarter of each year, and
also between annual tests upon the occurrence of trigger events. The reviews are
performed at the reporting unit level. Generally fair value represents
discounted projected future cash flows. Impairment is indicated when the
carrying value of a reporting unit including goodwill exceeds its fair value.
Under such circumstances, the fair value of a reporting unit is subsequently
measured against the fair value of its underlying assets and liabilities,
excluding goodwill, to estimate an implied fair value of the reporting unit
goodwill. Impairment loss is recognized for any excess of the carrying value of
the reporting unit’s goodwill over the implied fair value.


     The
performance of the goodwill impairment test is subject to significant judgment
in determining the fair value of reporting units, the estimation of future cash
flows, the estimation of discount rates, and other assumptions. Changes in these
estimates and assumptions could have a significant impact on the fair value
and/or goodwill impairment of each reporting unit.


Income Taxes


     Some
deductions for tax return purposes are taken when the expenses are actually
paid, rather than when the expenses are recorded for book purposes. We accrue
for the tax benefit expected to be received in future years if, in our judgment,
it is more likely than not that we will receive such benefits. The amount and
timing of certain current deductions require interpretation of tax laws. We
estimate and accrue income tax contingencies for differences in interpretation
that may exist with tax authorities. Quarterly, we evaluate income tax
contingency accruals and the likelihood the benefits of a deferred tax asset
will be realized. We consider a variety of factors, including the nature and
amount of tax income and expense items, the current tax statutes, the current
status of audits performed by tax authorities and the projected future earnings.


     We record
a valuation allowance to reduce our deferred tax assets to the amount that we
believe it is more likely than not to be realized. While we have considered
future taxable income and ongoing feasible tax planning strategies in assessing
the need for the valuation allowance, we are unable to conclude that it is more
likely than not that we would be able to realize our net deferred tax assets in
the future. Should we determine that we would be able to realize our deferred
tax assets in the future, an adjustment to the deferred tax assets would
increase income in the period such determination was made.


Inflation


     There was
no significant impact on our operations as a result of inflation during the
three fiscal years ended August 26, 2006, August 25, 2007 and August 30, 2008.


Off-Balance Sheet Arrangements


     We have not entered into any
off-balance sheet arrangements.


20





Item 7A. Quantitative and Qualitative Disclosures about Market
Risk


     We are not exposed to market risks
relating to fluctuations in interest rates and foreign currency exchange rates.


     We have no borrowings and all
purchases of imported goods are denominated in United States dollars.


Item 8. Financial Statements and Supplementary Data.


     The consolidated financial
statements and supplementary data required in this item are set forth on the
pages indicated in Item 15(a)(1).


Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
.


     None.


Item 9A. Controls and Procedures.


     Management’s Report on Disclosure Controls and Procedures.
Our management, including our Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”), conducted an evaluation of the
effectiveness of disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)) as of the end of the period covered by this
report. Based on such evaluation, the CEO and CFO have concluded that, as of
August 30, 2008, our disclosure controls and procedures were effective in
ensuring that material information relating to us (including our consolidated
subsidiaries), which is required to be disclosed by us in our periodic reports
filed or submitted under the Exchange Act is (i) recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms, and
(ii) accumulated and communicated to management, including the CEO and CFO, as
appropriate, to allow timely decisions regarding required
disclosure.


     Management’s Report on Internal Control over Financial
Reporting
. Our management is responsible for
establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f). Under the
supervision and with the participation of management, including the CEO and CFO,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in
Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). Based on that evaluation, management concluded that our
internal control over financial reporting was effective as of August 30,
2008.


     Changes in Internal Controls. There
were no changes in our internal controls over financial reporting, identified in
connection with the evaluation of such internal controls that occurred during
our last fiscal quarter, that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial reporting.


Item 9B. Other Information.


     On
November 24, 2008, we entered into a fifth amendment to the Warehousing
Agreement among the private company, Jennifer Warehousing, Inc., our wholly
owned subsidiary, and us dated as of July 6, 2001, as amended, which amendment
provides that effective January 2009, the warehousing fee payable to us by the
private company will be raised from 2.5% to 7.5% on the net sales price of goods
sold by the related company for a one-year period.


     On
November 24, 2008, we entered into a fifth amendment to the Management Agreement
and License among the private company, Jennifer Acquisition Corp., Inc., our
wholly-owned subsidiary, and us, dated as of July 6, 2001, as amended. Pursuant
to the amendment, the related company has agreed, for a one year period
commencing January 2009, to increase its advertising contribution from $125,750
per month to $150,000 per month, an increase of $291,000 per year, and to
contribute an additional $180,000, in three monthly installments of $60,000,
beginning on January 15, 2009, for a planned television advertising campaign. In
addition, we eliminated the reductions to the related company's share of the
advertising costs, which reductions were tied to shortfalls in the related
company’s net delivered sales.


21





PART III


Item 10. Our Directors and Executive Officers and Corporate
Governance
.


     The
information set forth under the caption “Management” in our Proxy Statement to
be furnished in connection with our Annual Meeting of Stockholders to be held
February 17, 2009 is hereby incorporated by reference.


Item 11. Executive Compensation.


     The
information set forth under the caption “Executive Compensation” in our Proxy
Statement to be furnished in connection with our Annual Meeting of Stockholders
to be held February 17, 2009 is hereby incorporated by reference.


Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
.


     The
information set forth under the caption “Security Ownership of Certain
Beneficial Owners and Management” in our Proxy Statement to be furnished in
connection with our Annual Meeting of Stockholders to be held February 17, 2009
is hereby incorporated by reference. Please see “Item 5. Market for Registrant’s
Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities”
for the information required by Item 201(d) of Regulation S-K with respect to
Equity Compensation Plan Information.


Item 13. Certain Relationships and Related Transactions, and Director
Independence
.


     The
information set forth under the captions “Certain Relationships and Related
Transactions” and “The Board and Its Committees” in our Proxy Statement to be
furnished in connection with our Annual Meeting of Stockholders to be held
February 17, 2009 is hereby incorporated by reference.


Item 14. Principal Accountant Fees and Services.


     The
information set forth under the caption “Principal Accountant Fees and Services”
in our Proxy Statement to be furnished in connection with our Annual Meeting of
Stockholders to be held February 17, 2009 is hereby incorporated by
reference.


PART IV


Item 15. Exhibits and Financial Statement Schedules.


     (a) (1) Financial Statements.


     The financial statements required by
this item are submitted in a separate section beginning on Page F-1 of this
report.


         (2)
Financial Statement Schedules.


     Schedule II Valuation and Qualifying
accounts


All other
schedules have been omitted because of the absence of conditions under which
they are required or because the required information is included in the
financial statements or notes thereto.


22





























































































































(3) Exhibits.
   
3.1     

Certificate of Incorporation,
incorporated herein by reference to Exhibit 3.1 to our Registration
Statement — File Nos. 33-22214 and 33-10800.

 
3.2   

Certificate of Designations,
Preferences and Rights of Series A Preferred Stock, incorporated herein by
reference to Exhibit 3.2 to our Annual Report on Form 10-K for the year
ended August 30, 1997.

 
3.3  

Certificate of Designations,
Preferences and Rights of Series B Preferred Stock, incorporated herein by
reference to Exhibit 3.3 to our Annual Report on Form 10-K for the year
ended August 29, 1998.

 
3.4  

By-Laws, incorporated herein by
reference to Exhibit 3.2 to our Annual Report on Form 10-K for the year
ended August 26, 1995.

 
4.1  

Form of Non-Qualified Stock
Option Agreement with certain directors and officers of Jennifer
Convertibles, Inc. incorporated herein by reference to our Quarterly
Report on Form 10-Q for the quarterly period ended March 1,
2003.

     
4.2  

Form of Non-Qualified Stock
Option Agreement with certain employees and consultants of Jennifer
Convertibles, Inc. incorporated herein by reference to our Quarterly
Report on Form 10-Q for the quarterly period ended March 1,
2003.

     
10.1  

Incentive and Non-Qualified Stock
Option Plan, incorporated herein by reference to Exhibit 10.4 to the
Registration Statement.

 
10.2  

Amended and Restated 1991
Incentive and Non-Qualified Stock Option Plan incorporated herein by
reference to Exhibit 10.29 to the Registration Statement on Form
S-2.

 
10.3  

Warehousing Agreement, dated as
of December 31, 1993, between Jennifer Convertibles, Inc. and Jennifer
Warehousing, Inc., incorporated herein by reference to our Quarterly
Report on Form 10-Q for the quarterly period ending February 26,
1994.

 
10.4  

Purchasing Agreement, dated as of
December 31, 1993, between Jennifer Convertibles, Inc. and Jara
Enterprises, Inc., incorporated herein by reference to our Quarterly
Report on Form 10-Q for the quarterly period ending February 26,
1994.

  
10.5  

Advertising Agreement, dated as
of December 31, 1993, between Jennifer Convertibles, Inc. and Jara
Enterprises, Inc., incorporated herein by reference to our Quarterly
Report on Form 10-Q for the quarterly period ending February 26,
1994.

 
10.6  

Amendment No. 1 to Warehousing
Agreement, dated as of May 28, 1994, amending the Warehousing Agreement
referred to in 10.3 and the related Rebate Note, incorporated herein by
reference to Exhibit 10.34 to our Annual Report on Form 10- K for the
fiscal year ended August 27, 1994.

 
10.7  

Amendment No. 1 to Purchasing
Agreement, dated as of May 28, 1994, amending the Purchasing Agreement
referred to in 10.4. incorporated herein by reference to Exhibit 10.35 to
our Annual Report on Form 10-K for the fiscal year ended August 27,
1994.

 
10.8  

License Agreement, dated as of
October 28, 1993, between Jennifer Licensing Corp. and Jara Enterprises,
Inc., incorporated herein by reference to Exhibit 2 to our Current Report
on Form 8-K dated November 30, 1993.

 
10.9  

Agreement, dated as of May 19,
1995, among Jennifer Convertibles, Inc., Jennifer Purchasing Corp., Jara
Enterprises, Inc. and the licensees signatory thereto, incorporated herein
by reference to Exhibit 10.38 to our Annual Report on Form 10- K for the
fiscal year ended August 26, 1995.

 
10.10  

Agreement, dated as of November
1, 1995, among Jennifer Convertibles, Inc., Jennifer Purchasing Corp.,
Jara Enterprises, Inc. and the licensees signatory thereto, incorporated
herein by reference to Exhibit 10.39 to our Annual Report on Form 10- K
for fiscal year ended August 26, 1995.

 
10.11  

Form of Note, dated November
1994, made by Jara Enterprises, Inc. to Harley J. Greenfield and Edward B.
Seidner, incorporated herein by reference to Exhibit 10.43 to our Annual
Report on Form 10-K for the fiscal year ended August 26,
1995.

  
10.12  

Form of Option, dated November 7,
1994 to purchase common stock from Fred Love, Jara Enterprises, Inc. and
certain subsidiaries to Harley J. Greenfield and Fred Love, incorporated
herein by reference to Exhibit 10.44 to our Annual Report on Form 10-K for
the fiscal year ended August 26, 1995.



23





































































































(3) Exhibits.
   
10.13     

Form of Subordination Agreement,
dated as of August 9, 1996, by Harley J. Greenfield and Edward B. Seidner,
incorporated herein by reference to Exhibit 10.45 to our Annual Report on
Form 10-K for the fiscal year ended August 26, 1995.

 
10.14   

Credit and Security Agreement,
dated as of March 1, 1996, among Klaussner Furniture Industries, Inc.,
Jennifer Convertibles, Inc. and the other signatories thereto,
incorporated herein by reference to Exhibit 4 to our Current Report on
Form 8-K dated March 18, 1996.

 
10.15  

1997 Stock Option Plan,
incorporated herein by reference to Exhibit 10.29 to our Annual Report on
Form 10-K for the fiscal year ended August 31, 1997.

 
10.16  

Stock Purchase Agreement, dated
December 11, 1997, between Klaussner and Jennifer Convertibles, Inc.,
incorporated herein by reference to Exhibit 10.30 to our Annual Report on
Form 10-K for fiscal year ended August 30, 1997.

 
10.17  

Registration Rights Agreement,
dated December 11, 1997, between Klaussner and Jennifer Convertibles,
Inc., incorporated herein by reference to Exhibit 10.31 to our Annual
Report on Form 10-K for fiscal year ended August 30,
1997.

     
10.18  

Waiver and Modification
Agreement, dated December 11, 1997, among Klaussner and related entities
and Jennifer Purchasing Corp., Jennifer Convertibles, Inc., Jennifer
Licensing Corp., and Jennifer L.P. III,
incorporated herein by reference to Exhibit 10.32 to our Annual Report on
Form 10-K for the fiscal year ended August 30,
1997.

     
10.19  

L.P. and Option Purchase and
Termination Agreement, dated as of August 20, 1999, among Jennifer
Convertibles, Inc., Jennifer Chicago Ltd., an Illinois corporation and a
wholly-owned subsidiary of Jennifer Convertibles, Inc., Jenco Partners,
L.P., a limited partnership, which is the sole limited partner of Jennifer
Chicago, L.P., a Delaware Limited partnership, JCI Consultant, L.P., a
limited partnership which owned certain options to purchase capital stock
of Jennifer Convertibles, Inc., Selig Zises, a principal of Jenco
Partners, L.P. and JCI Consultant, L.P., Jay Zises, Jara Enterprises,
Inc., Fred J. Love, and, Harley J. Greenfield and Edward B. Seidner,
incorporated herein by reference to our Current Report on Form 8-K dated
August 20, 1999 and filed September 3, 1999 reporting on an Item 5
event.

 
10.20  

General Release, made as of
August 20, 1999, by JCI Consultant, L.P., Jenco Partners L.P., Jay Zises
and Selig Zises for the benefit of Jennifer Convertibles, Inc., Jennifer
Chicago Ltd., Jara Enterprises, Inc., Harley J. Greenfield, Fred J. Love
and Edward B. Seidner, incorporated herein by reference to our Current
Report on Form 8-K dated August 20, 1999 and filed September 3, 1999
reporting on an Item 5 event.

 
10.21  

General Release, made as of
August 20, 1999, by Jennifer Convertibles, Inc., Jennifer Chicago Ltd.,
Jara Enterprises, Inc., Harley J. Greenfield, Fred J. Love an Edward B.
Seidner for the benefit of JCI Consultant, L.P., Jenco Partners L.P., Jay
Zises and Selig Zises, incorporated herein by reference to our Current
Report on Form 8-K dated August 20, 1999 and filed September 3, 1999
reporting on an Item 5 event.

 
10.22  

Note, dated as of September 1,
1999, in the principal amount of $447,000 to the order of Jenco Partners,
L.P. from Jennifer Convertibles, Inc., incorporated herein by reference to
our Current Report on Form 8-K dated August 20, 1999 and filed September
3, 1999 reporting on an Item 5 event.

  
10.23  

Employment Agreement, dated as of
August 15, 1999, between Harley J. Greenfield and Jennifer Convertibles,
Inc. incorporated herein by reference to our Annual Report on Form 10-K
for the fiscal year ended August 28, 1999.

 
10.24  

Employment Agreement, dated as of August 15,
1999, between Rami Abada and Jennifer Convertibles, Inc., as amended,
incorporated herein by reference to our Annual Report on Form 10-K for the
fiscal year ended August 28, 1999.

 
10.25   Agreement,
dated as of September 1, 1999, between Jennifer Convertibles, Inc. and
Jara Enterprises, Inc. incorporated herein by reference to our Annual
Report on Form 10-K for the fiscal year ended August 28,
1999.
 
10.26   Agreement,
dated as of September 1, 1999 between Jennifer Convertibles, Inc. and Jara
Enterprises, Inc. incorporated herein by reference to our Annual Report on
Form 10-K for the fiscal year ended August 28,
1999.

24























































































































(3) Exhibits.
   
10.27     

Loan Agreement dated as of
December 8, 1999, between Jennifer Convertibles, Inc. and Klaussner
Furniture Industries, Inc. incorporated herein by reference to our Annual
Report on Form 10-K for the fiscal year ended August 28,
1999.

 
10.28   

Stock Option Agreement dated as
of December 8, 1999, between Harley J. Greenfield and Klaussner Furniture
Industries, Inc. incorporated herein by reference to our Annual Report on
Form 10-K for the fiscal year ended August 28, 1999.

 
10.29  

Registration Rights Agreement,
dated as of December 10, 1999, by Jennifer Convertibles, Inc. in favor of
Harley J. Greenfield in connection with the Stock Option Agreement, dated
as of December 8, 1999 incorporated herein by reference to our Annual
Report on Form 10-K for the fiscal year ended August 28,
1999.

 
10.30  

Interim Operating Agreement dated
as of July 6, 2001 by and between Jennifer Convertibles, Inc., a Delaware
corporation (“JCI”) and Jara Enterprises, Inc. (“Jara”) incorporated
herein by reference to our Quarterly Report on Form 10-Q for the quarterly
period ended May 26, 2001.

 
10.31  

Omnibus Agreement dated as of
July 6, 2001 by and between JCI and Jara incorporated herein by reference
to our Quarterly Report on Form 10-Q for the quarterly period ended May
26, 2001.

     
10.32  

Clarkstown Term Note in the
amount of $54,525 made as of May 26, 2001 by Jara in favor of JCI
incorporated herein by reference to our Quarterly Report on Form 10-Q for
the quarterly period ended May 26, 2001.

     
10.33  

Rudzin-Bronx Term Note in the
amount of $43,496 made as of May 26, 2001 by Jara in favor of JCI
incorporated herein by reference to our Quarterly Report on Form 10-Q for
the quarterly period ended May 26, 2001.

 
10.34  

Elmhurst Term Note in the amount
of $5,234 made as of May 26, 2001 by Jara in favor of JCI incorporated
herein by reference to our Quarterly Report on Form 10-Q for the quarterly
period ended May 26, 2001.

 
10.35  

Warehousing Transition Agreement
dated as of July 6, 2001 by and among JCI, Jennifer Warehousing, Inc., a
New York corporation (“JWI”), Jennifer Convertibles, Inc., a New York
corporation (“JCI-NY”) and Jennifer-CA Warehouse, Inc. (“JCA”)
incorporated herein by reference to our Quarterly Report on Form 10-Q for
the quarterly period ended May 26, 2001.

 
10.36  

Warehousing Agreement dated as of
July 6, 2001 by and among JCI, Jennifer Warehousing, Inc., a Delaware
corporation and a wholly owned subsidiary of JCI (“New Warehousing”) and
Jara incorporated herein by reference to our Quarterly Report on Form 10-Q
for the quarterly period ended May 26, 2001.

  
10.37  

Hardware Lease dated as of July
6, 2001 by and between JCI and Jara incorporated herein by reference to
our Quarterly Report on Form 10-Q for the quarterly period ended May 26,
2001.

 
10.38  

Software License Agreement dated
as of July 6, 2001 by and among JCI and Jara incorporated herein by
reference to our Quarterly Report on Form 10-Q for the quarterly period
ended May 26, 2001.

 
10.39  

Management Agreement and License
dated as of July 6, 2001 by and among Jara, JCI, Jennifer Acquisition
Corp. (“JAC”) and Fred Love (with respect to Sections 3.3 and 4.2 only)
incorporated herein by reference to our Quarterly Report on Form 10-Q for
the quarterly period ended May 26, 2001.

 
10.40  

Purchasing Agreement dated as of
July 6, 2001 by and between JCI and Jara incorporated herein by reference
to our Quarterly Report on Form 10-Q for the quarterly period ended May
26, 2001.

 
10.41  

Option Agreement dated as of July
6, 2001 by and among Jara, Fred J. Love and JCI incorporated herein by
reference to our Quarterly Report on Form 10-Q for the quarterly period
ended May 26, 2001.

 
10.42  

L.P. Purchase Agreement dated as
of July 6, 2001 by and among JCI, Jennifer Management III, Ltd., Jennifer
Management IV Corp. and Jennifer Management V Ltd., and Jara incorporated
herein by reference to our Quarterly Report on Form 10-Q for the quarterly
period ended May 26, 2001.

 
10.43  

Indemnification Agreement dated
as of July 6, 2001 by and among JCI and, with respect to Sections 11, 12
and 14 only: JWI; JCI-NY; JCA; and Jara incorporated herein by reference
to our Quarterly Report on Form 10-Q for the quarterly period ended May
26, 2001.


25

















































































































(3) Exhibits.
   
10.44     

Side Letter regarding Fairness
Opinion dated as of July 6, 2001 by and between JCI and Jara incorporated
herein by reference to our Quarterly Report on Form 10-Q for the quarterly
period ended May 26, 2001.

 
10.45   

Agreement dated as of July 6,
2001 by and between Harley J. Greenfield, Edward B. Seidner and JCI
incorporated herein by reference to our Quarterly Report on Form 10-Q for
the quarterly period ended May 26, 2001.

 
10.46  

Audit Committee Charter
incorporated herein by reference to our Quarterly Report on Form 10-Q for
the quarterly period ended February 23, 2002.

 
10.47  

Amendment No. 1 to Management
Agreement and License by and among Jara Enterprises, Inc., Jennifer
Convertibles, Inc., Fred Love and Jennifer Acquisition Corp. incorporated
herein by reference to our Quarterly Report on Form 10-Q for the quarterly
period ended May 25, 2002.

 
10.48  

Amendment No. 1 to Warehousing
Agreement by and between Jara Enterprises, Inc. and Jennifer Convertibles,
Inc. incorporated herein by reference to our Quarterly Report on Form 10-Q
for the quarterly period ended May 25, 2002.

     
10.49  

Termination Agreement and
Release, by and among Klaussner Furniture Industries, Inc., Jennifer
Convertibles, Inc. and the other signatories thereto incorporated herein
by reference to our Current Report on Form 8-K filed on May 13, 2003
reporting as an Item 5 event.

     
10.50  

Amendment No. 2 to Warehousing
Agreement, by and between Jara Enterprises, Inc. and Jennifer
Convertibles, Inc. incorporated herein by reference to our Current Report
on Form 8-K filed on May 13, 2003 reporting as an Item 5
event.

 
10.51  

Amendment No. 2 to Management
Agreement and License, by and between Jara Enterprises, Inc., Jennifer
Convertibles, Inc., Fred Love and Jennifer Acquisition Corp., incorporated
herein by reference to our Quarterly Report on Form 10-Q for the quarterly
period ended May 31, 2003.

 
10.52  

Termination Agreement by and
between Jennifer Convertibles, Inc., Harley Greenfield and Edward Seidner,
incorporated herein by reference to our Annual Report on Form 10-K for the
fiscal year ended August 30, 2003.

 
10.53  

Jennifer Convertibles, Inc. 2003
Stock Option Plan, incorporated herein by reference to our Proxy Statement
on Schedule 14A filed on August 11, 2003.

  
10.54  

Purchase Administration Fee
Agreement by and between Jennifer Convertibles, Inc. and Jara Enterprises,
Inc. incorporated herein by reference to our Quarterly Report on Form 10-Q
for the quarterly period ended May 31, 2004.

 
10.55  

Customer Service Administration
Fee Agreement by and between Jennifer Convertibles, Inc. and Jara
Enterprises, Inc. incorporated herein by reference to our Quarterly Report
on Form 10-Q for the quarterly period ended May 31, 2004.

 
10.56  

Amendment No. 3 to Management
Agreement and License, by and between Jara Enterprises, Inc., Jennifer
Convertibles, Inc. and Jennifer Acquisition Corp. incorporated herein by
reference to our Annual Report on Form 10-K for the fiscal year ended
August 28, 2004.

 
10.57  

Warrant dated as of March 30,
2005 incorporated herein by reference to our Quarterly Report on Form 10-Q
for the quarterly period ended February 26, 2005.

 
10.58  

Executive Compensation
Arrangements incorporated herein by reference to our Quarterly Report on
Form 10-Q for the quarterly period ended February 26,
2005.

 
10.59  

Director Compensation
Arrangements incorporated herein by reference to our Quarterly Report on
Form 10-Q for the quarterly period ended February 26,
2005.


26











































































































(3) Exhibits.
   
10.60     

Credit Agreement by and among
Jennifer Convertibles, Inc., Caye Home Furnishings, LLC, Caye Upholstery,
LLC and Caye International Furnishings, LLC incorporated herein by
reference to our Quarterly Report on Form 10-Q for the quarterly period
ended May 28, 2005.

 
10.61   

Security Agreement by and among
Jennifer Convertibles, Inc., Caye Home Furnishings, LLC, Caye Upholstery,
LLC and Caye International Furnishings, LLC incorporated herein by
reference to our Quarterly Report on Form 10-Q for the quarterly period
ended May 28, 2005.

 
10.62  

Amendment No.3 to Warehousing
Agreement, by and among Jennifer Convertibles, Inc., Jennifer Warehousing,
Inc., and Jara Enterprises, Inc. incorporated herein by reference to our
Annual Report on Form 10-K for the fiscal year ended August 27,
2005.

 
10.63  

First Amendment to Credit
Agreement incorporated herein by reference to our Quarterly Report on Form
10-Q for the quarterly period ended February 25, 2006.

 
10.64  

Amendment No. 4 to Management
Agreement and License, by and between Jara Enterprises, Inc., Jennifer
Convertibles, Inc. and Jennifer Acquisition Corp. incorporated herein by
reference to our Current Report on Form 8-K filed on October 18, 2006
reporting as an Item 1.01 event.

     
10.65  

Second Amendment to Credit
Agreement and First Amendment to Security Agreement by and among Caye Home
Furnishings, LLC, Caye Upholstery, LLC, Caye International Furnishings,
LLC incorporated herein by reference to our Current Report on Form 8-K
filed on November 2, 2006 reporting as an Item 1.01
event.

     
10.66  

Ashley Homestores, Ltd. Trademark
Usage Agreement by and between Hartsdale Convertibles, Inc. (a wholly
owned subsidiary of Jennifer Convertibles, Inc.) and Ashley Homestores,
Ltd. incorporated herein by reference to our Current Report on Form 8-K
filed on November 2, 2006 reporting as an Item 1.01
event.

 
10.67  

Third Amendment to Credit
Agreement and Second Amendment to Security Agreement by and among Caye
Home Furnishings, LLC, Caye Upholstery, LLC, Caye International
Furnishings, LLC incorporated herein by reference to our Quarterly Report
on Form 10-Q for the quarterly period ended May 26, 2007.

 
10.68  

Fourth Amendment to Credit
Agreement and Third Amendment to Security Agreement by and among Caye Home
Furnishings, LLC, Caye Upholstery, LLC, Caye International Furnishings,
LLC incorporated herein by reference to our Quarterly Report on Form 10-Q
for the quarterly period ended February 23, 2008.

 
10.69  

Amendment No. 4 to Warehousing
Agreement, by and among Jennifer Convertibles, Inc., Jennifer Warehousing,
Inc., and Jara Enterprises, Inc. incorporated herein by reference to our
Current Report on Form 8-K filed on August 21, 2008 reporting as an Item
1.01 event.

  
10.70  

Amendment No. 5 to Warehousing
Agreement, by and among Jennifer Convertibles, Inc., Jennifer Warehousing,
Inc., and Jara Enterprises, Inc.*

 
10.71  

Amendment No. 5 to Management
Agreement and License, by and among Jara Enterprises, Inc., Jennifer
Convertibles, Inc. and Jennifer Acquisition Corp.*

 
14  

Corporate Code of Conduct and
Ethics incorporated herein by reference to our Annual Report on Form 10-K
for the fiscal year ended August 28, 2004.

 
21.1  

Subsidiaries, incorporated herein
by reference to Exhibit 22.1 to our Annual Report on Form 10-K for fiscal
year ended August 27, 1994.

 
23.1  

Consent of Eisner LLP.
*


27







































(3) Exhibits.
 
31.1       Certification of Chief Executive
Officer. *
 
31.2   Certification of Chief Financial
Officer. *
 
32.1   Certification of Principal
Executive Officer pursuant to U.S.C. Section 1350.*
 
32.2   Certification of Principal
Financial Officer pursuant to U.S.C. Section 1350.*
 

* Filed herewith.


     (b) Exhibits.


     See (a) (3) above.


     (c) Financial Statement
Schedules
.


     See (a) (2) above.


28





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES


Index to Financial Statements and
Financial Statement Schedule



















































Report of
Independent Registered Public Accounting Firm
 
F-1 
 
Consolidated
Balance Sheets at August 30, 2008 and August 25, 2007
 
F-2 
 
Consolidated
Statements of Operations for the years ended August 30, 2008,
 
 
     August 25, 2007 and August 26, 2006  F-3 
 
Consolidated
Statements of Stockholders' Equity for the years ended
 
 
     August 30, 2008, August 25, 2007 and August 26, 2006 
F-4 
 
Consolidated
Statements of Cash Flows for the years ended
 
 
     August 30, 2008, August 25, 2007 and August 26, 2006 
F-5 
 
Notes to
Consolidated Financial Statements
 
F-6 
 
Schedule II
Valuation and Qualifying Accounts
 
F-30


29





REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM


To the Board of Directors and
Shareholders of
Jennifer Convertibles, Inc.
Woodbury, New York


We have audited the accompanying
consolidated balance sheets of Jennifer Convertibles, Inc. and subsidiaries (the
"Company") as of August 30, 2008 and August 25, 2007, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended August 30, 2008. Our audits also
included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.


We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Company's internal
control over financial reporting. Our audits include consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.


In our opinion, the financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of Jennifer Convertibles, Inc. and subsidiaries
as of August 30, 2008 and August 25, 2007, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
August 30, 2008, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.


As described in Note 3, the Company has
significant transactions with a related company.













New York, New
York
 
November 26,
2008
 

F-1





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except for share
data)

































































































































































































































































































































































































































































     August 30, 2008      August 25, 2007
ASSETS
Current
assets:
       Cash and cash
equivalents
$     9,057     $     8,375
       Marketable auction rate
securities
  8,300
       Restricted cash 1,116 1,076
       Accounts receivable 779 855
       Merchandise inventories,
net
10,646 14,391
       Due from Related
Company
4,063 4,834
       Prepaid expenses and other
current assets
1,508 1,235
             
Total current assets
27,169 39,066
 
Marketable auction rate securities 1,400
Store fixtures,
equipment and leasehold improvements, at cost, net
3,202 3,377
Goodwill 1,650 1,650
Other assets (primarily
security deposits)
691 706
$ 34,112 $ 44,799
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
liabilities:
       Accounts payable, trade
(including $892 and $1,317 to a stockholder)
$ 12,932 $ 19,718
       Customer deposits 6,493 6,543
       Accrued expenses and other
current liabilities
3,892 4,183
       Due to Related
Company
400 550
       Deferred rent and allowances -
current portion
634 713
             
Total current liabilities
24,351 31,707
 
Deferred rent and allowances, net of current portion 2,905 2,948
Obligations under
capital leases, net of current portion
139 119
             
Total liabilities
27,395 34,774
 
Commitments and contingencies (Notes 14 and 15)
 
Stockholders' Equity:
       Preferred stock, par value
$.01 per share
             
Authorized 1,000,000 shares
             
Series A Convertible Preferred - issued and outstanding 6,490
             
shares at August 30, 2008 and August 25, 2007
             
(liquidation preference $3,245)
             
Series B Convertible Preferred - issued and outstanding 47,989
             
shares at August 30, 2008 and August 25, 2007
             
(liquidation preference $240)
1 1
       Common stock, par value $.01
per share
             
Authorized 12,000,000 shares; issued and outstanding 7,073,466
             
shares at August 30, 2008 and August 25, 2007
70 70
       Additional paid-in
capital
29,626 29,605
       Accumulated deficit (22,980 ) (19,651 )
6,717 10,025
$ 34,112 $ 44,799


See Notes to Consolidated Financial
Statements.


F-2





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except
for share data)



































































































































































































































































































































































































































































































































































Year ended Year ended Year ended
August 30, 2008 August 25, 2007 August 26, 2006
     (53 weeks)      (52 weeks)      (52 weeks)
Revenue:
       Net sales $     113,851 $     125,300 $     127,875
       Revenue from service
contracts
7,114 8,652   9,252
  120,965 133,952 137,127
Cost of
sales, including store occupancy,
       warehousing, delivery and
service costs
85,503 92,045 93,711
Selling, general and
administrative expenses
38,009 37,452   37,460
Depreciation and amortization 1,008 902 804
  124,520 130,399 131,975
(Loss)
income from operations
(3,555 ) 3,553 5,152
Interest
income
521 736 402
Interest expense (16 ) (14 ) (26 )
(Loss) income from
continuing operations before income taxes
(3,050 )   4,275 5,528
Income
tax expense
10   124 321
(Loss) income from
continuing operations
  (3,060 ) 4,151 5,207
(Loss)
income from discontinued operations
 
       (including (loss) income on
store closings of ($84) and
 
       $180 for 2008 and 2006,
respectively)
(269 ) (180 ) 13
 
Net
(loss) income
$ (3,329 ) $ 3,971 $ 5,220
 
 
Basic
(loss) income per common share:
       (Loss) income from continuing
operations
$ (0.43 ) $ 0.53 $ 0.71
       (Loss) income from
discontinued operations
(0.04 ) (0.02 ) 0.00
       Net (loss) income $ (0.47 ) $ 0.51 $ 0.71
 
Diluted
(loss) income per common share:
       (Loss) income from continuing
operations
$ (0.43 ) $ 0.47 $ 0.62
       (Loss) income from
discontinued operations
(0.04 ) (0.02 ) 0.00
       Net (loss) income $ (0.47 ) $ 0.45 $ 0.62
 
 
Weighted average common shares outstanding 7,073,466 6,910,523 6,043,157
Weighted average common
shares issuable on conversion of
       outstanding Series A
participating preferred stock
924,500 1,292,269
 
Total
weighted average common shares basic
7,073,466 7,835,023 7,335,426
Effect of potential
common share issuance:
       Stock options 847,359 886,152
       Warrants 81,635 70,497
       Series B convertible preferred
stock
54,265 57,915
 
Weighted average common shares diluted 7,073,466 8,818,282 8,349,990


See Notes to Consolidated Financial
Statements.


F-3





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Consolidated Statements of
Stockholders' Equity
Years
Ended
August 30, 2008, August 25, 2007 and
August 26, 2006
(In
thousands, except for share
data)






































































































































































































































































































































































































































































































































































































































































































































































Preferred stock Preferred stock Additional
Series A Series B Common stock paid-in Accumulated
    Shares     Par Value     Shares     Par Value     Shares     Par Value     capital     (deficit)     Totals
Balances at August 27, 2005 10,000 $   57,381 $   1 5,793,058 $   58 $   27,935 $   (28,842 ) $   (848 )
Conversion of Series A
preferred stock
(3,510 ) 500,000 5 (5 )  
Issuance of Series B preferred stock 31,499 131   131
Dividends paid on Series
B
     preferred stock (50 )     (50 )
Exercise of stock options 494,878 5 1,080 1,085
Non cash compensation
to consultant
21     21
Net
income
5,220 5,220
Balances at August 26,
2006
6,490 88,880 1 6,787,936   68   29,112 (23,622 ) 5,559
Conversion of Series B preferred stock         (40,891 )       28,523    
Dividends paid on Series
B
     preferred stock (48 ) (48 )
Other
distributions in connection with
     conversion of Series B
     preferred stock (5 ) (5 )
Exercise of stock
options
257,007 2 525 527
Non
cash compensation to consultant
21 21
Net income 3,971 3,971
Balances at August 25, 2007 6,490     $ 47,989 $ 1 7,073,466 $ 70 $ 29,605 $ (19,651 ) $ 10,025
Non cash compensation
to consultant
21 21
Net
loss
(3,329 ) (3,329 )
Balances at August 30,
2008
6,490 $ 47,989 $ 1 7,073,466 $ 70 $ 29,626 $ (22,980 ) $ 6,717

See Notes to Consolidated Financial Statements.


F-4





JENNIFER CONVERTIBLES INC. AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)





























































































































































































































































































































































































































































































































































































































































































Year Ended Year Ended Year Ended
August 30,
2008
August 25,
2007
August 26,
2006
     (53 weeks)      (52 weeks)      (52 weeks)
Cash
flows from operating activities:
Net (loss)
income
  $     (3,329 )   $     3,971     $     5,220
Adjustments to reconcile net (loss) income to net cash (used
in)
     provided by operating activities of
continuing operations:
       Depreciation and
amortization
1,008 902 804
       Non cash compensation to
consultant
21 21 21
       Loss (income) from
discontinued operations
269 180 (13 )
       Loss on disposal of
property
58 10 7
       Interest earned on annuity
contract
(16 ) (29 )
       Deferred rent (96 ) 122 (34 )
       Recovery of prior year
receivables and other amounts due from Related Company
600
Changes
in operating assets and liabilities
       Merchandise inventories,
net
3,494 (845 ) (318 )
       Prepaid expenses and other
current assets
(272 ) (76 ) (89 )
       Accounts receivable 31 56 162
       Due from Related Company,
net
621 86 (529 )
       Other assets, net 3 (6 ) (121 )
       Accounts payable,
trade
(6,786 ) 880 226
       Customer deposits 127 (474 ) (727 )
       Accrued expenses and other
current liabilities
(318 ) (197 ) 1,145
Net
cash (used in) provided by operating activities of continuing
operations
(5,169 ) 4,614 6,325
 
Cash
flows from investing activities:
       Capital expenditures (835 ) (1,635 ) (1,083 )
       Proceeds from redemption of
annuity contract
951 106
       Sale of marketable auction
rate securities
6,900
       Purchase of marketable auction
rate securities
(3,300 ) (5,000 )
       Restricted cash (40 ) (213 ) (753 )
Net
cash provided by (used in) investing activities of continuing
operations
6,025 (4,197 ) (6,730 )
 
Cash
flows from financing activities:
       Principal payments under
capital lease obligations
(33 ) (24 ) (9 )
       Proceeds from exercise of
stock options
527 1,085
       Dividends on Series B
preferred stock
(48 ) (50 )
       Other distributions in
connection with conversion of Series B preferred stock
(5 )
Net cash (used in)
provided by financing activities of continuing operations
(33 ) 450 1,026
 
Net
increase in cash and cash equivalents from continuing operations
823 867 621
 
Net
decrease in cash and cash equivalents from operating activities of
discontinued operations
(141 ) (133 ) (140 )
 
Net
decrease in cash and cash equivalents from investing activities of
discontinued operations
(17 )
 
Cash
and cash equivalents at beginning of year
8,375 7,641 7,177
 
Cash
and cash equivalents at end of year
$ 9,057 $ 8,375 $ 7,641
 
 
Supplemental disclosure of cash flow information:
 
Income
taxes paid
$ 462 $ 374 $ 89
 
Interest paid $ 16 $ 14 $ 26
 
Issuance of preferred stock in connection with derivative
litigation settlement
$ $ $ 131
 
Obligations under capital leases for equipment and leasehold
improvements
 
$ 68 $ $ 179


See Notes to Consolidated Financial
Statements.


F-5





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


(1) Business


     Jennifer Convertibles, Inc. and
subsidiaries (the “Company”) owns and is the licensor of specialty retail stores
that sell a complete line of sofa beds, as well as sofas and companion pieces,
such as loveseats, chairs and recliners, and specialty retail stores that sell
leather living room furniture. Such stores are in the United States and are
located throughout the Eastern Seaboard, in the Midwest, on the West Coast and
in the Southwest. As of August 30, 2008 and August 25, 2007, respectively, 149
and 160 Company-owned stores operated under the Jennifer Convertibles and
Jennifer Leather names. On May 26, 2007, the Company opened its first Ashley
Furniture Homestore and opened its second store on May 7, 2008 (“Ashley stores”)
as further described in Note 13. The stores are located in New York and sell
home furnishings, consisting of Ashley Homestores, Ltd. products and
accessories.


     During fiscal 2008, the Company
combined one store with another and closed ten stores of which the operating
results of six have been reflected as discontinued operations in the
accompanying financial statements. During fiscal 2007, the Company opened one
store and closed eight stores of which the operating results of two have been
reflected as discontinued operations in the accompanying financial statements.
During fiscal 2006, the Company closed three stores, the operating results of
which have been reflected as discontinued operations in the accompanying
financial statements. The operations of four stores closed in fiscal 2008 and
six stores closed during fiscal 2007 have not been reported as discontinued
operations as the Company anticipates that such stores will continue to generate
revenues from customers of stores located in the same territory as the closed
stores.


     As more fully discussed in Note 3,
the Company and a related company (the “Related Company”) have had numerous
transactions with each other. Due to the numerous transactions with the Related
Company, the results of operations of the Company are not necessarily indicative
of what they would be if all transactions were with independent parties.


(2) Summary of Significant Accounting Policies


Principles of consolidation:


     The consolidated financial
statements include the accounts of Jennifer Convertibles, Inc. and its wholly
owned subsidiaries. Intercompany balances and transactions have been eliminated
in consolidation. The 2007 and 2006 results of operations and cash flows have
been restated from amounts previously reported to reflect operations of stores
closed in 2008 as discontinued operations.


Fiscal year:


     The Company has adopted a fiscal
year ending on the last Saturday in August, which would be either 52 or 53 weeks
long.


Use of estimates:


     The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.


Segment information:


     Statement of Financial Accounting
Standards (“SFAS”) No. 131, “Disclosure about Segments of an Enterprise and
Related Information”, requires publicly held companies to report financial and
other information about key revenue-producing segments of the entity for which
such information is available and is utilized by the chief operating decision
maker in deciding how to allocate resources and in assessing performance. SFAS
No. 131 permits operating segments to be aggregated if they have similar
economic characteristics, products, types of customers and methods of
distribution. Accordingly, the Company’s specialty furniture stores (“Jennifer”)
are considered to be one reportable operating segment. In addition, commencing
in fiscal 2007, the Ashley stores – big box, full line home furniture retail
stores are another reportable segment.


F-6





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
August 30,
2008, August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


Cash and cash equivalents:


     The Company considers all
short-term, highly liquid instruments with a maturity of three months or less
when purchased to be cash equivalents.


Marketable Securities:


     The Company determines the
appropriate classification of its investments in marketable securities at the
time of purchase and reevaluates such designation at each balance sheet date.
The Company’s marketable securities have been classified and accounted for as
available-for-sale. Available-for-sale securities are recorded at fair value
with unrealized gains and losses reported, net of related income taxes, in
accumulated other comprehensive income (loss) as a separate component of
stockholders’ equity until realized. As of August 30, 2008 and August 25, 2007,
unrealized gains and losses have been nominal.


Merchandise inventories:


     Merchandise inventories are stated
at the lower of cost (determined on the first-in, first-out method) or market
and are physically located as follows:








































August 30, August 25,
     2008      2007
Showrooms 5,681   $  6,130
Warehouses   4,965   8,261
$ 10,646 $ 14,391


Store fixtures, equipment and
leasehold improvements:


     Store fixtures and equipment are
carried at cost less accumulated depreciation, which is computed using the
straight-line method over the estimated useful lives or, when applicable, the
life of the lease, whichever is shorter. Betterments and major remodeling costs
are capitalized. Leasehold improvements are capitalized and amortized over the
shorter of their estimated useful lives or the terms of the respective leases.


Annuity contract:


     The Company was the owner and
beneficiary of an annuity contract purchased as an investment in November 2003
for $1,065. The annuity contract was carried at contract value which is
equivalent to the amount invested in the contract plus accumulated earnings,
less redemptions and an insurance charge on the life of the annuitant who is an
officer of the Company. Withdrawals under the contract could have been made at
any time and were payable to the Company. During fiscal 2007 the annuity
contract was liquidated.


Goodwill:


     Goodwill consists of the excess of
cost of the Company’s investments in certain subsidiaries over the fair value of
net assets acquired. The Company reviews goodwill for impairment annually during
the fourth quarter of each year, and also between annual tests upon the
occurrence of trigger events. The reviews are performed at the reporting unit
level. Generally fair value represents discounted projected future cash
flows.


F-7





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


     Impairment is indicated when the
carrying value of a reporting unit including goodwill exceeds its fair value. If
impairment exists, the fair value of a reporting unit is subsequently measured
against the fair value of its underlying assets and liabilities, excluding
goodwill, to estimate an implied fair value of the reporting unit’s goodwill.
Impairment loss is recognized for any excess of the carrying value of the
reporting unit’s goodwill over the implied fair value.


     During the fiscal years ended in
2008, 2007 and 2006, the Company performed the required annual impairment tests
and has determined that there was no impairment of the Company’s
goodwill.


Income taxes:


     Deferred tax assets and liabilities
are determined based on the estimated future tax effects of net operating loss
carryforwards and temporary differences between the financial statement and tax
bases of assets and liabilities, as measured by the current enacted tax rates.
Deferred tax expense (benefit) is the result of changes in the deferred tax
assets and liabilities.


Deferred lease and other intangible
costs:


     Deferred lease costs, consisting
primarily of lease commissions and payments made to assume existing leases, are
deferred and amortized over the term of the lease.


Deferred rent and allowances:


     Rent expense charged to operations
differs from rent paid pursuant to certain of the Company’s leases, because of
the effect of free rent periods and work allowances granted by the landlord.
Rent expense is calculated by allocating total rental payments, including those
attributable to scheduled rent increases reduced by work allowances granted, on
a straight-line basis, over the respective lease term. Accordingly, the Company
has recorded deferred rent and allowances of $3,539 and $3,661 at August 30,
2008 and August 25, 2007, respectively.


Revenue recognition:


     Sales and delivery fees paid by
customers are recognized as revenue upon delivery of the merchandise to the
customer. Sales are made on either a non-financed or financed basis (see Note
5). For the Jennifer stores, a minimum deposit of 50% is typically required upon
placing a non-financed sales order with the balance payable upon delivery. For
non-financed sales, the Ashley stores typically require payment of 100% of the
purchase price when the sales order is written.


     A subsidiary of the Related Company
assumes all performance obligations and risks of any loss under the lifetime
protection plans for the Jennifer segment. An independent outside company
assumes all performance obligations and risks of any loss under the protection
plans for the Ashley segment. Accordingly, the Company recognizes revenue from
the sale of service contracts related to the plans at the time of sale to the
customer.


     The Company is entitled to royalty
income from two stores owned by the Related Company and one store owned by an
unconsolidated licensee that is managed by the Related Company. Royalty income
from the three stores amounted to $143, $177 and $168 for the years ended August
30, 2008, August 25, 2007 and August 26, 2006, respectively. Such amounts are
included in net sales in the consolidated statements of operations.


     Warehousing and management fee
income from the Related Company is recognized when earned.


F-8





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


Advertising:


     The Company advertises in newspapers
and on television. Advertising costs are expensed as incurred and are included
in selling, general and administrative expense. Advertising expense from
continuing operations for the years ended August 30, 2008, August 25, 2007 and
August 26, 2006 aggregated $13,371, $12,606, and $12,803, respectively, net of
amounts charged to the Related Company and unconsolidated licensees (see Note
3).


Selling, general and administrative
expenses:


     Included in selling, general and
administrative expenses in the consolidated statement of operations are the
following: compensation expense, advertising expense, professional fees, board
of director fees, utilities, insurance premiums, claims and deductibles, travel
and entertainment, showroom and store supplies, repairs and maintenance, finance
fees, and transactions with the Related Company as more fully described in Note
3.


Shipping and handling costs:


     Shipping and handling costs are
included in cost of sales. Delivery fees paid by customers are included in
revenue.


Pre-opening costs:


     Costs incurred in connection with
the opening of stores are expensed as incurred.


Warranties:


     Estimated warranty costs are
expensed in the same period that sales are recognized.


Concentration of risks:


     The receivable from the Related
Company as of August 30, 2008 and August 25, 2007, represents current charges
aggregating $4,063 and $4,834, respectively, principally for merchandise
transfers, warehousing services and advertising costs, which are payable within
85 days of the end of the month in which the transactions originate. Such
amounts have been fully paid subsequent to the balance sheet dates. However, at
any given time, the Related Company owes the Company approximately $4 million
for the services and goods that were provided. The Company assumes that like
other retailers and itself, the Related Company has been adversely affected by
the economy. If the Related Company were unable to pay the amounts due to the
Company, it would have a material adverse effect on the Company’s cash flow and
financial condition.


     The Company purchased inventory from
three suppliers under normal or extended trade terms amounting to 12%, 69% and
16% of inventory purchases during fiscal 2008. The Company purchased inventory
from two suppliers amounting to 14% and 71% of inventory purchases during fiscal
2007 and 22% and 62% of inventory purchases during fiscal 2006.


     The Company utilizes many local
banks as depositories for cash receipts received at its showrooms. Such funds
are transferred daily to a concentration account maintained at one commercial
bank. As of August 30, 2008 and August 25, 2007, amounts at risk and on deposit
with three banks totaled 96% and 95%, of total cash and cash equivalents,
respectively.


Stock options:


     In December 2004, the Financial
Accounting Standards Board (the FASB) issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment, (SFAS 123(R)) which
replaced SFAS 123 and superseded APB Opinion No. 25. Under the provisions of
SFAS 123(R), companies are required to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award,
usually the vesting period. The statement was effective as of the beginning of
the first annual reporting period that begins after June 15, 2005 and
accordingly was adopted by the Company in the first quarter of fiscal year 2006.
SFAS 123 (R) requires that compensation expense be recognized for the unvested
portions of existing options granted prior to its effective date and the cost of
options granted to employees after the effective date based on the fair value of
the stock options at grant date. On March 9, 2005, the Board of Directors opted
to accelerate the vesting of outstanding stock options, all of which were out of
the money, in order to avoid the recognition of compensation expense under SFAS
123 (R) with respect to these options. There were no stock options granted to
employees during fiscal 2008, 2007 and 2006 and accordingly, there was no
employee compensation expense related to stock options or other stock based
awards during such years.


F-9





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


Per share data:


     Basic net loss per common share for
fiscal 2008 is computed by dividing the net loss increased by cumulative
preferred stock dividends on the Series B preferred stock of $17 by the weighted
average number of shares of common stock outstanding during the year.
Potentially dilutive shares in fiscal 2008, which aggregated 3,476,215 shares,
related to the conversion of Series A and Series B preferred stock and the
exercise of stock options and warrants, were excluded from the diluted loss per
share calculation, because their effects would have been anti-dilutive. Basic
net income per common share for fiscal 2007 and 2006 is computed by dividing net
income reduced by cumulative preferred stock dividends and other distributions
on the Series B preferred stock of $32 and $29, respectively, by the weighted
average number of shares of common stock outstanding during the year plus
weighted average common shares issuable upon conversion of the Series A
participating preferred stock. Diluted net income per common share for fiscal
2007 and 2006 is computed similar to basic net income per common share except
that it reflects the potential dilution that could occur if dilutive options and
warrants were exercised, using the treasury stock method, and assumes that the
Series B preferred stock was converted into common stock upon
issuance.


Fair value of financial instruments:


     The carrying amount of the
investment in marketable securities approximates fair value. The carrying amount
of accounts receivable, accounts payable and customer deposits approximates fair
value due to their short-term nature.


Recently issued accounting
standards:


     In September 2006, the FASB issued
SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) that defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands the disclosures about fair value measurement.
This statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
Management does not anticipate that the adoption of this statement will have a
material effect on the Company’s financial statements.


     In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, which allows the Company to choose to measure selected financial
assets and financial liabilities at fair value. Unrealized gains and losses on
items for which the fair value option has been elected are reported in earnings.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.
Management does not anticipate that the adoption of this statement will have a
material effect on the Company’s financial statements.


     In December 2007, the FASB issued
SFAS No. 141(R), “Business Combinations”, and No. 160, “Noncontrolling Interests
in Consolidated Financial Statements.” Effective for fiscal years beginning
after December 15, 2008, these statements revise and converge internationally
the accounting for business combinations and the reporting of noncontrolling
interests in consolidated financial statements. The adoption of these statements
will change the Company’s accounting treatment for business combinations on a
prospective basis.


F-10





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


     In March 2008, the FASB issued SFAS
No.161, Disclosures about Derivative Instruments and Hedging Activities - An
Amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative agreements. SFAS No. 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008. The
Company does not anticipate that the statement will have a material impact since
the Company has not historically engaged in hedging activities or acquired
derivative instruments.


     In May 2008, the FASB issued SFAS
No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No.
162 identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with U.S. GAAP.
SFAS No. 162 will become effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles.” This statement is not expected to change the Company’s current
accounting practice.


(3) Agreements and Transactions With
Related Company


     The consolidated financial
statements do not include the results of operations of 22 stores licensed by the
Company, 21 of which are owned and operated by a company (the “Related
Company”), which is owned by the estate of a deceased stockholder of the Company
who also was the brother-in-law of the Company’s Chairman of the Board and Chief
Executive Officer “(CEO)”. The sister of the Company’s CEO is currently acting
as the interim president of the Related Company. Nineteen of the 21 stores are
located in New York and are on a royalty-free basis. Until November 1994, the
Related Company was owned by three of the officers/directors/principal
stockholders of the Company. In November 1994, the Related Company redeemed the
stock in the Related Company of two of the principal stockholders (Harley
Greenfield and Edward Seidner) for notes in the amount of $10,273 which are due
in 2023 and are collateralized by the assets of the Related Company and a pledge
of the remaining stockholder’s stock in the Related Company to secure his
personal guarantee of the notes. As of August 30, 2008, the remaining principal
amount of the notes is $8,355 and the personal guarantee of the remaining
stockholder was released.


     Pursuant to a Warehousing Agreement,
the Company is obligated to provide warehouse services to the Related Company.
Through April 30, 2010, the Company will receive a warehousing fee of 2.5% on
the net sales price of goods sold by the Related Company up to $27,640 of net
delivered sales and 5% on net delivered sales over $27,640. After April 30,
2010, the Company will receive a warehousing fee of 7.5% of all net delivered
sales by the Related Company. On November 24, 2008, the Company entered into a
fifth amendment to the Warehousing Agreement with the Related Company which
provides that effective January 2009, the warehousing fee will be raised from
2.5% to 7.5% of all net delivered sales for a one-year period. In addition,
during the full term of the agreement, the Company will receive a fee based on
fabric protection sold and warranty services performed by the Related Company.
For the fiscal years ended in 2008, 2007 and 2006, respectively, charges
(included in net sales) to the Related Company for warehousing fees amounted to
$640, $933 and $780, based on net delivered sales and $644, $829 and $853, based
on sales of fabric protection and warranty services.


     Pursuant to a Purchasing Agreement,
the Company continues to purchase merchandise for the Company and the Related
Company. The Related Company has 85 days after the end of the month in which the
transactions originate to pay the amounts due.


F-11





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


     The Company has previously granted
the Related Company a perpetual, royalty-free license to use and to sublicense
and franchise the use of trademarks in the State of New York. The license is
exclusive in such territory, subject to certain exceptions. Under a Management
Agreement and License, the Company is responsible for managing the sales of the
Related Company’s stores so that the stores will be substantially the same as
the Company’s own stores, provided the Related Company is not obligated to spend
more than $25 per store or $100 in any 12-month period on maintenance and
improvements to its stores. If during any annual period the Related Company’s
net delivered sales exceed $27,640 but do not surpass $29,640, then the Related
Company will pay to the Company an amount equal to ten percent (10%) of such
excess and if the Related Company's net delivered sales exceed $29,640, the
Related Company must pay to the Company 48% of any excess over $29,640. During
the fiscal year ended August 26, 2006 no such management fees were earned. On
October 13, 2006, the Management Agreement and License was amended to eliminate
any future or prior shortfall payments that may be due to or from the Related
Company.


     The Company also has the right to
open an unlimited number of stores in New York in exchange for a royalty to the
Related Company of $400 per year which was paid to the Related Company for each
of the fiscal years ended in 2008, 2007 and 2006.


     Because the Company may negatively
impact the Related Company’s sales by opening additional stores within the State
of New York and because the Company is managing the Related Company’s stores,
the Company has agreed to pay the Related Company 10% of the amount by which
their net delivered sales for any 12-month period are below $27,640, provided
that if such net delivered sales fall below $26,000, the Company will pay the
Related Company 15% of such shortfall amount. However, such amounts together
with amounts the Company may pay for advertising if the Related Company’s net
delivered sales drop below $27,640 as described below, shall not, in the
aggregate exceed $2,700 in any 12-month period. On November 18, 2004, the
Management Agreement and License pursuant to which the Company is required to
make such payments to the Related Company was amended such that the Related
Company has agreed to waive its rights to receive the payments described above
during the period commencing January 1, 2005 through August 31, 2007. On October
13, 2006, the Management Agreement and License was further amended to eliminate
any future or prior shortfall payments that may be due to the Related
Company.


     The Related Company has the right to
close stores and, if it does, the Company has the right to purchase them for the
cost of the related inventory (estimated at approximately $50 on average) and,
subject to obtaining any necessary landlord’s consent, continue the operations
of the stores for the Company’s own account.


     The Related Company is to contribute
$126 per month to advertising, provided that such amount is to be reduced by the
lesser of $80 or 1% of the Company’s sales in New York (other than sales of
leather furniture and sales from six stores in New York which the Company has
owned for many years). On November 24, 2008, the Company entered into a fifth
amendment to the Management Agreement and License, pursuant to which the Related
Company also agreed, for a one year period commencing in January 2009, to
increase its advertising contribution from $126 per month to $150 per month and
to eliminate the reductions to the Related Company's share of the advertising
costs tied to the shortfalls in the Related Company’s net delivered sales. In
addition, subject to certain exceptions, if the Related Company’s sales are less
than $27,640 in any 12-month period, the Company will pay the Related Company
(or reduce the advertising payment the Related Company owes the Company by) an
amount equal to 50% of the amount by which its sales are below such amount
provided that such payment plus any payments of the 10-15% with respect to sales
shortfalls as described above, will not exceed $2,700 (in any 12-month period)
in the aggregate. On November 18, 2004, the Management Agreement and License
pursuant to which the Company is required to make such payments to the Related
Company was amended such that the Related Company has agreed to waive its rights
to receive the payments described above during the period commencing January 1,
2005 through August 31, 2007. On October 13, 2006, the Management Agreement and
License was further amended to eliminate any future or prior shortfall payments
that may be due to the Related Company. For the fiscal years ended in 2008, 2007
and 2006, contributions from the Related Company for advertising, which reduced
selling, general and administrative expenses from continuing operations,
amounted to $1,509, $1,509 and $1,509, respectively.


F-12





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


     The Management Agreement and License
expires in 2049 and may be terminated by an arbitrator for material breach. The
Management Agreement also terminates upon purchase by the Company of the Related
Company’s stores pursuant to the Option Agreement described below. If terminated
for a reason other than a purchase, the Company would be unable to sell
furniture other than leather furniture in New York, except in certain counties
and, accordingly, would have to either sell the Company’s Jennifer Convertibles
stores to the Related Company, close them or convert them to Jennifer Leather
stores. In addition, in case of such termination, the Company would have to make
up certain shortfalls, if any, in the Related Company sales in cash or by
delivery of stores in New York meeting certain sales volume requirements.


     Pursuant to an Option Agreement, the
Company has received the option to purchase the assets relating to the Related
Company’s stores for a period of 10 years beginning on July 6, 2011 at a
purchase price starting at $8,125, and decreasing over the term of the option,
plus the assumption of approximately $5,000 principal amount of notes due to
each of Messers. Greenfield and Seidner, and declining over the term of the
option. As of August 30, 2008, the principal balance on the notes due is an
aggregate of approximately $8,355.


     A monitoring committee has been set
up to review, on an on-going basis, the relationships between the Related
Company and the Company in order to avoid potential conflicts of interest
between the parties. The monitoring committee will remain in effect for five
years commencing April 30, 2005, the date the settlement agreements became
effective.


     Effective June 23, 2002, the Company
amended the warehousing agreement with the Related Company whereby the Related
Company became the sole obligor on all lifetime fabric and leather protection
plans sold by the Company or the Related Company on and after such date through
August 30, 2008 and assumed all performance obligations and risk of loss there
under. On August 18, 2008, the Company entered into a fourth amendment to the
warehousing agreement extending the terms effective August 30, 2008 through
August 29, 2009. The Company has no obligation with respect to such plans. The
Related Company is entitled to receive a monthly payment of $50, payable by the
Company 85 days after the end of the month, subject to an adjustment based on
the volume of annual sales of the plans. The Company retains any remaining
revenue from the sales of the plans. Payments to the Related Company amounted to
$400, $550 and $550 for the fiscal years ended in 2008, 2007 and 2006
respectively. In addition, for a payment of $400 by the Company, the Related
Company also assumed responsibility to service and pay any claims related to
sales made by the Company or the Related Company prior to June 23, 2002.
Accordingly, the Company has no obligations for any claims filed after June 23,
2002.


Transactions with the Related
Company:


     The Company purchased merchandise
for itself, its wholly owned subsidiaries, unconsolidated licensees and the
Related Company. During the fiscal years ended in 2008, 2007 and 2006,
approximately $11,531, $14,200 and $13,829, respectively, of inventory at cost
was purchased by the Related Company and the unconsolidated licensees through
the Company. These transactions are not reflected in the consolidated statements
of operations of the Company and do not impact the Company’s earnings. The
Company receives the benefit of any vendor discounts and allowances in respect
of merchandise purchased by the Company on behalf of its subsidiaries and
certain other licensees. The Related Company receives the benefit of any
discounts refunded or credited by suppliers in respect of merchandise purchased
by the Related Company through the Company. Except for “special orders”
representing goods with fabric specially ordered by a customer of a Related
Company store, which are transferred to the Related Company when the merchandise
is received by the Company at its warehouse, the Company maintains title to
inventory purchased on behalf of the Related Company until the Related Company
sells it. The Company is solely responsible for payment to the merchandise
vendors.


F-13





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


     Included in the consolidated
statements of operations are the following amounts charged by and to the Related
Company:




































































































































































































Increase (Decrease)
Year Ended
August 30, August 25, August 26,
     2008      2007      2006
Net sales:
       Royalty income
143
177  
168
       Warehouse fees 1,284 1,762 1,633
       Delivery charges 3,557 4,169 3,470
             
Total charged to the Related Company
  $ 4,984 $ 6,108 $ 5,271
Revenue from service contracts:    
       Fabric protection fees charged
by the Related Company
$ (400 ) $ (550 ) $ (550 )
Selling, general and administrative expenses:  
       Administrative fees paid by
the Related Company
$ (112 ) $ (110 ) $ (112 )
       Advertising reimbursement paid
by the Related Company
  (1,509 ) (1,509 ) (1,509 )
       Royalty expense paid to the
Related Company
400 400 400
             
Net charged to the Related Company
$ (1,221 ) $ (1,219 ) $ (1,221 )


     The Company has no equity interest
in the Related Company.


(4) Investments


     The Company invests its excess cash
in money market funds, debt instruments of U.S. municipalities and preferred
stock. All highly liquid investments with stated maturities of three months or
less from date of purchase are classified as cash equivalents. All highly liquid
investments with stated maturities of greater than three months are classified
as marketable securities.


     The Company determines the
appropriate classification of its investments in marketable securities at the
time of purchase and reevaluates such designation at each balance sheet date.
The Company’s marketable securities have been classified and accounted for as
available-for-sale. Available-for-sale securities are recorded at fair value
with unrealized gains and losses reported, if significant, net of related income
taxes, in accumulated other comprehensive income (loss) as a separate component
of stockholders’ equity until realized.


     Marketable securities consist of the
following:
























































































     August 30,      August 25,
2008 2007
Current:  
       Auction rate municipal
bonds

$ 
6,150
       Auction market preferred
stock
    2,150
             
Total
8,300
Non-current:
       Auction rate municipal
bonds
800
       Auction market preferred
stock
600
             
Total
1,400
Total marketable
securities
$ 1,400 $ 8,300


F-14





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


     The auction rate securities (“ARS”)
held by the Company are marketable securities with maturities ranging from 12 to
39 years for which the interest rates are reset through a Dutch auction every 28
days. The auctions have historically provided a liquid market for these
securities as investors historically could readily sell their investments at
auction. At August 25, 2007, ARS were viewed by the Company as available to
support current operations and accordingly were classified as current assets
without regard to contractual maturities. During the year ended August 30, 2008,
the Company sold $5,350 of auction rate municipal bonds and $1,550 of auction
market preferred stock at face value; however, as a result of liquidity issues
experienced in global credit and capital markets, the remaining ARS held by the
Company have experienced multiple failed auctions, beginning in February 2008,
as the amount of securities submitted for sale has exceeded the amount of
purchase orders.


     Of the auction rate securities held
by the Company on August 30, 2008, $800 are auction rate municipal bonds
collateralized by student loans, which are insured and guaranteed by the United
States Federal Department of Education. The balance of ARS consist of auction
market preferred stock issued by closed end mutual funds with a par value of
$600, of which $550
is invested in a fund whose underlying investments consist
primarily of a diversified portfolio of preferred securities issued by companies
in the banking, utilities, and insurance industries. Such fund is required to
maintain asset coverage of at least 200% with respect to the auction market
preferred stock. If the fund fails to meet this requirement and does not correct
such failure, the fund may be required to redeem, in part or in full, the
preferred stock at par value plus accumulated and unpaid dividends.
Substantially all of the Company’s ARS carry AAA ratings and have not
experienced any payment defaults. Further, ARS that did not successfully auction
reset to maximum interest rates as prescribed in the underlying indenture or
prospectus.


     Based on the Company’s assessment of
the credit quality of the underlying collateral and credit support available to
the securities in which the Company is invested, the Company believes no
impairment has occurred at August 30, 2008, as the Company presently has the
ability and the intent to hold these investments long enough to avoid realizing
any significant loss.


     As of August 30, 2008, the $1,400 of
auction rate securities were classified in non-current assets due to the fact
that they were not currently trading at such date and conditions in the general
debt markets created uncertainty as to when successful auctions would be
reestablished.


     Pursuant to an offer to purchase
dated September 30, 2008, the Company as of November 21, 2008, sold $1,350 of
auction rate securities to Morgan Stanley & Co. Incorporated, the Company’s
broker, at face value.


(5) Accounts
Receivable


     Accounts receivable in the
accompanying balance sheets principally represent amounts due from a finance
company and credit card processors for certain sales made in August of each
year. The Company finances sales and sells financed receivables on a
non-recourse basis to an independent finance company. The Company does not
retain any interests in or service the sold receivables. In addition, customers
through credit cards, charge certain sales. The selling price of the receivables
is dependent upon the payment terms with the customer and results in either a
payment to or receipt from the finance company of a percentage of the receivable
as a fee. Net fees paid to the credit card and finance companies, which amounted
to $1,423, $1,616 and $1,595, for the fiscal years ended in 2008, 2007 and 2006,
respectively, are included in selling, general and administrative expenses from
continuing operations. Proceeds received from the sale of the receivables
amounted to $22,323, $21,176 and $20,493, for the fiscal years ended in 2008,
2007 and 2006, respectively.


     Credit card processors pay the
Company shortly after credit card purchases by customers and before merchandise
is delivered. However, credit card companies have indicated to the Company that
in light of current economic and credit conditions they are reexamining their
payment policies. In this connection, in November 2008, the Company entered into
an interim agreement with a credit card company pursuant to which the credit
card processor will, through December 17, 2008, hold back $500,000 as a reserve
against delivery by the company of merchandise ordered by its credit card
customers. Subsequent to such date, a new agreement is to be entered into which
may adjust the amount of the hold back and certain other terms and conditions.


F-15





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


(6) Store Fixtures, Equipment and
Leasehold Improvements


     Store fixtures, equipment and
leasehold improvements consist of the following:














































































































Year
Ended
Estimated
August 30, August 25,   Useful Lives
     2008      2007      (in
Years)
Store fixtures and furniture $ 5,642 $ 5,649 5 to 10
Leasehold
improvements
10,144   10,082 1 to 15
Computer equipment and software 1,947 1,919 3 to 10
Equipment under
capital leases
247   179 5 to 10
17,980 17,829
Less:
accumulated depreciation and amortization
  (14,778 ) (14,452 )
3,202 3,377


(7) Transactions with
Klaussner


     The Company and Klaussner Furniture
Industries Inc. (“Klaussner”), one of the Company’s larger suppliers and the
owner of the outstanding shares of the Company’s Series A convertible preferred
stock, executed a Credit and Security Agreement in March 1996 that effectively
extended the payment terms for merchandise shipped from 60 days to 81 days. The
Company agreed to pay Klaussner a late payment fee of .67% per month times the
sum of all invoices outstanding for more than 60 days at each month-end. As of
August 30, 2008 and August 25, 2007, the Company owed Klaussner $892 and $1,317,
respectively. The Company purchased approximately 12% (2008), 14% (2007) and 22%
(2006)) of its inventory from Klaussner.


     Purchase allowances of $248 (2008),
$343 (2007) and $466 (2006) were obtained from Klaussner, which reduced cost of
sales from continuing operations. The Company receives a purchase price
reduction from Klaussner in exchange for the Company assuming responsibility for
and incurring any costs of warranty work that has to be performed on merchandise
acquired from this vendor. The price reduction relates to all purchases and is
recorded as a reduction in the cost of the merchandise purchased, and is
included in cost of sales from continuing operations upon sale of the
merchandise.


     In addition, the Company also
receives a price reduction from Klaussner on all of its purchases relating to
how the merchandise is shipped to the Company. Such amounts are also recorded as
reductions in the cost of the merchandise purchased, and are included in cost of
sales from continuing operations upon sale of the merchandise.


     On December 11, 1997, the Company
sold to Klaussner 10,000 shares of Series A preferred stock for $5,000. During
May 2006, Klaussner voluntarily converted 3,510 shares of Series A preferred
stock into 500,000 shares of the Company’s common stock. The remaining 6,490
shares of Series A preferred stock are non-voting, have a liquidation preference
of $3,245, do not pay dividends (except if declared on the common stock) and are
convertible into 924,500 shares of the Company’s common stock. In addition, as
long as Klaussner owns at least 10% of the Company’s outstanding common stock,
assuming conversion, it has the right of first refusal to purchase any common
stock or equivalents sold by the Company at less than $3.51 per share. In
connection therewith, and as a result of the Company granting options to
employees to purchase shares of common stock at $2.00 per share, on January 18,
2001, the Company granted Klaussner an option to purchase 18,730 shares of
common stock at an exercise price of $2.00 per share. The option expires in
January 2011.


F-16





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


     On December 15, 2004, Klaussner
granted to the Company’s Chief Executive Officer, options which expire on
November 30, 2009, to purchase 2,106 shares of the Company’s Series A preferred
stock, at an exercise price of $712.25 per share. Such shares are convertible
into an aggregate of 300,000 shares of the Company’s common stock. The exercise
price of the options is equivalent to $5.00 per share of underlying common
stock, which was greater than the quoted market price of the common stock on the
date of grant.


(8) Transactions with
Caye


     In July 2005, the Company entered
into a Credit Agreement (“Agreement”) with Caye Home Furnishings, LLC and its
affiliates (“Caye”) who is also a vendor of the Company. Under the Agreement, as
amended, the Company can draw down up to $11.5 million for the purchase from
Caye of merchandise subject to a formula based on eligible accounts receivable,
inventory and cash in deposit accounts. The borrowings under the Agreement are
due 105 days from the date goods are received by the Company and bear interest
for the period between 75 and 105 days at prime plus .75%. If the borrowings are
not repaid after 105 days the interest rate increases to prime plus
2.75%.


     The credit facility is
collateralized by a security interest in all of the Company’s assets, excluding
restricted cash. Under the terms of the facility the Company is required to
maintain a fixed charge coverage ratio, as defined, for a trailing four-quarter
period and a minimum cash balance in deposit accounts. The facility also
prohibits the Company from incurring certain additional indebtedness, liens,
certain guarantees or distributions to common stockholders; limits certain
investments, and certain advances or loans and restricts substantial asset sales
and capital expenditures.


     On October 27, 2006, the Agreement
was amended to permit the Company to open and operate several licensed Ashley
Furniture HomeStores in New York. On July 7, 2007, the Agreement was further
amended to (1) increase the credit facility from $11.5 million to $13.5 million
and (2) reduce the amount required to be maintained in deposit accounts to no
less than $1 million (which is classified as restricted cash on the accompanying
consolidated balance sheets).


     On April 3, 2008, the Company
entered into a further amendment to the terms of the Credit Facility to (1)
expand the scope of the Credit Facility to include Ashley stores in additional
New York metropolitan areas and (2) increase the amount of capital expenditures
allowable in certain New York metropolitan areas.


     As of August 30, 2008, the Company
has satisfied all covenants of the credit facility as amended, except for the
fixed charge ratio for the trailing four quarter period ended August 30, 2008
for which it obtained a waiver. The Company does not expect to be in compliance
with the ratio for the trailing four quarter period ending November 29, 2008 and
for subsequent interim periods during the fiscal year ending August 29, 2009 and
has also obtained a waiver for such periods.


     Approximately 69%, 71% and 62% of
the Company’s purchases of merchandise were from Caye during fiscal 2008, 2007
and 2006, respectively. As of August 30, 2008 and August 25, 2007, the Company
owed Caye approximately $9,050 and $14,469, respectively, no portion of which
exceeded the 75-day payment terms. Such amounts are included in accounts
payable, trade on the respective accompanying consolidated balance sheets.


     Caye has advised us that, as a
result of current economic conditions and conditions in the credit market, it
may substantially decrease the amount of inventory it supplies to the Company.
Caye has indicated that it expects to continue to supply the Company at least
through the end of March 2009 but it is uncertain whether it will continue after
such date to take orders from the Company, except for orders from its domestic
factories, which represent approximately 5% of its business with Caye. Given the
time lag between the taking of orders and delivery, that means that after June
2009, the Company may need to get substantially all of our inventory from other
sources.


     The Chinese company which currently
manufactures approximately 95% of what the Company orders through Caye, has
provided a letter agreement to the effect that if Caye stops supplying the
Company prior to November 12, 2009, it will, for at least a year thereafter,
supply the Company goods and provide 75 days to pay for those goods without
interest or penalty and an additional 30 days grace period on amounts over 75
days at a per annum rate of 0.75% over prime, provided that in no event will the
amount payable by the Company exceed $10 million. This arrangement is
substantially the same as the current arrangement with Caye except that under
the Caye agreement the Company can owe up to $13.5 million.


F-17





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


(9) Income Taxes


     Components of income tax expense
(benefit) applicable to continuing operations are as follows:








































































Year
Ended
August 30, August 25, August 26,
     2008
     2007
     2006
Current:
       Federal   $ (4 ) (a) $ 59 $ 85
       State   14   65 236
$ 10 $ 124   $ 321
____________________
 






(a)      Represents an over accrual of
federal alternative minimum taxes at August 25,
2007.

     Expected income tax expense
(benefit) applicable to continuing operations based on the statutory rate is
reconciled with actual income tax expense as follows:



























































































































Year Ended
August 30, August 25, August 26,
     2008      2007      2006
“Expected” tax expense (benefit)   (34.0 )% 34.0 % 34.0 %
Increase
(reduction) in taxes resulting from:
State and local income tax, net of federal income  
       tax effect 0.3 % 1.0 % 2.8 %
Non-deductible
items
0.5 % 0.4 % 0.3 %
Other 0.0 %   0.4 % (4.6 )%
Utilization of
net operating loss carryforwards
0.0 % (32.1 )% (26.7 )%
Increase in valuation allowance 33.7 % 0.0 % 0.0 %
Actual tax expense 0.5 % 3.7 % 5.8 %


F-18





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


     The principal components of deferred
tax assets, liabilities and the valuation allowance are as follows:




















































































































































































Year
Ended
August 30, August 25,
     2008      2007
Deferred tax assets:
       Net operating loss
carryforward
$  3,399
1,958
       Alternative minimum tax credit
carryforward
  142 144
       Deferred rent
expense
1,362 1,409
       Excess of tax over book basis
of leasehold
             
improvements
2,196 2,141
       Inventory
capitalization
258 422
       Other expenses for financial
reporting, not yet
 
             
deductible for taxes
79 176
                    
Total deferred tax assets, before valuation allowance
7,436 6,250
       Less: valuation
allowance
(7,097 ) (5,972 )
                    
Total deferred tax assets
339 278
Deferred tax liabilities:
       Excess of book over tax basis
of store fixtures and
 
             
equipment
339 278
Net deferred tax assets $ $


     As of August 30, 2008, the Company
has a net operating loss carryforward of $8,829, which expires in years 2023
through 2028.


     A valuation allowance has been
established to offset the deferred tax asset to the extent the Company has not
determined that it is more likely than not that the future tax benefits will be
realized. During the year ended August 30, 2008, the valuation allowance
increased by $1,125 resulting principally from net operating losses incurred by
the Company in fiscal 2008. During the years ended August 25, 2007 and August
26, 2006, the valuation allowance decreased by $1,292 and $1,393, respectively,
due principally to utilization of net operating loss carryforwards.


     Effective August 26, 2007, the
Company adopted FASB Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes (an Interpretation of FASB Statement No. 109)” (“FIN 48”). This
interpretation was issued in July 2006 to clarify the uncertainty in income
taxes recognized in the financial statements by prescribing a recognition
threshold and measurement attribute for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. As
required by FIN 48, the Company applied the “more-likely-than-not” recognition
threshold to all tax provisions, commencing at the adoption date, which resulted
in no unrecognized tax benefits as of such date. Additionally, there have been
no unrecognized tax benefits subsequent to adoption. Accordingly the adoption of
FIN 48 had no effect on the Company’s financial statements. Pursuant to FIN 48,
the Company has opted to classify interest and penalties that would accrue
according to the provisions of relevant tax law as selling, general, and
administrative expense, in the consolidated statement of operations.


     The Company files income tax returns
in the U.S. federal jurisdiction and various states. For federal income tax
purposes, the 2006 through 2008 tax years remain open for examination by the tax
authorities under the normal three-year statute of limitations. For state tax
purposes, the 2004 through 2008 tax years remain open for examination by the tax
authorities under a four-year statute of limitations.


F-19





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


(10) Warrant


     On March 30, 2005, in connection
with the settlement of the derivative litigation (see Note 14 – Consulting
agreement), as additional compensation for consulting services, the Company
issued to a consultant a warrant to purchase 150,000 shares of common stock, at
an exercise price of $2.37 per share. In the event the consulting agreement is
terminated for any reason, including but not limited to the Consultant’s death
or disability, the warrant shall immediately become exercisable with respect to
remaining unvested shares effective the date of such termination. The warrant
expires ten years from the date of issuance and vests as follows: 50,000 shares
upon issuance, 50,000 shares on the first anniversary thereof, and 50,000 shares
on the second anniversary thereof. The warrant will become fully vested if the
closing price of the Company’s common stock exceeds $7.00 per share for five
consecutive trading days. On October 30, 2006, the warrant became fully vested
since the Company’s common stock exceeded $7.00 for five consecutive days. The
fair value of the warrant on the date of issuance was approximately $146
utilizing the Black-Scholes option-pricing model with the following assumptions:
40% volatility, five-year expected life, risk-free interest rate of 4.27 % and a
dividend yield ratio of 0%, which value is being amortized over the five year
term of the consulting agreement.


(11) Stock Option
Plans


     At the Company’s annual meeting of
stockholders, which was held on September 9, 2003, the 2003 Stock Option Plan
was adopted, under which 700,000 common shares were reserved for issuance for
grants of incentive and non-qualified options to selected employees, officers,
directors, agents, consultants and independent contractors of the Company. The
exercise price with respect to qualified incentive options may not be less than
100% of the fair market value of the common stock at the date of
grant.


     At the Company’s annual meeting of
stockholders, which was held on February 6, 2007, the 2006 Equity Incentive Plan
(the “2006 Plan”) was adopted allowing the Company, under the direction of its
Compensation and Option Committee, to make grants of stock options, and
restricted and unrestricted stock awards to employees, consultants and directors
of the Company. The 2006 Plan also authorizes the grant of other types of
stock-based compensation including, but not limited to stock appreciation
rights, phantom stock awards, and stock units in which shares of the Company’s
common stock are not issued until the performance or vesting period is
satisfied. The 2006 Plan allows for the issuance of up to 600,000 shares of the
Company’s common stock, 300,000 of which were previously authorized but will not
be issued under the 2003 Stock Option Plan. The adoption of the 2006 Plan
terminates the 2003 Stock Option Plan and all outstanding options under the 2003
Stock Option Plan will remain in effect, but no additional option grants may be
made. The exercise price of a stock option may not be less than 100% of the fair
market value of our common stock on the date of grant. If an incentive stock
option is granted to an individual who owns more than 10% of the combined voting
power of all classes of our capital stock, the exercise price may not be less
than 110% of the fair market value of our common stock on the date of grant and
the term of the option may not be longer than five years. The 2006 Plan expires
on December 17, 2016. There were no stock awards granted under the 2006 Plan
during the years ended August 30, 2008 and August 25, 2007. Outstanding stock
options at August 30, 2008 represent options granted under plans, which have
expired, plus options granted outside plans pursuant to individual stock option
agreements.


F-20





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


     A summary of option activity as of
August 30, 2008 and changes during the fiscal year then ended is presented
below:

























































































































Options
Weighted
Weighted Average
Average Remaining Aggregate
Number of  Price Contractual Intrinsic
      Shares      Per
Share
     Term      Value
Outstanding at August 25, 2007 2,389,725 3.47  
Expired   (31,000 ) 2.00
Canceled (5,000 ) 3.90
Outstanding at August 30,
2008
2,353,725 3.49 3.45   $


     There were no options exercised
during the fiscal year ended 2008. Cash received from options exercised during
fiscal years 2007 and 2006 was $527 and $1,085, respectively. The total
intrinsic value of options exercised during the fiscal years 2007 and 2006 was
$731 and $1,728, respectively. Tax benefits related to option exercises were not
deemed to be realized as net operating loss carryforwards are available to
offset taxable income computed without giving effect to tax deductions related
to option exercises. Tax benefits related to option exercises will be recognized
through an increase in additional paid-in capital when they are deemed to have
reduced taxes currently payable.


     The Company generally issues new
shares upon the exercise of stock options.


(12) Discontinued
Operations


     During fiscal 2008, the Company
closed ten stores, one each in Parma, Olmstead, Lyndhurst, Mentor, Shaker
Heights and Strongsville, Ohio, one store in New York City, one each in Buford
and Roswell, Georgia and one in Florida. During fiscal 2007, the Company closed
eight stores of which one was located in Edgewater, New Jersey, one in Woodland
Hills, California, one each in the cities of Evergreen Park, Naperville, Niles
and Chicago in Illinois, one in Ann Arbor, Michigan and one in Indianapolis,
Indiana. During fiscal 2006, the Company closed three stores of which one was
located in Las Vegas, Nevada and two were located in Indianapolis, Indiana. In
accordance with Statement of Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, the results of stores
closed have been reported as discontinued operations in the consolidated
statement of operations, except for four stores closed during fiscal 2008 (one
in New York City, two in Georgia and one in Florida), six stores closed during
fiscal 2007 (one in New Jersey, one in California and four in Illinois) and two
stores closed during fiscal 2005 (one in Massachusetts and one in New York
City), where in management’s judgment there will be significant continuing sales
to customers of the closed stores from other stores in the area. The
consolidated statements of operations for years ended August 25, 2007 and August
26, 2006, have been restated to include the results of the six closed stores in
Ohio reported as discontinued operations during fiscal 2008.


     Revenues from stores reported as
discontinued operations, amounted to $1,316, $3,036 and $3,599 for the fiscal
years ended August 30, 2008, August 25, 2007 and August 26, 2006, respectively.


F-21





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


     Income (loss) related to store
closings consist of the following:































































Year
Ended
August 30, August 25, August 26,
    2008     2007     2006
Write-off of store fixtures and leasehold improvements   $      (18 ) $   $ (8 )
Lease
termination costs
  (66 )        
188
Total (loss) income on store
closings
$ (84 ) $ $ 180


     Income from store closings during
fiscal 2006 includes income of approximately $200 attributable to the early
termination of a lease for a store, which was closed in June 2005, resulting in
the reversal of the remaining related liability for early termination costs.


(13) Segment Information


     On October 27, 2006, the Company’s
wholly-owned subsidiary, Hartsdale Convertibles, Inc. (“Hartsdale”), entered
into the Ashley Homestores, Ltd. Trademark Usage Agreement (the “Trademark Usage
Agreement”) with Ashley Homestores, Ltd. (“Ashley”), pursuant to which Hartsdale
was granted a 5-year nonexclusive, limited sublicense to use the image,
technique, design, concept, trademarks and business methods developed by Ashley
for the retail sale of Ashley products and accessories. During the 5-year term
of the agreement, Hartsdale will use its best efforts to solicit sales of Ashley
products and accessories at the authorized location, and in consultation with
Ashley, develop annual sales goals and marketing objectives reasonably designed
to assure maximum sales and market penetration of the Ashley products and
accessories in the licensed territory. The Company has guaranteed the
obligations of Hartsdale under the Trademark Usage Agreement. On May 26, 2007,
the Company opened its first Ashley Furniture HomeStore and on May 7, 2008,
opened its second Ashley store.


     Prior to the Trademark Usage
Agreement, the Company operated in a single reportable segment, the operation of
Jennifer specialty furniture retail stores. Subsequent thereto, the Company has
determined that it has two reportable segments organized by product line:
Jennifer – specialty furniture retail stores and Ashley – a big box, full line
home furniture retail store. The accounting policies of the segments are the
same as those described in Note 2. There are no inter-company sales between
segments. The Company does not allocate indirect expenses such as compensation
to executives and corporate personnel, corporate facility costs, professional
fees, information systems, finance, insurance, and other non-operating costs to
the individual segments. These costs apply to all of the Company’s businesses
and are reported and evaluated as corporate expenses for segment reporting
purposes.


F-22





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


     The following tables present segment
level financial information for the years ended August 30, 2008, August 25, 2007
and August 26, 2006:












































































































































































































































































     Jennifer      Ashley      Totals
2008
Revenue  
109,159
11,806  
120,965
Segment income from continuing
       operations before income
taxes
3,499 907 4,406
Depreciation and
amortization
856 132 988
Segment assets 19,599 3,629 23,228
Segment capital
expenditures
612 279 891
 
2007
Revenue $ 132,115   $ 1,837 $ 133,952
Segment income (loss) from continuing
       operations before income
taxes
12,450 (677 ) 11,773
Depreciation and
amortization
847 28 875
Segment assets 24,576 2,785 27,361
Segment capital
expenditures
654 957 1,611
 
2006
Revenue $ 137,127 $ 137,127
Segment income from continuing
       operations before income
taxes
12,815 12,815
Depreciation and
amortization
761 761
Segment assets 24,592 24,592
Segment capital
expenditures
1,245 1,245


Reconciliations:


























































































































































































































































Year Ended
August 30, August 25, August 26,
     2008      2007      2006
Profit or loss  
Income from
continuing operations
 
       before income taxes for
reportable segments

4,406
11,773
12,815
Corporate expenses and other (7,456 )   (7,498 )   (7,287 )
       Consolidated (loss) income
from continuing
 
             
operations before income taxes
$ (3,050 ) $ 4,275 $ 5,528
Depreciation and amortization
Total
depreciation and amortization for
       reportable segments $ 988 $ 875 $ 761
Corporate depreciation and amortization 20 27 43
$ 1,008 $ 902 $ 804
 
Assets
Total assets for
reportable segments
$ 23,228 $ 27,361 $ 24,592
Corporate assets (a) 10,884 17,438 15,415
      
Total consolidated assets
$ 34,112 $ 44,799 $ 40,007


F-23





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(
In thousands, except for share amounts)


























































































Year Ended
August 30, August 25, August 26,
     2008      2007      2006
Capital expenditures      
Total
capital expenditures for reportable segments
$ 891 (b) $ 1,611 $ 1,245 (b)
Corporate capital expenditures   12 24 34
Discontinued operations capital expenditures (17 )
$ 903 $ 1,635 $ 1,262
____________________
 












(a) Corporate assets consist
primarily of cash and cash equivalents, marketable securities, restricted
cash, and amounts due from Related Company.
 
(b)      Includes equipment under capital
leases of $68 and $179 in 2008 and 2006,
respectively.

(14) Commitments and Other


Leases:


     The Company leases retail store,
warehouse and executive office locations under operating leases for varying
periods through fiscal 2018, which are generally renewable at the option of the
lessee. Certain leases contain provisions for additional rental payments based
on increases in certain indexes.


     Rental expense from continuing
operations for all operating leases amounted to approximately $24,479, $23,692
and $22,635, net of sublease income of $80, $214 and $203 for the years ended
August 30, 2008, August 25, 2007 and August 26, 2006, respectively.


     The Company also leases warehouse
equipment under capital leases expiring through 2018. The capital leases are
included with store fixtures, equipment and leasehold improvements on the
balance sheet in the amount of $247 at August 30, 2008. Related accumulated
depreciation amounted to $79.


     At August 30, 2008, minimum payments
due under leases consisted of the following:







































































Year
Ending
  Operating Capital
August   Leases      Leases
2009 17,549   54
2010   13,962 54
2011 10,983 44
2012 8,438 26
     2013 5,996 17
     2014 and thereafter 16,527 24
$ 73,455 $ 219


     The total minimum lease payments for
capital leases in the amount of $219 include $39 of interest. The present value
of the above future capital lease payments is included in the liability section
of the balance sheet. As of August 30, 2008, $41 was classified in accrued
expenses and other current liabilities and $139 as obligations under capital
leases, net of current portion.


F-24





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


Letter of credit:


     In February 2004, the Company
entered into a standby letter of credit in the amount of $110, as required by
the Company’s workers’ compensation insurance provider. The Company has
purchased a certificate of deposit for the same amount from a financial
institution as collateral for the letter of credit and has classified the
certificate as restricted cash.


Accrued expenses and other current
liabilities:


     The components of accrued expenses
and other current liabilities are as follows:












































































































Year
Ended
August 30, August 25,
     2008      2007
Payroll and bonuses $ 778 $ 1,140
Advertising 1,522 1,231
Sales tax 458 557
Accounting 256 256
Warranty 62 107
Finance
fees
  81   99
Income taxes 5   45
Freight 39 157
Home delivery   218 161
Other 473 430
$ 3,892 $ 4,183


Warranties:


     The aggregate changes in the
liability for product warranties during the fiscal years ended 2008, 2007, and
2006 are as follows:





























































































Year Ended
August 30, August 25, August 26,
     2008      2007      2006
Warranty payable at beginning of year $ 107   $     248 $     136
Amount paid
during fiscal year
    
(332
) (295 ) (533 )
Amount expensed during fiscal year 287 154 645
 
       Warranty payable at end of
year
$ 62 $ 107 $ 248


F-25





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


Employment agreements:


     On August 15, 1999, the Chief
Executive Officer of the Company entered into a five-year renewable employment
agreement, which provides for a base salary of $400 per annum, subject to
certain cost of living increases, and bonuses based on earnings and revenues.
The agreement automatically renews annually and is cancellable on six months
notice by either party.


     On August 15, 1999, the President,
Chief Financial Officer and Chief Operating Officer of the Company entered into
a five-year renewable employment agreement which provides for a base salary of
$400 per annum for the first three years and $500 per annum thereafter, subject
to certain cost-of-living increases and bonuses based on earnings and revenues.
The agreement automatically renews annually and is cancellable on six months
notice by either party.


Consulting agreement:


     The Company executed a five-year
consulting agreement expiring on March 30, 2010 with one of the parties
objecting to the original settlement between the Related Company and the
Company. Pursuant to the agreement, the individual shall perform consulting
services including, among other things, providing advice with respect to the
operation and financing of the Company’s business; assisting the Company in
identifying and communicating with potential market makers and investors;
assisting the Company with strategic planning and capital-raising activities;
and identifying potential strategic partners. In consideration for his services,
the individual is to be paid a fee of $50 per annum and was issued a warrant to
purchase 150,000 shares of the Company’s common stock, as more fully described
in Note 10. In addition, the Company established a monitoring committee to
review the relationship between the Related Company and the Company. The
aforementioned individual is a member of the committee.


Certain related party transactions:


     The Company incurred approximately
$99, $79 and $77 of legal fees payable to a former director (and stockholder) of
the Company in the fiscal years ended in 2008, 2007 and 2006, respectively.


     For fiscal years 2008, 2007 and
2006, the Company paid $644, $842 and $752, respectively, for home delivery and
furniture repair service contracts entered into with companies owned by
employees of the Company.


(15) Litigation


     The Company is subject to litigation
in the normal course of business, including a claim for unspecified damages for
sexual harassment, discrimination, retaliation, mental infliction of emotional
stress, false imprisonment and collateral claims. The Company denies liability
and does not believe that this matter or any of its other litigation will have a
material adverse effect on its financial condition, results of operations or
cash flows.


(16) Preferred Stock


     See Note 7 for a description of the
provisions of the Series A convertible preferred stock.


     In connection with the settlement of
class action litigation, the Company issued 88,880 shares of Series B
convertible preferred stock (“Series B Stock”) having a value of $370. Each
share of Series B Stock is convertible, at the option of the holder, into
seven-tenths of a share of the Company’s common stock. In addition, holders of
the Series B Stock are entitled to receive, upon surrender of their stock
certificates, $0.10 in cash for each pre-conversion share of the Company’s
Series B Stock held by such holder. The Series B shares are non-voting, have a
liquidation preference of $5.00 per share and accrue dividends at the rate of
$.35 per share per annum. The Series B Stock is convertible at the option of the
Company at any time after the common stock trades at a price of at least $7.00
per share.


F-26





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


     During March 2007, as a result of a
discrepancy between a court settlement stipulation and the Company’s certificate
of incorporation, and in order to avoid a dispute, the Company rescinded their
option which had previously been exercised, to require the conversion of the
Series B Stock. However, so as not to unduly inconvenience preferred
stockholders who wished to convert to common stock, the Company permitted
holders of the preferred stock who wanted to convert to common stock to do so on
the same terms by delivering their Series B Stock certificates to their transfer
agent by May 15, 2007.


     On May 15, 2007, certain holders of
Series B Stock elected to convert 40,891 shares into 28,523 shares of the
Company’s common stock. Fractional shares of the Company’s common stock were not
issued as a result of the conversion. Instead, holders of the Series B Stock who
otherwise would have been entitled to receive a fractional share received an
amount in cash equal to $5.00 per post conversion share (calculated on a pro
rata basis) for such fractional shares. Dividends earned on the Company’s Series
B Stock tendered for conversion up until and including May 15, 2007 were paid.
During May 2007, the Company paid an aggregate of $4 for each pre-conversion
share of the Company’s Series B Stock held by such holders and $1 for fractional
shares of common stock. In addition, accumulated unpaid dividends for the period
October 30, 2005 through May 15, 2007 in the amount of $48 were paid to all
holders of Series B Stock. All such amounts were charged to additional paid in
capital. Accumulated unpaid dividends for the period May 16, 2007 through August
30, 2008 amounted to $22.


(17) Quarterly Results of Operations
(Unaudited)


     The following is a summary of the
quarterly results of operations for the years ended August 30, 2008 and August
25, 2007:





































































































































































































































































































Thirteen Weeks
Ended
November 24, February 23, May 24, August 30,
2007 2008 2008 2008
     (b)      (b)          
Revenue:
 
     Net sales
$ 31,955 $ 26,074 $ 26,755 $    29,067
       Revenue from service
contracts
2,016 1,647 1,674 1,777
  33,971 27,721 28,429 30,844
Cost of sales, including store occupancy  
       warehousing, delivery and
service costs
23,770 20,122 20,280 21,331
Loss from
continuing operations
 
       before income taxes (423 )   (1,159 ) (644 ) (824 )
Income tax expense (benefit)   53 (47 ) - 4
Loss from
continuing operations
(476 ) (1,112 ) (644 ) (828 )
Loss from discontinued operations (29 ) (134 ) (67 ) (39 )
Net
loss
(505 )   (1,246 )   (711 ) (867 )
Basic net loss per share $       (0.07 ) $    (0.18 ) $ (0.10 )   $ (0.12 )
Diluted net loss
per share
$ (0.07 ) $ (0.18 ) $ (0.10 ) $ (0.12 )


F-27





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)


































































































































































































































































































Thirteen Weeks
Ended
November 25, February 24, May 26, August 25,
2006 2007 2007 2007
     (b)      (b)      (b)      (b)
Revenue:  
       Net sales $      29,882 $    30,565
30,343 $  
34,510
       Revenue from service
contracts
2,041   2,117 2,193 2,301
31,923 32,682 32,536 36,811
Cost of sales, including store occupancy  
       warehousing, delivery and
service costs
22,379   22,949 22,057 24,660
(Loss) income
from continuing
       operations before income
taxes
(583 ) 1,268 1,720 1,870
Income tax expense (benefit)   30 (31 ) 45 80
(Loss) income
from continuing operations
(613 ) 1,299   1,675 1,790
Loss from discontinued operations (24 ) (41 ) (66 ) (49 )
Net (loss)
income
(637 ) 1,258 1,609 1,741
Basic net (loss) income per share $ (0.09 ) $ 0.16 $ 0.20 $ 0.22
Diluted net
(loss) income per share (a)
$ (0.09 ) $ 0.14 $ 0.18 $ 0.20
____________________
 












(a)

The sum of the four quarters
differs from the income per share for the year as the weighted average
common shares issuable upon conversion of the series A and B convertible
preferred stock, or exercise of options and warrants are not included in
calculating the loss per share for the quarter ended November 25, 2006, as
they are anti-dilutive.

 
(b)     

During the second and third
quarters of fiscal 2008, the Company closed eight stores of which six
stores have been classified as discontinued operations. As a result,
revenue and cost of sales for the first two quarters of fiscal 2008 and
each of the quarters in fiscal 2007 have been restated to reflect only the
Company’s continuing operations. There was no effect on previously
reported net income (loss) for any of the quarters as a result of the
above. Below is a reconciliation of amounts as previously reported in the
Company’s quarterly reports on Form 10Q with respect to the first and
second quarters of fiscal 2008 and each of the four quarters of fiscal
2007 in the Company’s annual report on Form10K to the restated amounts
reported above.


 
























































































































































































Thirteen Weeks Ended
     November 24,      February 23,
2007 2008
Revenue:
       As previously
reported
$ 34,702   $ 27,944
       Stores closed in subsequent
periods
  (731 ) (223 )
      
As restated
$     33,971 $     27,721
 
Cost of sales:
       As previously
reported
$ 24,301 $ 20,297
       Stores closed in subsequent
periods
(531 ) (175 )
      
As restated
$ 23,770 $ 20,122
 
Loss from continuing operations:
       As previously
reported
$ (512 ) $ (1,160 )
       Stores closed in subsequent
periods
36 48
      
As restated
$ (476 ) $ (1,112 )
 
Income (loss) from discontinued operations
       As previously
reported
$ 7 $ (86 )
       Stores closed in subsequent
periods
(36 ) (48 )
      
As restated
$ (29 ) $ (134 )


F-28





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Notes to Consolidated
Financial Statements
August 30, 2008,
August 25, 2007 and August 26, 2006
(In thousands, except for share amounts)




































































































































































































































































































































Thirteen Weeks
Ended
November 25, February 24, May 26, August 25,
     2006      2007      2007      2007
Revenue:  
       As previously
reported
$     32,577 $     32,974   $
 
32,536 $  
37,477
       Stores closed in subsequent
periods
  (654 ) (292 )   (666 )
      
As restated
$ 31,923 $ 32,682 $ 32,536 $ 36,811
 
Cost of sales:
       As previously
reported
$ 22,831 $ 23,155 $ 22,057 $ 25,135
       Stores closed in subsequent
periods
(452 ) (206 ) (475 )
       As restated $ 22,379 $ 22,949 $ 22,057 $ 24,660
 
(Loss) income from continuing operations:
       As previously
reported
$ (627 ) $ 1,237 $ 1,675 $ 1,767
       Stores closed in subsequent
periods
14 62 23
      
As restated
$ (613 ) $ 1,299 $ 1,675 $ 1,790
 
(Loss) income from discontinued operations
       As previously
reported
$ (10 ) $ 21 $ (66 ) $ (26 )
       Stores closed in subsequent
periods
(14 ) (62 ) (23 )
      
As restated
$ (24 ) $ (41 ) $ (66 ) $ (49 )


F-29





JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

(In thousands)







































































































































































































Balance at Charged to Balance at
Beginning Charged to Other   End of
     of Period      Expenses      Accounts      Deductions      Period
2008
Deducted from
asset accounts:
       
       Allowance for inventory
obsolescence
$ 37 $ $ $ 5 $ 32
 
2007
Deducted from
asset accounts:
       Allowance for inventory
obsolescence
$ 133 $ $ $ 96 $ 37
 
2006
Deducted from
asset accounts:
       Allowance for inventory
obsolescence
$ 179 $ $ $ 46 $ 133


F-30





SIGNATURES


     Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





























JENNIFER
CONVERTIBLES, INC.
   
By:  /s/ Harley J. Greenfield  
Name:  Harley J.
Greenfield
Title: Chairman of
the Board
and Chief
Executive Officer
Date: November 26,
2008



     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.

































































































NAME      POSITION      DATE
/s/ Harley J.
Greenfield
Chairman of the Board
and Chief Executive
November 26,
2008
    Harley J. Greenfield      Officer (Principal Executive
Officer)
 
   
 
 
/s/ Edward
Bohn
Director November 26,
2008
    Edward Bohn    
 
/s/ Kevin J.
Coyle
Director November 26,
2008
    Kevin J. Coyle    
 
/s/ Mark
Berman
Director November 26,
2008
    Mark Berman    
 
/s/ Rami
Abada
President, Director,
Chief Operating
November 26,
2008
    Rami Abada      Officer and
Chief Financial Officer
 












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GRAPHIC

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