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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

For the fiscal year ended Commission File number 1-9681
August 26, 1995

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.)

419 Crossways Park Drive
Woodbury, New York 11797 5712
- --------------------------------------- -------------------------
(Address of principal executive office) (Primary Standard
Industrial Classification
Code Number)

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

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

Common Stock, par value $.01
------------------------------
(Title of class)

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

Yes No X
----- -----

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

Aggregate market value of voting stock held by non-affiliates of registrant as
of November 30, 1995: $11,008,622.

Shares of Common Stock outstanding as of November 30, 1995: 5,700,725

DOCUMENTS INCORPORATED BY REFERENCE
NONE









PART I
Item 1. Business

Recent Developments

In late November 1994, the Company was advised by KPMG Peat Marwick
("Peat"), its independent auditors at the time, that its method of accounting
for certain of its licensees should be changed and would likely require a
restatement of previously announced financial results. The financial
statements included herein consolidate the operating losses for certain
limited partnership licensees (the "LPs"), to the extent such losses exceed
the capital contributions of the limited partners. In addition, on December 2,
1994, as more fully discussed under "Certain Relationships and Related
Transactions," a special committee of the Company's Board of Directors
delivered a summary report which concluded that the Company had meritorious
claims against three members of its management, an affiliated private company
and others. The Company announced these matters publicly in a press release on
December 2, 1994. In March 1995, the Company received a response to such
report prepared on behalf of one of the members of its management which
concluded that there were no valid claims. As more fully discussed under
"Legal Proceedings," the Company and certain of its management became involved
in class action and derivative litigations relating to the matters referred to
above and, on May 3, 1995, the Securities and Exchange Commission commenced an
investigation relating to such matters. On May 2, 1995, BDO Seidman, the
Company's auditors for the 1993 fiscal year, advised the Company that BDO
Seidman, had withdrawn its opinion with respect to the Company's financial
statements for the fiscal year ended August 31, 1993. In March 1996, as
described in "Legal Proceedings," the Company announced that it had entered
into memoranda of understanding ("MOUS") with the other parties in the class
action and derivative litigations (other than Selig Zises, Peat and BDO
Seidman) for the purpose of settling such litigations. The transactions set
forth in the MOUS and the settlement of such litigation are subject, among
other things, to execution of definitive documentation and Court approval.

As a result of the late filing of this Annual Report, the Company is
simultaneously filing its Quarterly Reports on Form 10-Q for the quarters
ended November 25, 1995, February 24, 1996 and May 25, 1996 (the "Quarterly
Reports"). Certain of the information contained in this Annual Report is out
of date and, accordingly, this Annual Report should be read in conjunction
with the Quarterly Reports. Unless expressly otherwise stated, information in
this Annual Report is as of August 26, 1995.

Unless otherwise set forth herein, the term the "Company" includes
Jennifer Convertibles, Inc., a Delaware corporation, and its direct or
indirect subsidiaries.

Business Overview

The Company is the owner and licensor of the largest group of sofabed
specialty retail stores in the United States, with 130 Jennifer
Convertibles(R) stores located on the Eastern seaboard, in the Midwest, on the
West Coast and in the Southwest. As of August 26, 1995, the Company also
operated 38 "Jennifer Leather" ("Jennifer Leather") stores and one "Elegant
Living" ("Elegant Living") store. Of the Jennifer Convertibles(R) stores, as
of August 26, 1995, 51 were owned by the Company and 79 were licensed by the
Company.



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NUMBER OF STORES IN OPERATION AS OF AUGUST 26, 1995
=================================================================================
ELEGANT TOTAL LPS AND OTHER PRIVATE TOTAL
CONVERTIBLES LEATHER LIVING COMPANY LICENSEES(1) COMPANY(2) STORES
---------------------------------------------------------------------------------

REGION
TRI-STATE AREA
NEW YORK 7 12 1 20 3 25 48
NEW JERSEY 9 8 17 4 21
CONNECTICUT 4 1 5 2 7
---------------------------------------------------------------------------------
SUBTOTAL 20 21 1 42 9 25 76

ARIZONA 3 3
CALIFORNIA 4 4 22 26
FLORIDA 5 5 13 18
GEORGIA 4 4
ILLINOIS 15 15
INDIANA 3 3 3
KANSAS 1 1 1
MARYLAND 3 1 4 3 7
MASSACHUSETTS 6 5 11 11
MICHIGAN 6 6 6
MISSOURI 5 5 5
NEVADA 2 2
NEW HAMPSHIRE 2 2 2
OHIO 4 4
PENNSYLVANIA 4 4
VIRGINIA 2 1 3 3
WISCONSIN 2 2 2
WASHINGTON, D.C. 1 1 2 2

---------------------------------------------------------------------------------
TOTAL 51 38 1 90 79 25 194
=================================================================================



(1) These include LPs, which are licensees whose accounts are included in
the consolidated financial statements of the Company, and licensees (the
"Unconsolidated Licensees") whose accounts are not so included.

(2) These 25 stores are not owned and do not pay royalties to the Company.
They operate in New York (the "Private Stores") and 21 of such stores
are owned by a company (the "Private Company") that, as of August 26,
1995, was owned by an individual who was a principal stockholder of the
Company and the brother-in-law of Harley J. Greenfield, the Company's
Chairman of the Board, Chief Executive Officer and a director and
principal stockholder. In addition, Mr. Greenfield and Edward Seidner
(also an officer, director and principal stockholder of the Company)
retain a substantial economic interest in the Private Company through
ownership of $10,273,204 in the aggregate principal amount of secured
Private Company promissory notes issued in connection with the
redemption of their stock ownership in the Private Company. Accordingly,
the Private Company may be deemed an affiliate of the Company. The
remaining three stores are sublicensees of the Private Company and one
of such stores is owned by the father of an executive officer of the
Company. The 25 New York stores are operated in substantially the same
way as the Company-owned stores. See "Notes to Consolidated Financial
Statements - Footnote-Related Party Transactions."

Jennifer Convertibles(R) stores specialize in the retail sale of a
complete line of sofabeds and companion pieces, such as loveseats, chairs and
recliners, designed and priced to appeal to a broad range of consumers. The
sofabeds and companion pieces are made by several manufacturers and range from
expensive, high-end

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merchandise to relatively inexpensive models. The Jennifer
Leather stores specialize in the retail sale of leather livingroom furniture.
The Company is the largest dealer of Sealy(R) sofabeds in the United States.
Merchandise is displayed in attractively decorated model room settings in the
store designed to show the merchandise as it would appear in the customer's
home. In order to generate sales, the Company and its licensees rely on the
attractive image of the stores, competitive pricing, prompt delivery and
extensive advertising.

The table below sets forth information with respect to the number of
stores (Company-owned and licensed) opened since fiscal 1986:

Fiscal Years
---------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ----
Company-owned stores
open at end of
period (1)(2)(3) 90 55 34 33 33 39 42 31 13
Licensed stores open at
end of period 79 113 87 42 15 0 0 0 0
-- --- --- -- -- -- -- -- --
Total stores open at
end of period 169 168 121 75 48 39 42 31 13
=== === === == == == == == ==
- ----------

(1) Stores acquired from affiliated companies are reflected as opened in the
year they were opened by the affiliate, not in the year they were
acquired by the Company.

(2) For fiscal 1994, includes the 19 Jennifer Leather and two Elegant Living
stores open at the end of such fiscal year.

(3) For fiscal 1995 includes the 38 Jennifer Leather stores and one Elegant
Living store open at the end of such fiscal year.

Store Image and Merchandise

The Company believes that the image presented by its stores is an
important factor in its overall marketing strategy. Accordingly, stores are
designed to display the Company's merchandise in attractive model room
settings. All Jennifer Convertibles or Jennifer Leather stores, as the case
may be, are of a similar clearly defined style, are designed as showrooms for
the merchandise and are carpeted, well-lighted and well-maintained.
Inventories for delivery are maintained in separate warehouses. The Company
displays a variety of sofabeds and companion pieces (including cocktail
tables) at each Jennifer Convertibles retail location with carpeting and
certain accessories. In contrast to certain of its competitors that primarily
target particular segments of the market, the Company attempts to attract
customers covering a broad socio-economic range of the market and,
accordingly, offers a complete line of sofabeds made by a number of
manufacturers in a variety of styles at prices currently ranging from
approximately $400 to $2,200. The Jennifer Leather stores similarly offer a
complete line of leather living room furniture in a variety of styles and
colors at prices currently ranging from approximately $499 to $6,000. The
Company generally features attractive price incentives to promote the purchase
of merchandise. In addition to offering merchandise by a number of brand name
manufacturers, the Company offers merchandise at its Jennifer Convertibles and
Jennifer Leather stores under the "Jennifer" brand name.


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Although each style of sofabed, loveseat, chair and recliner is generally
displayed at Jennifer Convertibles stores in one color and fabric, samples of
the other available colors and fabrics are available. On selected merchandise,
up to 300 different colors and fabrics are available without extra charge and
up to 2,000 different colors and fabrics are available on selected items for
an additional charge. Leather furniture is offered in a number of different
grades of leather and colors. The Company currently emphasizes contemporary
and traditional sofabeds and companion pieces in the Jennifer Convertibles
stores and contemporary leather pieces in the Jennifer Leather stores. The
Company generates additional revenue by selling tables and offering related
services, such as fabric protection and a lifetime warranty. Fabric protection
services are obtained from, and the warranty is given by, the Private Company,
which retains approximately 1/3 of the revenues generated from such services.
See "Certain Relationships and Related Transactions."

Merchandise ordered from inventory (approximately 55% of sales in the
Jennifer Convertibles stores and 35% of sales in the Jennifer Leather stores)
is generally available to be delivered to customers within 48 to 72 hours of
placing an order. Customers who place orders for items, colors or fabrics not
in inventory ("special orders") must generally wait three to five weeks for
delivery, except for Italian leather merchandise which may take up to 20
weeks. The Company believes that its delivery times on stocked items and
special orders are significantly faster than the usual delivery times for
furniture and that its ability to offer quick delivery of merchandise
represents a significant competitive advantage.

Operations

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

The Company and its licensees have regional managers throughout the
United States. The regional managers supervise store management and monitor
stores within their assigned region to ensure compliance with operating
procedures. Regional managers report to and coordinate operations in their
region with the Company's executive management.

An inventory of approximately 70% of the items displayed in the stores,
in the colors and fabrics displayed, is usually maintained at the Private
Company's warehouse facilities (described below.) The Company and its
licensees typically 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 certified or official bank check upon delivery of the
merchandise. The balance of the purchase price is collected by the independent
trucker making the delivery.

Marketing

The Company and its licensees advertise in newspapers, transit and other
media and on television in an attempt to saturate its marketplaces. The
Company's approach to advertising requires the Company to establish a number
of stores in each area it enters. This concentration of stores enables area
advertising expenses to be spread over a larger revenue base and to increase
the prominence of the local advertising program. The Company's and the LPs'
expenditures for advertising were approximately $14,900,000 (11.9%)


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of sales in the fiscal year ended August 26, 1995 as compared to approximately
$11,400,000 (11.7%) of sales in the prior year.

The Company creates advertising campaigns which may be used by the
Company's stores and may be used by the Private Stores. The Private Company
bears an amount which approximates its pro rata share of advertisements which
target customers in New York, New Jersey and Connecticut. (See "Certain
Relationships and Related Transactions.") However, the Company also advertises
independently of the Private Company outside of the New York metropolitan
area. The Company is entitled to reimbursement from most of its licensees,
which are responsible for their respective costs of advertising; however, the
approach and format of such advertising is usually substantially the same for
the Company and its licensees. The Company has the right to approve the
content of all licensee advertising.

In order to further understand its markets, the Company carefully
monitors its sales, interviews customers and obtains other information
reflecting trends in the furniture industry and changes in customer
preferences. The Company also reviews industry publications, attends trade
shows and maintains close contact with its suppliers to aid in identifying
trends and changes in the industry.

Leasing Strategy and Current Locations

The Company considers the ability to obtain attractive, high-traffic
store locations to be critical to the success of its stores. The Company,
together with outside real estate consultants, selects sites and negotiates
leases on behalf of its licensees. The site selection process involves
numerous steps, beginning with the identification of territories capable of
sustaining a number of stores sufficient to enable such stores to enjoy
significant economies of scale, particularly in advertising, management and
distribution. Significant factors in choosing a territory include market
demographics and the availability of newspapers and other advertising media to
efficiently provide an advertising umbrella in the new territory.

Once a territory is selected, the Company picks the specific locations
within such territory. Although a real estate consultant typically screens
sites within a territory and engages in preliminary lease negotiations, each
site is inspected by an officer of the Company and the Company is responsible
for approval of each location. The leased locations are generally in close
proximity to heavily populated areas, shopping malls, and other competing
retail operations which are on or near major highways or major thoroughfares,
are easily accessible by auto or other forms of transportation and provide
convenient parking.

The locations currently leased by the Company and its licensees range in
size from 1,900 square feet to a little over 8,000 square feet. The Company
anticipates that stores opened in the future will range from approximately
2,000 square feet to 4,000 square feet. Management believes that optimal store
size for a Jennifer Convertibles store is approximately 3,000 square feet
while optimal store size for a Jennifer Leather store is 3,500 square feet.
Stores may be freestanding or part of a strip shopping center.

In fiscal 1995, the Company and the LPs closed an aggregate of 37
stores. Several were closed for non-performance, but a number of such closings
were due to the Company's plan to combine separate Jennifer Convertibles and
Jennifer Leather stores located in the same demographic areas into one store.
The primary benefit of combining both operations into one store was an
elimination of the real estate expenses and other expenses associated with the
closed showroom. Additional benefits realized included reductions of personnel
and, in a number of cases, elimination of duplicate office equipment and
telephone lines. Although combining

6









two stores into one store generally reduces sales, management believes that
sales at the combined store will generate more profit due to the elimination
or reduction of expenses described above.

Although the Company and the LPs closed a number of stores during fiscal
1995, the Company does not anticipate closing a significant number of stores
during fiscal 1996 and it will selectively open additional stores if
attractive opportunities present themselves.

Sources of Supply

The Company currently purchases merchandise, for its stores and the
stores of its licensees and the Private Company, from a variety of domestic
manufacturers generally on 40 or 60 day terms. The combined purchasing power
of the Company, its licensees and the Private Company enables them to receive
the right, in some instances, to market exclusively certain products, fabrics
and styles. See "Certain Relationships and Related Transactions."

The Company's principal suppliers of sofabeds are Klaussner Furniture,
Inc. ("Klaussner") and Sealy Furniture of Maryland, Inc. ("Sealy Maryland").
Sealy(R) brand name sofabeds are the Company's largest selling brand name item
and the Company believes that Sealy(R) brand name mattresses are the largest
selling mattresses in the world and have the highest consumer brand awareness.
The Company also believes that Sealy Maryland is the largest manufacturer of
Sealy(R) brand name convertible sofabeds. The Company is the largest sofabed
specialty retailer and the largest Sealy(R) sofabed dealer in the United
States. During the fiscal year ended August 26, 1995, the Company purchased
approximately 73% of its merchandise from Klaussner and approximately 22% of
its merchandise from Sealy Maryland. Leather furniture is purchased primarily
from Klaussner and Industries Natuzzi S.p.A. The loss of Klaussner as a
supplier could have a material adverse effect on the Company. In March 1996,
as part of a series of transactions (the "Klaussner Transaction") the Company,
among other things, granted Klaussner a security interest in substantially all
of its assets in exchange for improved credit terms. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
a fuller description of the Klaussner Transaction.

Licensing Arrangements

In fiscal 1991, the Company shifted its focus from owning and operating
stores to a licensing program under which it licensed stores in exchange for
an ongoing royalty. As of August 26, 1995, an aggregate of 79 licensed stores
were open. Among the reasons for the Company's shift to licensing had been
that Jennifer Convertibles stores typically experience losses for three to
four years. The Company had believed that the losses from stores operated by
licensees would not be included in the Company's financial statements. In
November 1994, the Company's accountants advised the Company that the losses
of certain licensees in excess of capital contributions of the limited
partners must be included in the Company's financial statements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." As a result of such conclusion, the Company is no longer actively
seeking to license additional stores. In addition, as set forth under "Legal
Proceedings," the MOUS contemplate that the Company will receive the limited
partnership interests in licensees which now own 55 licensed stores,
representing all but 20 of the royalty bearing licensed stores in connection
with the settlement of certain litigation.

The Company's arrangements with its licensees typically involve providing
the licensee with a license, bearing a royalty of 5% of sales, to use the name
Jennifer Convertibles(R). The Company's existing licensing arrangements are
not uniform and vary from licensee to licensee. Generally, however, the
Company either

7








manages the licensed stores or, if the licensee is a partnership, has a
subsidiary act as general partner of such partnership, in each case, for 1% of
the licensees' profits. The arrangements generally have a term ranging between
10 and 20 years (and may include options on the licensee's part to extend the
license for additional periods) and involve the grant of exclusivity as to
defined territories. In some cases, the Company also has an option to purchase
the licensee or the licensed stores for a price based on an established
formula or valuation method. Investors in certain licensees have, in certain
circumstances (including a change of control of the Company), the right to put
their investments to the Company for a price based upon an established formula
or valuation method. The Private Company currently provides warehousing,
fabric protection and other services to licensees on substantially the same
basis as such services are provided to the Company and the Company purchases
merchandise for the licensees. The Company also provides certain accounting
services to certain licensees for which it generally charges $6,000 per store.
As of August 26, 1995, the Company was owed an aggregate of $15,106,000 for
royalties, advances and merchandise by its licensees, a substantial portion of
which was overdue. Of such amount, $10,629,000 due from the LPs is not shown
separately on the Company's financial statements as a result of the
consolidation of the LPs and $4,477,000 due from Unconsolidated Licensees was
reserved against in such financial statements due to doubts as to
collectibility. The Private Company has agreed to assume $1,866,000 of such
amount. Most of the investors in the licensees have other relationships with
the Company or its current or former management. See "Certain Relationships
and Related Transactions."

Although the Company does not believe that certain transactions in which
licenses were granted to operate stores were subject to state and Federal laws
regulating the offer and sale of franchises, the applicability of such laws is
uncertain as applied to the Company's licensing program, and there can be no
assurance that a court would not take the position that the Company should
have complied with such laws in connection with those transactions. In order
to reduce or eliminate this uncertainty, in 1993 the Company offered certain
licensees the opportunity to rescind their license agreements. All such
licensees declined such offers of rescission.

Warehousing and Related Services

Effective January 1, 1994, the Company and the Private Company entered
into a new warehousing agreement (the "New Warehousing Agreement") which
terminated the original Warehousing and Purchasing Agreement (the "Original
Warehousing Agreement") entered into in 1986. Pursuant to the New Warehousing
Agreement (which expires in 2001), the Company currently utilizes the
warehousing and distribution facilities leased and operated by the Private
Company and, as of July 1996, consisting of a 236,000 square foot warehouse
facility in North Carolina, and satellite warehouse facilities in New Jersey
and California (collectively, the "Warehouse Facilities"). Until June 1996,
the Company had utilized a warehouse facility in Inwood, New York. The
Warehouse Facilities service Company-owned and licensed stores and the Private
Stores.

The Company presently uses the Warehouse Facilities to service all of
the Company-owned and licensed stores. Although the Company is not obligated
to use the Warehouse Facilities of the Private Company, it has done so to
avoid the administrative and other costs associated with developing and
maintaining the infrastructure required to manage warehousing and handling
independently. The New Warehousing Agreement provides that the Private Company
is not obligated to provide services for more than 300 Company-owned stores.
The Company pays the Private Company a monthly warehouse fee (the "Warehouse
Fee") equal to 5% of the retail selling price of all merchandise (including
the retail selling price of any related services, such as fabric protection
and merchandise warranties) delivered from the Warehouse


8











Facilities to customers of the Company-owned stores plus 5% of the retail
selling price of all merchandise delivered from the Warehouse Facilities to
Company-owned stores for display purposes. In addition, the Private Company
has separately contracted with the Company's licensees to provide warehousing
and handling services for licensed stores for a fee equal to 5% of the retail
price of merchandise delivered to the licensees' customers and on other terms
substantially similar to those under the New Warehousing Agreement.

The Private Company also provides a number of other services, including
arranging for freight deliveries, providing customer service, data entry
processing and related services, fabric protection and warranty services and
other customer services. In addition to the Warehouse Fee, the Company pays
the Private Company a portion (approximately one-third) of the fabric
protection and merchandise warranty revenues collected from customers and the
Company also pays the Private Company for freight charges based on quoted
freight rates. See "Certain Relationships and Related Transactions."

The Private Company is only obligated to provide warehousing for 300
Company-owned stores. If the Company expands to more than 300 Company-owned
stores or if the Warehouse Facilities, for some reason, can not service all
such stores, the Company may be required to purchase or lease warehousing
facilities to serve such additional stores. In such event, the Company
believes that adequate public warehousing facilities would be available for
such services. The Company would also incur certain warehousing costs not
incurred by the Company for stores serviced by the Warehouse Facilities.

As described in "Legal Proceedings," the MOUS contemplate that the
Company and the Private Company will enter into a new warehousing agreement
pursuant to which the arrangements described above will be substantially
revised and the Company will take over the warehousing and related functions
over a period ending January 1, 1999. In contemplation of the settlement, the
Company has begun to take over certain of the related functions, including
customer service, cash processing, order processing and store support.

Trademarks

The trademarks Jennifer Convertibles(R) and With a Jennifer Sofabed,
There's Always a Place to Stay(R) are registered with the U.S. Patent and
Trademark Office and now owned by the Company. The Private Company, as
licensee, was granted a perpetual royalty-free license to use and sublicense
the proprietary marks in the State of New York, subject to certain exceptions.
See "Certain Relationships and Related Transactions."

Employees

As of August 26, 1995, the Company had 478 employees including eight
executive officers. The Company trains personnel to meet its expansion needs
by having its most effective managers and salespersons train others and
evaluate their progress and potential for the Company. The Company believes
that its employee relations are satisfactory. None of the Company's employees
are represented by a collective bargaining unit. The Company has never
experienced a strike or other material labor dispute.

Competition

The Company competes with other furniture specialty stores, major
department stores, individual furniture stores, discount stores and chain
stores, some of which have been established for a long time in the same
geographic areas as the Company's stores (or areas where the Company or its
licensees may open stores). The


9










Company believes that the principal areas of competition with respect to its
business are store image, price, delivery time, selection and service. The
Company believes that it competes effectively with such retailers because its
stores offer a broader assortment of convertible sofabeds than most of its
competitors and, as a result of volume purchasing, it is able to offer its
merchandise at attractive prices. The Company also advertises more extensively
than many of its competitors and offers substantially faster delivery on most
of its items.


10











Item 2. Properties

The Company maintains its executive offices in Woodbury, New York
pursuant to a lease which expires in the year 2005.

As of August 26, 1995, the Company and the LPs lease all of their store
locations pursuant to leases which expire between 1995 and 2009. None of its
leases expire until fiscal 1996, at which time three leases will expire
although the lessee has an option to renew each such lease. The leases are
usually for a base term of at least five years. For additional information
concerning the leases, see Note 8 of "Notes to Consolidated Financial
Statements."

Item 3. Legal Proceedings.

The Company is involved in a number of proceedings described below.

A. The Class Action Litigation

Beginning in December 1994, a series of 11 class actions were
brought against the Company, various of its present and former officers and
directors, and certain third parties, in the United States District Court for
the Eastern District of New York. The complaints in all of these actions
alleged that the Company and the other defendants violated Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder in
connection with the press release (the "Press Release") issued by the Company
on or about December 2, 1994. All of these class actions have been
consolidated under the caption In Re Jennifer Convertibles, Case No. 94 Civ.
5570, pending in the Eastern District of New York (the "Class Action
Litigation").

In March 1996, the parties in the Class Action Litigation signed a
Memorandum of Understanding for the purpose of settling the Class Action
Litigation (the "Class Action MOU"). The terms of the Class Action MOU (which
are described below) are subject to a stipulation of settlement and other
documentation to be submitted to the United States District Court for the
Eastern District of New York, as well as the approval of the terms of the
settlement by that Court.

The Class Action MOU also provides that the settlement of the Class
Action Litigation is contingent upon final Court approval of the proposed
settlement set forth in another Memorandum of Understanding dated March 18,
1996 with respect to certain derivative actions pending in: (a) the United
States District Court for the Eastern District of New York; (b) the Supreme
Court of the State of New York; and (c) the Court of Chancery in the State of
Delaware (the "Derivative Action MOU"). These derivative actions and the terms
of the Derivative Action MOU, are also described below.

The Class Action MOU provides for the payment to certain members of
the class and their attorneys of an aggregate maximum amount of $7 million in
cash and preferred stock having a present value of $370,000. The cash portion
of the settlement will be funded entirely by insurance company proceeds. The
stock portion of the settlement will be provided by the Company based on a new
issue of preferred stock of the Company having an aggregate present value of
$370,000, which will bear an annual dividend of 7% and which will be
convertible into the Company's Common Stock (at such time as the Company's
Common Stock trades at $7.00 per share or higher) at $7.00 per share.


11











The settlement of the Class Action Litigation is a claims made
settlement, meaning that the actual amount of cash and stock to be paid out
will depend on the number of persons entitled to participate in the settlement
who actually file valid proofs of claim. All those who purchased Common Stock
during the period from December 9, 1992 through December 2, 1994 and who held
their stock through December 2, 1994, will be entitled to participate in the
settlement.

The Class Action MOU also provides that the defendants will not
object to an application by plaintiffs' attorneys for fees and expenses of up
to 1/3 of the total of the maximum amount of the cash and stock proceeds of
the settlement, without regard to the number of class members who filed valid
proofs of claim.

B. The Derivative Litigation

Beginning in December 1994, a series of six actions were commenced
as derivative actions on behalf of the Company, against Harley J. Greenfield,
Fred J. Love, Edward B. Seidner, Bernard Wincig, Michael J. Colnes, Michael
Rosen, Al Ferarra, William M. Apfelbaum, Glenn S. Meyers, Lawrence R. Haut,
Jara Enterprises, Inc., Jerome I. Silverman, Jerome I. Silverman Company,
Selig Zises and BDO Seidman & Co.1 in: (a) the United States District Court
for the Eastern District of New York, entitled Philip E. Orbanes v. Harley J.
Greenfield, et al., Case No. CV 94-5694 (DRH) and Meyer Okun and David Semel
v. Al Ferrara, et al., Case No. CV 95-0080 (DRH); Meyer Okun Defined Benefit
Pension Plan, et al. v. BDO Seidman & Co., Case No. CV 95-1407 (DRH); and
Meyer Okun Defined Benefit Pension Plan v. Jerome I. Silverman Company, et.
al., Case No. CV 95-3162 (DRH); (b) the Court of Chancery for the County of
New Castle in the State of Delaware, entitled Massini v. Harley Greenfield,
et. al., Civil Action No. 13936 (WBC); and (c) the Supreme Court of the State
of New York, County of New York, entitled Meyer Okun Defined Benefit Pension
Plan v. Harley J. Greenfield, et. al., Index No. 95-110290 (collectively, the
"Derivative Litigation").

The complaints in each of these actions assert various acts of
wrongdoing by the defendants, as well as claims of breach of fiduciary duty by
the present and former officers and directors of the Company, including but
not limited to claims relating to the matters described in the Press Release.

In March 1996, all of the parties to the derivative action
(including the Company), except for Selig Zises ("Zises") and BDO Seidman &
Co. ("Seidman") signed a Memorandum of Understanding for the purpose of
settling all of the claims involving those parties in the Derivative
Litigation (the "Derivative Litigation MOU"). The terms of the Derivative
Litigation MOU (which are discussed below) are subject to a stipulation of
settlement and other documentation to be submitted to the appropriate
Court(s), as well as Court approval of the terms of the settlement.

The Derivative Litigation MOU also provides that the settlement of
the Derivative Litigation is contingent upon final Court approval of the
proposed settlement set forth in the Class Action MOU, by the United States
District Court for the Eastern District of New York. The terms of the Class
Action MOU have already been described above.

- --------
1 Each of these individuals and entities is named as a defendant in at
least one action.


12











The Derivative Litigation MOU annexes as Exhibit A thereto a signed
agreement (the "Settlement Agreement") dated March 5, 1996 between the Private
Company and the Company. The Settlement Agreement, although signed, provides
that it too is subject to and dependent upon Court approval of the settlement
of the Derivative Litigation.

The Settlement Agreement is designed to restructure the
relationship between the Private Company and the Company, in order to reduce
and eliminate any alleged actual or potential conflicts of interest, and to
provide tangible benefits to the Company. The Settlement Agreement
contemplates, inter alia, as follows:

1. From the date of the execution of the Settlement Agreement until
December 31, 1997, the Private Company will bill the Company for services
under a new warehousing agreement, a warehousing fee of 8.3% of the retail
selling price of merchandise leaving the Warehouse Facilities for Company
stores and their customers and a redelivery fee equal to 3% of the retail
selling price of merchandise which is required to be redelivered to customers,
under certain circumstances. The Company will be entitled to a reduction in
the warehousing fee to the extent, and as of the date, that the Company
assumes the costs of providing certain non-warehousing services presently
provided by the Private Company to the Company. The Settlement Agreement
contemplates that once the Company has assumed all of these services, the
warehousing fee shall be reduced to 7.2%, which will then be the warehousing
fee until December 31, 1997, and that under all circumstances, from January 1,
1998 through December 31, 1998, the warehousing fee shall be 7.2%. Upon the
effective date of the Settlement Agreement, the Company will no longer pay the
Private Company separately for "fabric protection" services.

2. In the event that the volume of merchandise shipped from all of
the Private Company's warehouses to Company stores during calendar year 1996
fails to equal a retail selling price of $135,000,000, the Company shall pay
the Private Company an additional fee of $65,000 for each million dollars of
the shortfall (the "Shortfall Payments"), but in no event more than $650,000.
The Private Company will repay the Company for the Shortfall Payments in the
following manner: (i) 50% in 1997 if $140,000,000 or more in shipments is
achieved; (ii) 50% in 1998 if $140,000,000 or more in shipments is achieved;
and (iii) the balance of any Shortfall Payments not repaid by the Private
Company to the Company under (i) and (ii) above will be repaid over seven
years in equal monthly installments, without interest, beginning on January 1,
1999. The Company anticipates that it will not achieve sales of $135,000,000
in calendar 1996 and, accordingly, it will be liable for the Shortfall
Payments if the settlement is approved as contemplated.

3. On January 1, 1999, the Private Company will assign to the
Company all of its real property interests in or to the various warehouse
facilities then being operated by the Private Company (including all related
computer hardware), including any fee simple and/or leasehold interest,subject
only to any mortgages, purchase money security agreements, leasehold
obligations, racking and forklifting expenses, and other operation expenses
relating to such property interest and the mortgage on the Inwood warehouse.
The Settlement Agreement also provided that, as of December 31, 1998, the
aggregate of all mortgages on the Inwood Warehouse facility would not exceed
$2,850,000 and that, to the extent that the aggregate of all such mortgages
was less than $2,850,000 as of that date, the Company would pay the Private
Company the difference between $2,850,000 and the actual amount of such
mortgages by way of set-off against the Private Company's obligation to the
Company for warehousing services.

4. The Settlement Agreement provided that if the Private Company
sold the Inwood Warehouse before December 31, 1998 (as it has already done),
then the Private Company would pay the


13



APITAL PRINTING SYSTEMS]




Company $25,000 per month starting January 1, 1999 for a period of 84 months.
The Settlement Agreement also provided that if the Inwood Warehouse was sold
for more than $4,500,000 (net of all reasonable and customary expenses and
brokerage commissions), the Company would be entitled to any such excess.
However, the Inwood Warehouse was sold in June 1996 for less than $4,500,000.

5. Commencing January 1, 1999, and continuing for seven years, the
Company will provide the Private Company all warehousing services formerly
provided by the Private Company to the Company for a fee equal to 2% of the
Private Company's deemed retail selling price, plus an additional fee for any
fabric protection services sold by the Private Company to customers, payable
at the then current invoice rate.

6. The Private Company will purchase the interest of the limited
partners in the LPs known as Jennifer, LP III, Jennifer, LP IV, Jennifer, LP V
(the "Partnerships") and the stock of the shareholders of Southeastern Florida
Holding Co., Inc. ("S.F.H.C.") and the Private Company will assign these
interests and stock to the Company at no cost (except as described below). As
of March 15, 1996, S.F.H.C. and the Partnerships own an aggregate of 55
licensed Jennifer Convertibles stores which, after such assignment, will be
wholly-owned by the Company. In this connection, the Private Company and the
Company will release the aforementioned limited partners and the shareholders,
officers and directors of S.F.H.C. from all claims, including all obligations
under the notes referred to below. Although it is not reflected in the
Settlement Agreement, it is currently contemplated that the limited partners
of the Partnerships will receive 10-year warrants to purchase an aggregate of
180,000 shares of Common Stock at $7.00 per share. In addition, the maturity
date of three-year notes (with an aggregate remaining balance of $300,000)
originally entered into by them in connection with their purchase of warrants
(the "Original Warrants"), expiring June 1998, to purchase an aggregate of
180,000 shares of Common Stock at $15.625 per share, will be extended to 10
years after the settlement is approved. The extended notes will bear interest
at a rate of 7.12% per annum, and 10% of the principal amount of such notes
will be due each year. Such notes will be secured by the Original Warrants to
purchase an aggregate of 105,636 shares of Common Stock (representing the
unpaid for Original Warrants) and the Company's sole remedy, until the notes
mature, upon any default in the payment of principal of such notes, will be to
cancel a proportionate number of Original Warrants. There is no signed
agreement with the limited partners as to the transfer of the interests in the
Partnerships and S.F.H.C. described above and there can be no assurance that
the Private Company will be able to obtain such agreements and to transfer the
interests in the Partnerships and S.F.H.C. on the terms contemplated above or
at all. If the Private Company is unable to obtain such agreements and to make
the transfer, the settlement will not be consummated on the terms outlined
above or possibly, at all.

7. The Private Company agrees to pay the Company, under the offset
agreement described in Paragraph 11 below, $1,400,000 in resolution of certain
intercompany accounts as of August 26, 1995 to be paid, $17,000 per month to
be applied toward principal and interest, with interest computed at 6%
annually.

8. Commencing January 1, 1999, the Private Company will provide a
license to the Company permitting the Company to use and change the Private
Company's computer program without fee. As of January 1, 1999, the Company
will also assume the obligations and personnel of the computer department
presently maintained by the Private Company.

9. On or after the effective date of the Settlement Agreement, and
through December 31, 1998, although the Private Company will continue to be
responsible to apply fabric protection (at no additional charge to the Company),
the Company will be responsible for any claims on breach of warranty relating to
fabric protection (irrespective of whether the sale was made by the Private
Company or the Company),


14








provided, that, as to such claims made as to merchandise sold by the Private
Company, the Company may bill the Private Company for outside parts and labor
directly expended in connection therewith.

10. The Private Company will assume and pay the $1,200,000 debt of
certain stockholders of S.F.H.C. to S.F.H.C. in 84 equal monthly installments
without interest, beginning January 1, 1999.

11. As of the effective date of the Settlement Agreement, the
Private Company and the Company will enter into an offset agreement similar to
the one described under "Certain Relationships and Related Transactions"
dealing with the offset of obligations for the period not covered by the
initial offset agreement and providing for cash payments to the extent that
any amounts due under such agreement exceeds $1,000,000.

12. Royalties aggregating $100,147 from certain licensees managed
by the Private Company will be paid in 84 equal monthly installments,
commencing January 1, 1999, without interest.

The Derivative Litigation MOU also provides, inter alia, as
follows:

1. All of the plaintiffs in the derivative actions and the Company
will release all of current and former officers and directors, including
Isabelle Silverman, and the defendants in the derivative actions (except for
Zises, Peat and Seidman), from all claims which were or could have been
asserted against them in the Derivative Litigation or in any other Court
including, but not limited to: (a) the matters discussed or referred to in the
Final Report of Counsel to the Independent Committee of the Board of Directors
of Jennifer Convertibles, Inc., dated January 26, 1995 (as described under
"Certain Relationships and Related Transactions"); (b) the draft complaint in
a proposed action entitled Zises, et. ano. v. Greenfield, et al., (S.D.N.Y.)
dated March 30, 1994; (c) all transactions publicly disclosed by Jennifer
through the date of filing with the SEC of its Annual Report on Form 10-K for
the year ended August 26, 1995; and (d) the negotiation and approval of the
settlement of the Class Action Litigation.

2. Although one or more of the derivative actions may continue
against Peat, Zises and/or Seidman, the Derivative Litigation MOU contains
provisions designed to relieve those receiving releases from any claims by
Peat, Seidman and/or Zises for contribution or indemnification.

3. The defendants in the derivative actions will not object to an
application by counsel for the plaintiffs in the derivative actions for an
award of attorneys' fees and expenses up to an aggregate of $795,000. Of this
amount, the first $500,000 will be funded by an insurance carrier for one of
the defendants other than the Company; $165,000 will be paid in cash by the
Private Company, and the remaining portion of fees and expenses will be paid
by the Company in preferred stock having a present value of up to $130,000.
The preferred stock to be issued by the Company will be of the same type and
will be subject to the same terms and conditions as the preferred stock to be
issued in connection with the Class Action Litigation described above.

C. SEC Investigation

On May 3, 1995, the Securities and Exchange Commission commenced a
formal investigation as to the Company. Subpoenas have been issued to the
Company and certain of its current and former management and the Company and
such persons have furnished various contracts, records and information.


15









D. Other Litigation

The Company is also subject, in the ordinary course of business, to a
number of litigations in relation to leases for those of its stores which it
has closed or relocated.


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

Not Applicable

16









PART II


Item 5: Market For Registrant's Common Equity and Related
Stockholder Matters

The principal market for the Common Stock during the fiscal year ended
August 26, 1995 was the Nasdaq National Market(R) (the "NASDAQ NMS") until the
Common Stock was delisted effective April 17, 1995. Thereafter, the Common
Stock traded in the "pink sheets", until May 16, 1995, when it commenced
trading on the Bulletin Board. The following table sets forth, for the fiscal
periods indicated, the high and low sales prices for the Common Stock as
reported by the NASDAQ NMS until April 17, 1995 and, thereafter the high and
low bid prices of the Common Stock in the over-the-counter market. Such
quotations since April 17, 1995 reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.

High Low
---- ---
Fiscal Year 1995:
1st Quarter..................... $ 8 5/8 $ 6 1/2
2nd Quarter..................... 7 1/2 2 1/4
3rd Quarter..................... 4 1/4 2 3/4 (NASDAQ)
2 1/2 2 1/4 (Pinksheets)
2 5/8 2 1/8 (Bulletin Board)
4th Quarter..................... 3 1/2 2 (Bulletin Board)

Fiscal Year 1994:
1st Quarter..................... $ 14 5/8 $11 1/2
2nd Quarter..................... 16 12 1/4
3rd Quarter..................... 14 3/4 8 3/4
4th Quarter..................... 10 7/8 7 1/4


As of November 30, 1995, there were approximately 290 holders of record
and approximately 4,178 beneficial owners for the Common Stock. On November
30, 1995, the closing bid and asked prices of the Common Stock as reported on
the NASDAQ Bulletin Board were $2 3/8 and $2 9/16, respectively.

Dividend Policy

The Company has never paid a dividend on its Common Stock and does not
anticipate paying dividends on the Common Stock at the present time. The
Company currently intends to retain earnings, if any, for use in its business.
There can be no assurance that the Company will ever pay dividends on its
Common Stock. The Company's dividend policy with respect to the Common Stock
is within the discretion of the Board of Directors and its policy with respect
to dividends in the future will depend on numerous factors, including the
Company's earnings, financial requirements and general business conditions.

As of August 26, 1995, the Company's revolving loan agreement prohibits
the payment of dividends.

17






Item 6. Selected Financial Data
The following table presents certain selected financial data for Jennifer
Convertibles, Inc. and subsidiaries:



(in thousands, except share data)
---------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
8/26/95 8/27/94 8/31/93 8/31/92 8/31/91
------- ------- ------- ------- -------

Operations Data:
Net sales $126,074 $97,420 $64,348 $33,383 $25,999
--------- --------- --------- --------- ---------
Cost of sales, including store occupancy,
warehousing, delivery and fabric protection 86,964 67,974 43,898 20,741 16,804
Selling, general and administrative expenses 45,955 34,139 22,652 10,618 8,452
Termination of consulting agreement,
legal and other costs 500 6,604 - - -
Write off of purchased limited partners' interests - 3,482 - - -
Provision for losses on amounts due from
Private Company and Unconsolidated Licensees 3,088 3,284 - - -
Loss from store closings 1,670 - - - -
Depreciation and amortization 2,261 2,091 1,583 555 518
--------- --------- --------- --------- ---------
140,438 117,574 68,133 31,914 25,774
--------- --------- --------- --------- ---------

Operating (loss) income (14,364) (20,154) (3,785) 1,469 225
--------- --------- --------- --------- ---------
Other income (expense)
Royalty income 523 644 711 779 175
Interest income 311 473 674 237 -
Interest expense (48) (61) (640) (164) (137)
Gain on sale of securities - 336 61 - -
Other income, net 1,670 1,374 696 74 179
--------- --------- --------- --------- ---------
2,456 2,766 1,502 926 217
--------- --------- --------- --------- ---------

(Loss) income before income taxes (benefit),
minority interest and extraordinary item (11,908) (17,388) (2,283) 2,395 442
Income taxes (benefit) 160 (322) 113 968 265
--------- --------- --------- --------- ---------

(Loss) income before minority interest and
extraordinary item (12,068) (17,066) (2,396) 1,427 177
Extraordinary item-utilization of net operating
loss carryforwards - - - 748 143
Minority interest share of losses - 2,449 2,902 - -
========= ========= ========= ========= =========
Net (loss) earnings ($12,068) ($14,617) $506 $2,175 $320
========= ========= ========= ========= =========

(Loss) earnings per common and common equivalent share:
Before extraordinary item ($2.12) ($2.56) $0.09 $0.34 $0.06
Extraordinary item - - - 0.16 0.05
========= ========= ========= ========= =========
Net (loss) earnings per share ($2.12) ($2.56) $0.09 $0.50 $0.11
========= ========= ========= ========= =========

Weighted average number of common
and common equivalent shares 5,700,725 5,700,725 6,013,000 4,605,000 2,985,000
========= ========= ========= ========= =========

Cash Dividends - - - - -
========= ========= ========= ========= =========

Store data: 8/26/95 8/27/94 8/31/93 8/31/92 8/31/91
- -----------------
Company-owned stores open
at end of period 90 55 34 33 33
Consolidated licensed stores open
at end of period 68 99 73 28 3
Licensed stores not consolidated
open at end of period 11 14 14 14 12
========= ========= ========= ========= =========
Total stores open at end of period 169 168 121 75 48
========= ========= ========= ========= =========

Balance Sheet Data: 8/26/95 8/27/94 8/31/93 8/31/92 8/31/91
- ------------------- ------- ------- ------- ------- -------
Working capital (deficiency) ($10,988) $1,240 $11,573 $11,053 $1,615
Total assets 33,871 44,922 37,488 28,819 8,291
Long-term obligations 337 477 118 11,733 384
Total liabilities 38,154 37,137 15,305 16,539 4,471
(Capital deficiency) stockholders' equity (4,283) 7,785 22,183 12,280 3,820
(Capital deficiency) stockholders' equity per share ($0.75) $1.37 $3.69 $2.67 $1.26


18






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


OVERVIEW


The Company is the owner and licensor of sofabed specialty retail
stores that specialize in the sale of a complete line of sofabeds and companion
pieces such as loveseats, chairs and recliners and specialty retail stores that
specialize in the sale of leather furniture.

For the fiscal years ended August 31, 1992 and August 31, 1993, the
Company did not consolidate the operations of the LP's of which subsidiaries of
the Company served as general partners. In November 1994, during the course of
its audit, KPMG Peat Marwick, the Company's independent auditor at the time,
advised the Company that its method of accounting for the LP's should be
changed and would likely require a restatement of previously announced
financial results. In addition, on December 2, 1994, as more fully discussed
under "Certain Relationships and Related Transactions," a special committee of
the Company's Board of Directors delivered a summary report which concluded
that the Company had meritorious claims against three members of its
management, the Private Company and others. The Company announced these matters
publicly in a press release on December 2, 1994. As more fully discussed under
"Legal Proceedings," the Company and certain of its management became involved
in class action and derivative litigations relating to such matters and, on May
3, 1995, the Securities and Exchange Commission commenced an investigation
relating to such matters. In November 1994, the Company determined that it
should consolidate the operating losses of such LP's, to the extent they
exceeded the capital contributions of the limited partners, in its financial
statements for the fiscal year ended August 27, 1994 and the Company
subsequently determined that such accounting treatment would have been the
appropriate treatment for the 1993 and 1992 fiscal years as well. Accordingly,
the 1994 and 1995 consolidated financial statements include the operations of
such LP's in excess of capital contributed by the limited partners as well as
those of the Company and its subsidiaries. The 1993 financial statements have
been restated to reflect such accounting treatment. However, information as to
the 1993 fiscal year is unaudited. On May 2, 1995, BDO Seidman withdrew its
opinion on the 1993 financial statements previously audited by it. The 1992
financial statements of the Company have not been restated, as the effect of
consolidating the operating losses of the LP's for that year are immaterial to
the previously reported results.

19










The operating losses in excess of capital contributions of the LP's
that are included in the consolidated financial statements are as follows:

Years Ended
-----------------------------------------
(In Thousands)

8/31/93 8/27/94 8/26/95
-------- -------- --------
Total operating losses before
capital contributions of LP's $(7,013) $(9,781) $(7,288)
-------- -------- --------

Total capital contributions 2,902 2,449 -
-------- -------- --------

Net operating losses $(4,111) $(7,332) $(7,288)
======== ======== ========

Two of the LP's, the losses of which are included in the table above
for the fiscal year ended August 27, 1994, were subsequently acquired by the
Company. The losses of such LP's for that year totalled $2,596,000.

The Company relies upon the Private Company to provide and maintain
all data entry processing and other related services that support its business.
Employees of the Private Company provide these services as well as other
related services such as all accounts payable (non-merchandise), all payroll
preparation services, inventory control reporting, certain store cash recording
and initial review of cash activity and store customer service.

The Company has for all fiscal years prior to September 1, 1994
engaged the accounting firm of Jerome I. Silverman Company ("JISCO") to provide
general accounting and tax services. Effective September 1, 1994, the Company
terminated the accounting and tax services of JISCO and hired nineteen
employees who had previously worked directly for JISCO. This group, under the
direction of a new Executive Vice President and Chief Financial Officer hired
on August 1, 1994, established the Company's general accounting offices.

In the fiscal year ended August 26, 1995, the new Chief Financial
Officer of the Company has been unable to establish internal controls over the
financial data processed by the Private Company. Additionally, the independent
auditors have disclaimed an opinion on the consolidated financial statements,
in part because "the Company does not have an adequate system of internal
accounting controls over the financial information processed for the Company by
the Private Company". See the Report of Management included elsewhere herein
discussing management's responsibility in this area and actions to be taken to
rectify the issues.

RESULTS OF OPERATIONS:
FISCAL YEAR ENDED AUGUST 26, 1995 COMPARED TO FISCAL YEAR ENDED AUGUST 27,
1994:

Net sales increased by 29.4% to $126,074,000 for the fiscal year ended
August 26, 1995 as compared to $97,420,000 for the year ended August 27, 1994.
This increase is attributable in part to the opening of 20 new Jennifer Leather
stores and 20 new Jennifer Convertibles stores. The Company and the LP's closed
an aggregate of 35 Jennifer Convertibles stores, one Elegant Living store and
one Jennifer Leather store in the fiscal year. Comparable store sales (those
open for a full year in each period) increased by 4.7%.

20










All royalty income earned in the fiscal year ended August 26, 1995 of
$523 has been fully reserved due to uncertainty as to the collectibility of
such amounts from the Unconsolidated Licensees.

Cost of sales increased 27.9% to $86,964,000 for the year ended August
26, 1995 from $67,974,000 for the fiscal year ended August 27, 1994. The dollar
increase of $18,990,000 is attributable to the higher sales while the decrease
in the cost of sales as a percentage of sales to 68.9% from 69.8% is
essentially due to lower costs of merchandise due to higher vendor rebates and
lower occupancy costs due to the closed stores. Warehouse expenses of
$6,304,000 and fabric protection services of $3,804,000 provided by the Private
Company increased from $4,871,000 and $3,298,000, respectively, from the
previous year due to the higher sales volume in the current fiscal year.

Selling, general and administrative expenses were $45,955,000 for the
fiscal year ended August 26, 1995, as compared to $34,139,000 for the fiscal
year ended August 27, 1994, an increase of $11,816,000, or 34.6% over the prior
year. This increase was due principally to direct costs associated with the
higher number of stores in operation in the current fiscal year. Selling,
general and administrative expenses as a percentage of sales were 36.5% for the
fiscal year ended August 26, 1995 as compared to 35.0% in the prior year.
Advertising expenses increased by $4,372,000, or 38.5%, over the prior year
essentially due to the initial advertising programs for the opening of the new
Jennifer Leather stores as well as the new Jennifer Convertibles stores opened
by the LP's. Salaries increased $4,701,000, or 36.7%, due to the expansion of
Jennifer Leather and Jennifer Convertibles stores, the assumption of purchasing
and advertising responsibilities from the Private Company and the hiring of
additional executive officers and other staff.

The Company's receivables from the Private Company, the Unconsolidated
Licensees and S.F.H.C increased by $1,256,000 in the fiscal year ended August
26, 1995 to $6,372,000. These entities have losses and capital deficiencies.
The Company has fully reserved for all amounts due from the Private Company and
the Unconsolidated Licensees. This resulted in a provision for loss of
$3,088,000. In the prior year, the Company had reserved the full amount of
amounts due from Unconsolidated Licensees which totalled $3,284,000. On
November 1, 1995, the Company signed an Offset Agreement with the Private
Company whereby it assumed $1,866,000 of indebtedness to the Company previously
owed by certain Unconsolidated Licensees.

In connection with the uncertainty of collectibility and the
relationship between the Company, the Private Company and the Unconsolidated
Licensees, the Company will account for subsequent transactions with these
entities on an offset basis. However, if the result of the offset is a
receivable due from them, then such net amount will be generally recognized
only at the time when cash is received from these entities.

The Company and LP's closed an aggregate of 37 stores during the
fiscal year ended August 26, 1995. As a result, the Company wrote off various
store fixed assets, reversed the deferred rent liability previously established
for these stores and incurred settlement costs to eliminate the leasehold
liabilities for these stores. These costs aggregated $1,670,000.

Interest income decreased by $162,000 to $311,000 for the fiscal year
ended August 26, 1995 as compared to the prior year. The decrease reflects the
generally lower level of investments throughout the fiscal year, and lower
levels of interest rates.


21







Other income increased to $1,670,000 in the fiscal year ended August
26, 1995 from $1,374,000 in the prior year. This increase is primarily
attributable to adjustments related to cancelled customer orders.

Net (loss) in the fiscal year ended August 26, 1995 was $(12,068,000)
compared to a net (loss) of $(14,617,000) in the prior year, a decrease of loss
of $2,549,000. The primary reason for the decreased loss was due to the charges
in the prior year for termination of consulting agreement, legal and other
costs of $6,604,000 and the write-off of purchased limited parties' interests
of $3,482,000; however, operating losses in the fiscal year ended August 26,
1995 increased as discussed above.

FISCAL YEAR ENDED AUGUST 27, 1994 COMPARED TO YEAR ENDED AUGUST 31, 1993:

Net sales increased by 51.4% to $97,420,000 for the fiscal year ended
August 27, 1994 as compared to $64,348,000 for the year ended August 31, 1993.
This increase is attributable in part to the purchase on November 30, 1993 of
nine new stores (four Elegant Living and five Jennifer Leather) and the opening
of 14 new Jennifer Leather stores as well as the opening of 37 new Jennifer
Convertibles stores in the LP's. The balance of the increase was attributable
to maturation of previously opened stores. In this connection, comparable store
sales increased by 3.4%.

All royalty income earned in the fiscal year ended August 27, 1994 has
been fully reserved due to uncertainty as to the collectibility of such amounts
from the Unconsolidated Licensees.

Cost of sales increased 54.8% from $43,898,000 for the year ended
August 31, 1993 to $67,974,000 for the fiscal year ended August 27, 1994. The
dollar increase of $24,076,000 is attributable to the higher sales while the
increase in the cost of sales as a percentage of sales from 68.2% to 69.8% is
essentially due to higher store occupancy costs in the current fiscal year as a
result of new store openings. Warehouse expenses of $4,871,000 and fabric
protection services of $3,298,000 provided by the Private Company increased
from $3,217,000 and $2,323,000, respectively, from the previous year due to the
higher sales volume in the current fiscal year.

Selling, general and administrative expenses were $34,139,000 for the
fiscal year ended August 27, 1994, as compared to $22,652,000 for the year
ended August 31, 1993, an increase of $11,487,000, or 50.7% over the prior
year. This increase was due principally to direct costs associated with the
higher number of stores in operation in the current fiscal year. Selling,
general and administrative expenses as a percentage of sales was 35.0% for the
fiscal year ended August 27, 1994 as compared to 35.2% in the prior year.
Advertising expenses increased by $4,199,000, or 58.7%, over the prior year
essentially due to the initial advertising programs for the opening of the new
Jennifer Leather stores as well as the new Jennifer Convertibles stores opened
by the LP's. Salaries increased $3,937,000, or 44.5%, due to the acquisition of
Jennifer Leather and Elegant Living stores, expansion of Jennifer Leather and
Jennifer Convertibles stores, the assumption of purchasing and advertising
responsibilities from the Private Company and the hiring of additional
executive officers and other staff.

Termination of consulting agreement, legal and other costs for the
fiscal 1994 period totalled $6,604,000, which included the following:



22













A) A payment to JCI Consultants L.P. ("JCI") of $2,500,000 on July 29,
1994 to terminate the February 1992 consulting agreement and to enter into a
related standstill agreement with JCI and its affiliates which restricts their
ability to acquire more than 5% of the Company's Common Stock until August 1,
2000. The Company had previously paid $522,000 in prior fiscal years and, with
the payment on July 29, 1994, JCI agreed to waive the right to receive any
further consulting fees which could have totalled approximately $6,500,000 over
the remaining term of the consulting agreement. In addition to this payment
during the year, the Company made additional payments to JCI pursuant to the
terms of the consulting agreement of $400,000 and wrote-off previously
capitalized costs in connection with the agreement of approximately $572,000.

B) Legal and accounting costs of $1,209,000 in connection with a
Committee appointed by the Company's Board of Directors to investigate
allegations made in a draft complaint delivered to the Company in March 1994.

C) Legal and accounting fees totalling $618,000 for the Chief
Executive Officer and President of the Company in connection with his response
to the Report of the Committee of the Board of Directors.

D) Audit fees for the fiscal year ended August 27, 1994 totalled
$1,305,000, which were larger than normal due to the change in the Company's
auditors referred to in Item 9, the inability to gain access to the work papers
of the predecessor accounting firms, the increased scope of the review
concerning the Private Company in light of the Committee report, and
consolidation of the accounts of the Consolidated Partnerships.

The write-off of $3,482,000 relates to the purchase of limited
partners' interests in Jennifer LP II and Elegant Living.

The provision for loss on amounts due from Unconsolidated Licensees of
$3,284,000 is due to the uncertainty of collection.

Interest expense decreased by $579,000 to $61,000 in the fiscal year
ended August 27, 1994 due principally to the redemption of $11,500,000, 8 1/2%
convertible subordinated debentures ("Debentures") on February 19, 1993.

Interest income decreased by $201,000 to $473,000 for the fiscal year
ended August 27, 1994 as compared to the prior year. The decrease reflects the
sale of the investments in government securities in the second fiscal quarter
of the year, and a generally lower level of interest rates paid on the
Company's cash investments throughout the year.

Other income increased to $1,374,000 in the fiscal year ended August
27, 1994 from $696,000 in the prior year. This increase is primarily
attributable to adjustments related to cancelled customer orders. The prior
year amount includes a one-time gain of $480,000.


23











Net (loss) in the fiscal year ended August 27, 1994 was $(14,617,000)
compared to net earnings of $506,000 in the prior year, an increase of loss of
$15,123,000. The primary reason for the larger loss was due to the $6,604,000
in connection with the termination of the consulting agreement and the legal,
accounting and other costs related to the Committee as discussed, an increase
in the net operating losses of the limited partnerships of $2,851,000, the
write-off of the excess of the purchase price of the limited partners'
interests over their net assets acquired of $3,482,000 and the reserve for
losses on amounts due from the Unconsolidated Licensees of $3,284,000.

LIQUIDITY AND CAPITAL RESOURCES:

As of August 26, 1995, the Company and LP's had an aggregate working
capital deficiency of $10,988,000 compared to $1,240,000 of working capital at
August 27, 1994 and had available cash and cash equivalents of $7,729,000
compared to $13,089,000 at August 27, 1994.

The Company is continuing to fund the operations of the LP's which, as
described above, continue to generate operating losses. All such losses have
been consolidated in the Company's consolidated financial statements.
Additionally, the Company's receivables from the Private Company, the
Unconsolidated Licensees, including S.F.H.C. increased by $1,256,000 in the
current fiscal year. These entities have operating losses and capital
deficiencies. Accordingly, a reserve for possible non-collection of such
receivables in the amount of $3,088,000 for the current fiscal year has been
provided. There can be no assurance that the total receivables will be
collected. It is the Company's intention to continue to fund these operations
in the future. The Company and the Private Company have entered into offset
agreements that permit the two companies to offset their current obligations to
each other. As part of such agreements, the Private Company agreed to assume
certain liabilities owed to the Company by the Unconsolidated Licensees.

On August 31, 1993, the Company entered into a credit agreement with a
bank providing a revolving credit line of up to $2,000,000. Loans under the
revolving credit line will bear interest per annum equal to the higher of the
Federal funds rate in effect on such date plus 1.5% or the prime rate in effect
on such date plus 1%. The credit line expires August 30, 1996. The Company did
not draw down on the line of credit in the fiscal year ended August 26, 1995.
In February 1995, the bank advised the Company that it was in breach of certain
covenants under the credit agreement because of its failure to file financial
statements. In March 1996, the credit agreement with the bank was terminated.

In March 1996, the Company executed a Credit and Security Agreement
("Agreement") with its principal supplier, Klaussner Furniture Industries, Inc.
("Klaussner") which effectively extended the payment terms for merchandise
shipped from 60 days to 81 days. As part of the Agreement, the Company granted
a security interest in all of its assets as well as assigning leasehold
interests, trademarks and a licensee agreement to operate the Company's
business in the event of default. Klaussner also lent $1,440,000 to the Private
Company to be used to pay down the mortgage balance on the warehouse property.
This paydown also reduced the Company's guarantee to the mortgagor.

In June 1996, the Private Company sold its principal New York
warehouse and repaid the mortgage thereon. As a result, the Company's guaranty
of a portion of such mortgage obligation was extinguished without any liability
to the Company.


24








The proposed settlement of the derivative and class action litigations
(as described elsewhere) will come from insurance company payments and the
issuance of new Preferred Stock by the Company. There will be no cash outlays
by the Company other than legal costs. Additionally, a new proposed agreement
with the Private Company (as described in the Notes to the Consolidated
Financial Statements) contemplates significant changes to the operating
relationship between the companies.

In September 1996, a Partnership Restructuring Agreement ("PRA") was
signed which had an effective date of December 1994. This PRA eliminated the
Agreements for LP's VI, VII and VIII and took $50 of the original capital
contributions for these LP's (total $150) and applied such funds as a payment
towards the original Warrants received by the limited partners in connection
with LP's III, IV and V. This transaction has been reflected in the financial
statements at August 27, 1994 and August 26, 1995. In addition, the warrant
notes aggregating $300 for the remaining 180,000 original Warrants have been
extended for ten years (with 10% of principal due annually) and will bear
interest at 7.12% per annum. For each annual principal payment which is not
made, 10,564 of the outstanding original Warrants shall be cancelled.

In fiscal 1995, the Company and the LP's closed an aggregate of 37
stores. Several were closed for non-performance, but a number of such closings
were due to the Company's decision to combine separate Jennifer Convertibles
and Jennifer Leather stores located in the same demographic areas into one
store. The primary benefit of combining both operations into one store was an
elimination of the real estate expenses and other expenses associated with the
closed showroom. Additional benefits realized included reductions of personnel
and, in a number of cases, elimination of duplicate office equipment and
telephone lines. Although combining two stores into one store generally reduces
sales, management believes that sales at the combined store will generate more
profit due to the elimination or reduction of expenses described above.

Management feels that with the above noted Klaussner Agreement and
significant cost cutting measures undertaken subsequent to August 26, 1995,
including, but not limited to, the closing of approximately five stores and the
reduction in salaries of certain management personnel, the Company will have
adequate cash flow to fund its operations.

For the year ended August 26, 1995 and year ended August 27, 1994, the
Company and the LP's spent $4,292,000 and $5,021,000, respectively, for capital
expenditures. The Company anticipates capital expenditures totalling
approximately $1,000,000 during fiscal 1996 for general maintenance of its
stores.

INFLATION:

There was no significant impact on the Company's operations as a
result of inflation during the fiscal year ended August 26, 1995.


25













Item 8. Financial Statements and Supplementary Data.

See Index immediately following the signature page

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

Information in response to Item 9 is incorporated by reference to the
Company's Current Report on Form 8-K dated May 5, 1995 and the Company's
Current Report on Form 8-K dated September 20, 1994.

Item 10. Directors and Executive Officers of the Company

The names and ages of the Company's directors and the Company's
executive officers as of November 30, 1995 are as follows:

Position(s) with the
Name Age Company
- -------------------- --- ---------------------
Harley J. Greenfield 51 Chairman of the Board,
Chief Executive Officer
and President
Edward G. Bohn 50 Director
Kevin J. Coyle 51 Director
Edward B. Seidner 41 Director and Executive Vice President
Bernard Wincig 64 Director
George J. Nadel 53 Executive Vice President, Chief Financial Officer
and Treasurer
Rami Abada 36 Executive Vice President and Chief Operating Officer
Ronald E. Rudzin 33 Senior Vice President - Retail Stores
Leslie Falchook 35 Vice President - Administration
Kevin Mattler 38 Vice President - Store Operations
Howard Horowitz 45 Vice President - Real Estate/Construction


The Company's directors are elected at the Annual Meeting of
stockholders and hold office until their successors are elected and qualified.
The Company's officers are appointed by the Board of Directors and serve at
the pleasure of the Board of Directors. The Company currently has no
compensation or nominating committees.

The Board of Directors held eight meetings during the 1995 fiscal year.
All of the directors attended each of the meetings, except for Fred Love, a
former director who missed one of such meetings. None of the directors
attended fewer than 75% of the number of meetings of the Board of Directors or
any committee of which he is a member, held during the period in which he was
a director or a committee member, as applicable.

The Board of Directors has a Stock Option Committee, which as of August
26, 1995, consisted of Messrs. Greenfield and Seidner. The Stock Option
Committee held two meetings during the last fiscal year. The Stock Option
Committee is authorized to administer the Company's stock option plans.

The Board of Directors has an Audit Committee, which during the fiscal
year ended August 26, 1995, consisted of Harley Greenfield, Bernard Wincig and
Michael Colnes until February 1995 when Mr. Colnes

26











resigned and Edward Bohn and Kevin Coyle were added. During such fiscal year,
the Audit Committee held six meetings. The Audit Committee is responsible for
reviewing the adequacy of the structure of the Company's financial
organization and the implementation of its financial and accounting policies.
In addition, the Audit Committee reviews the results of the audit performed by
the Company's outside auditors before the Annual Report to Stockholders is
published.

In December 1994, the Company established a Monitoring Committee
consisting of Bernard Wincig and Michael Colnes to monitor transactions
between the Company and the Private Company. The Monitoring Committee
currently consists of Edward Bohn, Kevin Coyle and Bernard Wincig.

Set forth below is a biographical description of each director and
executive officer of the Company as of August 26, 1995.

Harley J. Greenfield

Mr. Greenfield has been the Chairman of the Board, Chief Executive
Officer and President of the Company since August 1986. Mr. Greenfield has
been engaged for more than 25 years in the furniture wholesale and retail
business and was one of the co-founders of the Private Company which
established the Jennifer Convertibles concept in 1975. Mr. Greenfield is a
member of the Home Furnishings Association.

Edward G. Bohn

Mr. Bohn has been a director of the Company since February 1995. Since
March 1995, he has been engaged as a Consultant for Borlas Sales in Avenel,
New Jersey, an importer/exporter of consumer electronics. Borlas also handles
the sale and installation of software. Since June 1995, he has been a Director
of Nuwave Technologies, Inc. He has also operated as an Independent Consultant
in financial and operational matters since September 1994 through the present.
Mr. Bohn was employed by Emerson Radio Corporation, which designs and sells
consumer electronics, in various capacities from January 1983 through March
1994. From March 1993 to March 1994, he was the Senior Vice President-Special
Projects; he was Chief Financial Officer from March 1991 through March 1993
and Treasurer/Vice President of Finance prior to that. Emerson Radio filed in
the United States Bankruptcy Court, District of New Jersey, for protection
under Chapter 11 of the Federal Bankruptcy Act on September 29, 1993 and was
discharged on March 31, 1994.

Kevin J. Coyle

Mr. Coyle was appointed as a director of the Company in February 1995.
Mr. Coyle is a certified public accountant specializing in litigation support.
Until 1993, Mr. Coyle was President of Olde Kraft Company Ltd. ("Olde Kraft"),
a retail furniture business operating seven stores in the New York
Metropolitan Area. Olde Kraft filed a Chapter XI petition in bankruptcy in
October 1993 and converted to a Chapter VII in October 1994. Mr. Coyle
graduated from Queens College with a BS in accounting and is a member of the
American Institute of Certified Public Accountants and the New York State
Society of Certified Public Accountants.


27











Edward B. Seidner

Mr. Seidner became a director of the Company in August 1986 and an
Executive Vice President of the Company in September 1994. From 1977 until
November 1994, Mr. Seidner was an officer and a director of the Private
Company. Mr. Seidner has been engaged for more than 15 years in the furniture
wholesale and retail business. Mr. Seidner is a member of the Home Furnishings
Association.

Bernard Wincig

Mr. Wincig became a director of the Company in September 1986. Mr.
Wincig has been an attorney in private practice since 1962. Mr. Wincig
received his Juris Doctor degree from Brooklyn Law School.

George J. Nadel

Mr. Nadel joined the Company and became Executive Vice President, Chief
Financial Officer and Treasurer on August 1, 1994. Prior to joining the
Company, from October 1989 to July 1994, Mr. Nadel was the Senior Vice
President and Chief Financial Officer of Loehmann's Inc., a retail chain
specializing in ladies clothing and accessories. Prior to joining Loehmann's,
from June 1986 to October 1989, Mr. Nadel was the Chairman and Chief Executive
Officer of The Dry Goods, Inc., a chain of discount department stores, which
in November 1988 filed a Chapter XI petition in bankruptcy. Mr. Nadel has over
thirty years experience in various senior financial officer positions with
companies in the retail industry and is a Certified Public Accountant.

Rami Abada

Mr. Abada became the Executive Vice President and Chief Operating
Officer of the Company on April 12, 1994. Prior to joining the Company, Mr.
Abada had been employed by the Private Company since 1982.

Ronald E. Rudzin

Mr. Rudzin became Senior Vice President - Retail Stores on April 12,
1994. Prior to joining the Company, Mr. Rudzin had been employed by the
Private Company since 1979. Mr. Rudzin was, and is, in charge of directing the
sales force of the Company, including the Private Stores and licensed stores.


Leslie Falchook

Mr. Falchook has been a Vice President of the Company since September
1986. Mr. Falchook is primarily involved with the internal operations of the
Company. Prior to joining the Company, Mr. Falchook had been employed by the
Private Company since 1982.

Kevin Mattler

Mr. Mattler became Vice President - Store Operations on April 12, 1994
and has been with the Company since 1988. Mr. Mattler is involved with, and
supervises, the operation of the Company's licensed stores and during his
tenure with the Company Mr. Mattler has been involved in all facets of its
operations. Prior to joining the Company, Mr. Mattler had been employed by the
Private Company since 1982.


28











Howard Horowitz

Mr. Horowitz joined the Company in May 1992 and became Vice President -
Real Estate/Construction on April 12, 1994. Mr. Horowitz is primarily
responsible for site selection and coordinating the buildout and opening of
new stores. Prior to joining the Company Mr. Horowitz was self employed as a
general contractor. As a result of the Company's closing of certain stores and
its limited near term expansion plans, the office of Vice President - Real
Estate Construction was eliminated and Mr. Horowitz's employment with the
Company ended on May 3, 1996.

Certain of the directors and former officers of the Company are
defendants in the litigation described under "Legal Proceedings" above. See
also "Certain Relationship and Related Transactions."


29











Item 11. Executive Compensation

SUMMARY COMPENSATION TABLE

The following table sets forth compensation paid for the fiscal years
ended August 26, 1995, August 27, 1994 and August 31, 1993 (or such shorter
period as such employees were employed by the Company) of those persons who
were (i) the chief executive officer at August 26, 1995 and (ii) the four
other most highly compensated executive officers of the Company at August 26,
1995 whose total annual salary and other compensation exceeded $100,000
(collectively, the "Named Executive Officers").





ANNUAL LONG-TERM
COMPENSATION COMPENSATION
-------------- --------------
SECURITIES
NAME AND FISCAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) OPTIONS(#) COMPENSATION
- ----------------------- -------- -------------- -------------- --------------

Harley J. Greenfield, 1995 $400,000(1) 0(1) 0
Chairman of the Board, 1994 0(1) 0(1) 0
Chief Executive 1993 0(1) 25,000(1) 0
Officer and President

Edward B. Seidner, 1995 $300,000 0 0
Executive Vice
President

George J. Nadel 1995 $202,083 50,0000(2) 0
Executive Vice 1994 16,667(2) 0
President and Chief
Financial Officer

Leslie Falchook, 1995 $144,670(3) 0 0
Vice President-- 1994 144,670(3) 0 0
Administration 1993 133,000(3) 20,000(3) 0

Rami Abada 1995 $150,000 0 0
Executive Vice 1994 100,000 0 0
President and Chief
Operating Officer

Ronald E. Rudzin 1995 $150,000 0 0
Senior Vice President 1994 100,000 0 0
Retail Stores





30












- ---------------------

(1) On January 25, 1993, Mr. Greenfield was granted fully-vested options to
purchase 25,000 (as amended by an October 5, 1993 agreement) shares of
Common Stock at $13.125 per share, the market value on the date of
grant. Effective September 1, 1994, Mr. Greenfield began receiving a
salary from the Company at an annual rate of $400,000.

(2) Mr. Nadel joined the Company towards the end of fiscal 1994. On August
1, 1995, Mr. Nadel was granted options to purchase 25,000 shares of
Common Stock at $2.50 per share and, on February 1, 1995, Mr. Nadel was
granted options to purchase 25,000 shares of Common Stock at $3.53 per
share, in each case the market value on the date of grant. Such options
vest over a three-year period.

(3) In the fiscal years ended August 26, 1995, August 27, 1994 and August
31, 1993 the Private Company was responsible for $ -0-,$ -0- and
$30,000, respectively, of such salary, as a result of such officer
performing certain services for the Private Company. On January 25,
1993, Mr. Falchook was granted options to purchase 20,000 shares of
Common Stock at $13.125 per share, the market value on the date of
grant. Such options vest over a three-year period.

Effective February 1, 1995, Non-employee directors receive a fee of
$10,000 per year, plus $500 per meeting attended (an aggregate of $34,000 in
fiscal 1995). Directors are reimbursed for out-of-pocket expenses incurred in
connection with their services as such.

Effective February 1, 1996, the salaries of each of the Company's
officers was reduced (other than George J. Nadel, a portion of whose salary
was deferred), in connection with the Company's cost-cutting program. The
annual salaries of the Company's executive officers, effective February 1,
1996 are as follows: Harley Greenfield-$320,000; Edward Seidner - $240,000,
George J. Nadel - $225,000, of which approximately $26,000 is deferred until
September 1, 1996, Rami Abada - $120,000, Ronald E. Rudzin - $120,000, Leslie
Falchook - $116,000 and Kevin Mattler - $96,000.


Employment Agreements

Effective as of September 1, 1991, the Company entered into a five-year
employment agreement with Harley J. Greenfield. Pursuant to such agreement,
Mr. Greenfield agreed to devote his full time to the business of the Company
and not to compete with the Company during the term of his employment
agreement and for a period of one year thereafter. Pursuant to his employment
agreement, in lieu of salary, Mr. Greenfield received options to purchase
150,000 shares of Common Stock at a purchase price of $8.375 per share, with
such options vesting and becoming exercisable at the rate of 30,000 shares per
year, subject to acceleration for certain changes of control, mergers, and
similar events. Mr. Greenfield had waived his compensation under his prior
employment agreement for the three years ended August 31, 1991. Effective
September 1, 1994, Mr. Greenfield began receiving a salary from the Company at
an annual rate of $400,000. The Company and Mr. Greenfield have not entered
into a written employment agreement reflecting such increase. During the
fiscal year ended August 26, 1995, Mr. Greenfield received

31









approximately $360,000 of interest, severance pay, distributions and other
payments from the Private Company. The Company is not responsible for the
payment of such benefits to Mr. Greenfield.

Leslie Falchook entered into an employment agreement with the Company,
dated May 1, 1992, pursuant to which he agreed to devote his full time to the
business of the Company and not to compete with the Company during the term of
his employment agreement and for a period of one year thereafter. Pursuant to
his employment agreement (which expires August 31, 1996), Leslie Falchook
received a salary at the rate of $144,670 per annum for the year ended August
26, 1995, which amount may be increased at the discretion of the Board of
Directors.

Stock Option Plans

The Company has Incentive and Non-Qualified Stock Option Plans (the
"Plans"), pursuant to which, as of August 26, 1995, options to purchase an
aggregate of 656,547 shares of Common Stock were outstanding and under which
options to purchase an aggregate of 190,453 shares of Common Stock were
available for grant. In addition, options granted outside of the Plans to
purchase an additional 180,000 shares of Common Stock were outstanding as of
August 26, 1995. The Plans are administered by a Stock Option Committee (the
"Committee") consisting of two persons appointed by the Board of Directors. As
of August 26, 1995, the Committee consisted of Harley Greenfield and Edward B.
Seidner. The Committee has full and final authority (a) to determine the
persons to be granted options, (b) to determine the number of shares subject
to each option and whether or not options shall be incentive stock options or
non-qualified stock options, (c) to determine the exercise price per share of
the options (which, in the case of incentive stock options, may not be less
per share than 100% of the fair market value per share of the Common Stock on
the date the option is granted or, in the case of a stockholder owning more
than 10% of the stock of the Company, not less per share than 110% of the fair
market value per share of the Common Stock on the date the option is granted),
(d) to determine the time or times when each option shall be granted and
become exercisable and (e) to make all other determinations deemed necessary
or advisable in the administration of the Plans. In determining persons who
are to receive options and the number of shares to be covered by each option,
the Committee considers the person's position, responsibilities, service,
accomplishments, present and future value to the Company, the anticipated
length of his future service and other relevant factors. Members of the
Committee are not eligible to receive options under the Plans or otherwise
during the period of time they serve on the Committee and for one year prior
thereto, but may receive options after their term on the Committee is over.
Officers and directors, other than members of the Committee, may receive
options under the Plans. The exercise price of all options granted under or
outside of the Plans equalled or exceeded the market value of the underlying
shares on the date of grant.


32











OPTION GRANTS IN LAST FISCAL YEAR

The only options granted to Named Executive Officers during the fiscal
year ended August 26, 1995 were the options to purchase 25,000 shares of
Common Stock at $2.50 per share and options to purchase 25,000 shares of
Common Stock at $3.53 per share granted to George J. Nadel.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES



Name of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
August 26, 1995 August 26, 1995(1)
----------------------------- --------------------------
Shares Acquired on Value
Name Exercise(#) Realized Unexercisable Exercisable Unexercisable Exercisable
- -------------------- ----------- -------- ------------- ----------- ------------- -----------

Harley J. Greenfield(2)(4) N/A N/A 60,000 237,047 $0 $0
Edward B. Seidner N/A N/A 0 0 0 0
George J. Nadel(3)(4) N/A N/A 50,000 0 0 0
Leslie Falchook(4)(5) N/A N/A 6,666 38,334 0 9,375
Rami Abada N/A N/A 0 0 0 0
Ronald E. Rudzin(4)(6) N/A N/A 0 50,000 0 18,250



- -------------------

(1) Amount reflects the market value of the underlying shares of Common
Stock as reported on the Bulletin Board on August 26, 1995 (a bid price
of $3.125) less the exercise price of each option.

(2) Includes (i) 122,047 options granted on September 17, 1991 at an
exercise price of $4.88 per share, (ii) 150,000 options granted on April
6, 1992, at an exercise price of $8.375 per share, in connection with
Mr. Greenfield's employment agreement, with such options vesting and
becoming exercisable at the rate of 30,000 per year, with the first
installment having become exercisable on April 6, 1993, and (iii) 25,000
options granted on January 25, 1993 at an exercise price of $13.125 per
share.

(3) Includes 25,000 options granted on August 1, 1995 to Mr. Nadel at an
exercise price of $2.50 per share and 25,000 options granted on February
1, 1995 at an exercise price of $3.53 per share, none of which options
were exercisable at August 26, 1995.

(4) All options were granted at an exercise price equal to the market value
of the underlying Common Stock on the date of grant.

(5) Includes 25,000 options granted on March 7, 1988 to Mr. Falchook at an
exercise price of $2.75 per share, which options have all vested and
20,000 options granted on January 25, 1993 to Mr. Falchook at an
exercise price of $13.125 per share, of which 13,334 were exercisable at
August 26, 1995.

(6) Includes 50,000 options granted on March 7, 1988 at an exercise price of
$2.75 per share, which options have all vested.

33











Item 12. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth, as of August 26, 1995, information
regarding the beneficial ownership of the Company's Common Stock by (i) each
person who is known to the Company to be the owner of more than five percent
of the Company's Common Stock, (ii) each of the Company's directors, (iii)
each of the Named Executive Officers (as defined in Item 11) and (iv) by all
directors and executive officers of the Company as a group:

Amount and Nature Percent (%) of Class
of Beneficial Outstanding as of
Beneficial Owner Ownership(1) August 26, 1995
- ---------------- ------------ ---------------
Harley J. Greenfield 1,151,211 (2)(3) 19.9%
Fred J. Love 585,662 (2)(5)(6) 10.3
Edward B. Seidner 553,914 (2)(4) 9.7
Jara Enterprises, Inc. ("Jara") 343,579 (6) 6.0
Bernard Wincig 144,573 (7) 2.5
Edward G. Bohn 0 (8) 0
Kevin J. Coyle 1,250 (8) *
Leslie Falchook 63,334 (9) 0.1
George J. Nadel 0 (10) 0
Rami Abada 53,000 (11) 0.1
Ronald E. Rudzin 62,500 (12) 0.1
28.0

All directors and executive 1,676,657 (2)(3)(4)(5)(6)(7)(8)(9)
officers as a group (eleven (11) persons) (10)(11)(12)(13)
- -----------------

* Less than 1.0%



(1) All of such shares are owned directly with sole voting and investment
power, unless otherwise noted below.

(2) The address of Messrs. Greenfield and Seidner is c/o Jennifer Convertibles,
419 Crossways Park Drive, Woodbury, New York 11797. The address of Fred J.
Love was c/o Jennifer Convertibles, 245 Roger Avenue, Inwood, New York
11696 as of August 26, 1995 and is One Ames Court, Plainview, New York
11803 as of the date of this Annual Report. Mr. Greenfield and Mr. Love
are brothers-in-law. See "Certain Relationships and Related Transactions."
Subsequent to August 26, 1995, the shares of Common Stock owned by Messrs.
Greenfield, Seidner and Love and the Private Company were pledged to
Klaussner. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

(3) Includes (a) 492,916 shares of Common Stock owned by Messrs. Love and
Seidner which have been placed in a voting trust (the "Voting Trust")
administered by Mr. Greenfield as a voting trustee, pursuant to the
Jennifer Voting Trust Agreement, under which Mr. Greenfield has shared
voting and shared dispositive power with respect to such shares, (b)
171,790 Shares owned by Jara and representing a portion of 292,831 shares
underlying options granted to Mr. Greenfield by Mr.

34








Love (which are already included as beneficially owned under (a) above) and
the Private Company (the "Greenfield Option"), over which Mr. Greenfield has
no voting power but has shared dispositive power, as such shares may not be
disposed of without the consent of Mr. Greenfield, and (c) 237,047 shares
underlying vested options (but does not include 60,000 shares of Common
Stock underlying stock options not vested as of August 26, 1995) granted to
Mr. Greenfield by the Company, with respect to which shares Mr. Greenfield
would have sole voting and dispositive power upon exercise of such options.
See "Executive Compensation." Does not include 1,200,000 shares of Common
Stock underlying options, which become exercisable on April 1, 1996, owned
by JCI Consultant, L.P. ("JCI") and as to which Mr. Greenfield would be
voting trustee. See "Certain Relationships and Related Transactions."

(4) Includes (a) 250,583 shares of Common Stock owned by Mr. Seidner which are
subject to the Voting Trust, over which Mr. Seidner has shared voting and
shared dispositive power, and (b) 292,831 shares underlying the options
granted to Mr. Seidner by Mr. Love and the Private Company (the "Seidner
Option"), over which Mr. Seidner has no voting power but has shared
dispositive power, as such shares may not be disposed of without the
consent of Mr. Seidner.

(5) Includes (a) 343,579 shares of Common Stock owned by the Private Company,
over which Mr. Love has sole voting and dispositive power, as such shares
are not subject to the Voting Trust, but which are subject to the
Greenfield Option and the Seidner Option (the "Options") granted to
Messrs. Greenfield and Seidner, respectively, (the "Optionees") and may
not be disposed of without the consent of the relevant Optionee, and (b)
243,083 shares owned by Mr. Love which are subject to the Voting Trust and
the Options and as to which Mr. Love has no voting power but has shared
dispositive power.

(6) All of such shares are beneficially owned by Mr. Love , the sole
stockholder of Jara. Includes shares of Common Stock owned by three of
Jara's wholly-owned subsidiaries. Jara's address was 245 Roger Avenue,
Inwood, New York 11696 as of August 26, 1995 and is One Ames Court,
Plainview, New York 11803 as of the date of this Annual Report. Mr. Love
has sole voting and shared dispositive power over such shares, as such
shares are subject to the Options and may not be disposed of without the
consent of the relevant Optionee. Does not include 50,000 shares of Common
Stock pledged to Jara by Rami Abada, an executive officer of the Company.

(7) Includes 8,800 shares of Common Stock owned by Mr. Wincig's wife and
25,000 shares of Common Stock underlying vested options.

(8) Does not include, as to each individual, 25,000 shares of Common Stock
underlying options granted, which options have not yet vested.

(9) Does not include 6,666 shares of Common Stock underlying options granted,
which have not yet vested, but does include 38,334 shares of Common Stock
underlying options which have vested.



35












(10) Does not include 50,000 shares of Common Stock underlying options granted,
but not yet vested.

(11) Includes 50,000 shares pledged to Jara as described in Note 6.

(12) Includes 50,000 shares of Common Stock underlying vested options.

(13) Includes 25,000 shares of Common Stock underlying options granted to an
officer of the Company other than a Named Executive Officer, which options
have vested.

Based on the Company's review of reports filed by directors, executive
officers and 10% shareholders of the Company on Forms 3, 4 and 5 pursuant to
Section 16 of the Securities and Exchange Act of 1934, all such reports were
filed on a timely basis during fiscal year 1995, except that Edward Seidner
was one month late in reporting the acquisition of 4,000 shares of Common
Stock in October 1994.

36











Item 13. Certain Relationships and Related Transactions

The Private Company

In 1975, Harley J. Greenfield and his brother-in-law, Fred J. Love, formed
the Private Company and created the Jennifer Convertibles concept with a
single store on Park Avenue South in New York City. In 1977, they were joined
by Edward B. Seidner and together the three expanded the Private Company
until, by 1986, there were 21 Jennifer Convertibles stores operating in New
York. The Company was incorporated in Delaware in August 1986 with the goal of
expanding Jennifer Convertibles throughout the United States. To this end, an
affiliated company, owned by Messrs. Greenfield, Love and Seidner (the
"Licensor"), granted the Company the perpetual royalty-free, exclusive license
(the "License") to use, sublicense and franchise the use of the trademark
"Jennifer Convertibles(R)" which permitted the Company to open Jennifer
Convertibles stores outside of New York State and the Private Company agreed,
under the Original Warehousing Agreement, to support the Company by providing
access to its warehousing and distribution facilities and by permitting the
Company to take advantage of the Private Company's merchandise purchasing
power (see "Business - Warehousing"). On March 18, 1987, the Company completed
its initial public offering with five Jennifer Convertibles stores in New
Jersey and Connecticut.

Until November 1994 when Messrs. Greenfield and Seidner sold their
interests in the Private Company for a long-term note and options to purchase
the Common Stock owned by Mr. Love and the Private Company, Harley J.
Greenfield (the Chairman of the Board, Chief Executive Officer, President and
a principal stockholder of the Company), Fred J. Love (a director of the
Company until August 10, 1995 and principal stockholder of the Company as of
August 26, 1995) and Edward B. Seidner (a director, officer and principal
stockholder of the Company) each owned 33-1/3% of Jara, which, together with
its subsidiaries, comprises the Private Company, which owns or licenses the
Private Stores. Following such sale, Mr. Love beneficially owns 100% of the
Private Company. The Private Company is responsible for the warehousing for
the Company-owned stores, the Company's licensed stores and the Private
Stores, and leases and operates the Warehouse Facilities. Until December 31,
1993, the Private Company was also responsible for the purchasing and for
certain advertising and promotional activities for the Company-owned stores,
the Company's licensed stores and the Private Stores. Effective January 1,
1994, the Company assumed the responsibility for purchasing and advertising
for itself, its licensees, and the Private Stores. The Private Company is
responsible for an amount which approximates its pro-rata share of all
advertising production costs and costs of publication of promotional material
within the New York area. Until October 28, 1993, a corporation of which
Messrs. Greenfield, Seidner and Love each owned 33-1/3% (the "Licensor") owned
the trademarks "Jennifer Convertibles(R)" and "With a Jennifer Sofabed,
There's Always a Place to Stay(R)" (collectively the "Marks"). On October 28,
1993, the Marks were assigned to the Company from the Licensor for nominal
consideration, and the Company agreed to license such Marks to Jara in New
York, as described below. Mr. Love is, and until November 1994, Mr. Seidner
was, an executive officer and director of Jara and the Licensor and each
receives substantial income from the Private Company. During the fiscal year
ended August 26, 1995, Mr. Seidner received approximately $360,000 of
interest, severance pay, distributions and other payments from the Private
Company. During the fiscal year ended August 26, 1995, Mr. Greenfield received
approximately $360,000 of interest, severance pay, distributions and other
payments. With the exception of 6,250 shares owned directly by Mr. Seidner, as
of August 26, 1995, the shares of Common Stock directly owned by Messrs. Love
and Seidner were in a voting trust, expiring October 15, 1996,

37








administered by Mr. Greenfield as voting trustee. In November 1994, Mr.
Greenfield and Mr. Seidner sold their interests in the Private Company in
exchange for notes (the "Jara Notes") and options (the "Buy-Out Options") to
purchase the Common Stock owned by Mr. Love and the Private Company. The Jara
Notes are $10,273,204 in aggregate principal amount ($5,136,602 owned by Mr.
Greenfield and $5,136,602 owned by Mr. Seidner), bear interest at a rate of
7.5% per annum and are due in December 2023. Only interest is payable on the
Jara Notes until December 1, 2001 and, thereafter principal is payable monthly
through the maturity date. The Jara Notes are secured by (i) a security
interest in the Private Company's personal property, (ii) Mr. Love's personal
guarantee of the Private Company's performance under the Jara Notes, and (iii)
a stock pledge by Mr. Love of his stock in the Private Company to secure his
obligations under the guarantees. Subject to court approval of the Settlement
Agreement, Messrs. Greenfield and Seidner have agreed to subordinate, until
January 1, 1999, their right to receive payments in respect of the Jara Notes,
if the Private Company is in default in the payment of any cash obligation to
the Company arising after August 7, 1996, subject to offset as between Messrs.
Greenfield and Seidner and the Private Company. Such subordination does not
apply to any distribution in respect of a disposition of substantially all of
the assets of the Private Company. The Buy-Out Options are exercisable for an
aggregate of 585,662 shares of Common Stock (292,831 by Mr. Greenfield and
292,831 by Mr. Seidner) at a price of $15.00 per share until they expire on
November 7, 2004.

The License

Pursuant to a license agreement between the Company and Jara, Jara has the
perpetual, royalty-free right to use, and to sublicense and franchise the use
of, the Marks in the State of New York. The license is exclusive in such
territory, subject to certain exceptions.

The Purchasing and Warehousing Agreement

Prior to January 1, 1994, the Private Company and the Company were parties
to a Warehousing and Purchasing Agreement (the "Original Warehousing
Agreement") pursuant to which the Private Company was obligated to make
merchandise available to the Company on the same basis as such merchandise was
made available to the Private Stores and was obligated to promptly order
merchandise requested by the Company to fill special orders. The Original
Warehousing Agreement provided that the Private Company would sell such
merchandise to the Company at the Private Company's cost. Additionally, the
Private Company was obligated to provide certain warehousing and handling
services to the Company for up to 100 Company-owned stores and 200 Company
licensed stores. In return, the Company paid the Private Company a fee equal
to 5% of the retail selling price of all merchandise (including the retail
selling price of any related services, such as fabric protection and
merchandise warranties) delivered to customers of the Company's stores from
the warehouse facilities operated by the Private Company, plus 5% of the
retail selling price of all merchandise delivered from such warehouse
facilities to Company-owned stores for display purposes. Effective January 1,
1994, the Company assumed the responsibility for purchasing for itself, its
licensees and the Private Company. However, the Private Company continued to
provide warehousing and handling services as described above. During the
fiscal year ended August 26, 1995 the Company and the LPs paid warehouse fees
to the Private Company aggregating approximately $6,304,000. During the fiscal
year ended August 26, 1995, the Private Company purchased from the Company
approximately $8,584,000 of merchandise (net of discounts and allowances).
Under the terms

38









of the Warehousing Agreement, however, the Company was not obligated to use
the Private Company's warehouse facilities or purchase through the Private
Company. As part of the transfer of the purchasing function, the Private
Company, on May 29, 1994, agreed to pay the Company $1,000,000 representing
discounts and allowances received from suppliers with respect to merchandise
previously delivered. Such payment was in the form of a note, dated May 29,
1994, calling for payments in 36 equal monthly installments and bearing
interest at 8% per annum. The Private Company made $333,333 of payments on
such note during the fiscal year ended August 26, 1995, leaving $638,889
principal amount outstanding as of August 26, 1995.

As set forth in "Business-Warehousing," the Private Company also provides
certain other services at the Warehouse Facilities, including arranging for
goods to be delivered to the Warehouse Facilities and customers and providing
fabric protection, customer service and warranty services. The Private Company
is reimbursed by the Company and its licensees for freight charges on
deliveries to the Warehouse Facilities at the manufacturer's freight rate. The
Private Company also provides fabric protection services, including a
life-time warranty, to customers of the Company and its licensees. The Company
retains approximately 2/3 of the revenues from fabric protection and the
warranty. During the fiscal year ended August 26, 1995, the Company and the
LPs paid $3,775,000 for freight charges and $3,804,000 for fabric protection
to the Private Company. See "The Committee Report" below.

The Inwood, New York warehouse facility (the "Inwood Warehouse"), which
was the main facility servicing the Company's stores until such facility was
sold in June 1996, was owned (subject to a ground lease) equally by two
corporations, one of which was owned 33-1/3% by each of Messrs. Greenfield,
Love and Seidner and the other of which was partially owned by the
brother-in-law of Isabelle Silverman, the Company's Vice President-Finance and
Treasurer from May 1, 1992 to January 1, 1994. On December 1, 1994, the Inwood
Warehouse was transferred to a corporation owned by Fred Love. On June 29,
1988, the Company acquired a 10-year option to purchase the Inwood Warehouse
(subject to a ground lease with a non-affiliate expiring in February 2035) for
its appraised value, as of June 1988, of $9,000,000, increasing each year of
the option period by an additional $900,000. The option was granted in
consideration of the guarantee by the Company, and others, of $6,500,000 of
mortgage financing on the Inwood Warehouse. The guarantors, other than the
Company (i.e., Jara and Messrs. Greenfield, Love and Seidner), agreed to
indemnify the Company against any loss under the guarantee and agreed to pay
the Company an annual guarantee fee of $32,500, representing 1/2 of 1% of the
amount guaranteed. As of August 31, 1993, the mortgage was refinanced and the
amount guaranteed by the Company was reduced from $6,500,000 to $5,000,000
(which mortgage was scheduled to become due on October 7, 1994). The mortgage
was refinanced again, in October 1994, and was due over a five-year period
with a final maturity date of October 7, 1999. The Company guaranteed a
portion of the debt equal, at any time, to 60% of the aggregate amount of the
debt then outstanding. The other guaranty and indemnity arrangements as to
such refinancing were the same as for the original financing, and the Company
was entitled to receive an annual guarantee fee of 1/2 of 1% of the amount
guaranteed, which was $25,000 in fiscal 1995. In March 1996, as part of the
Klaussner Transaction, among other things, Klaussner loaned the Private
Company $1,440,000, which was used to reduce the debt guaranteed by the
Company from $4,800,000 to $3,360,000 and the lender agreed that the Company's
liability under the guarantee would be limited to the lesser of 60% of the
debt or $2,016,000. In June 1996, in connection with the sale of the Inwood
Warehouse, the mortgage was extinguished without liability to the Company. The
Company also guarantees the lease for the Private Company's satellite
warehouse in California. Such lease expires September 30, 1998 and the annual
base rent is $133,000. Pursuant to an agreement dated September 1,


39









1993, the Company is indemnified against any liability arising under such
guaranty by the Private Company.

By agreement, dated May 19, 1995, between the Company and the Private
Company, the parties agreed to settle a dispute as to certain discounts and
allowances on merchandise owed to the Company by the Private Company and
certain licensees managed by the Private Company for the period from January
1, 1994 to April 30, 1995. The agreement provides that the Private Company
will pay the Company $473,000, $200,000 of which was paid in May 1995 and
agreed to pay the balance in five equal installments (inclusive of interest at
a rate of 10.5% per annum) through November 1, 1995. As of December 1995, all
of such amounts had been paid. In addition, the Company agreed, beginning in
May 1995, to pay the Private Company its share of discounts and allowances
within 30 days of the end of each month.

By agreement (the "Offset Agreement") dated November 1, 1995, the Private
Company and the Company acknowledged that as of August 26, 1995 the Private
Company owed the Company $9,267,962, certain licensees owed the Company
$2,117,616 for merchandise purchased (of which $1,865,813 was past due) and
the Company owed the Private Company $11,459,677. In addition, the Private
Company agreed to assume the obligations of the licensees referred to above
and to offset the amounts owed to the Company by the Private Company against
the amounts owed to the Private Company by the Company. By agreement dated
March 1, 1996, the Private Company and the Company agreed to continue to
offset, on a monthly basis, amounts owed by the Private Company and certain
licensees to the Company for purchasing, advertising, and other services and
matters against amounts owed by the Company to the Private Company for
warehousing services, fabric protection, freight and other services and
matters. Amounts owed by the Private Company to the Company as of August 26,
1995 are reserved against in the accompanying consolidated financial
statements due to uncertain collectibility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

The Advertising Agreement

Under the advertising agreement with the Private Company, the Private
Company bears an amount which approximates its pro-rata share of all
advertising production costs and costs of publication of promotional
advertising material within the New York area. During the fiscal ended August
26, 1995, the Company charged the Private Company $2,040,000 under the
advertising agreement.

Jennifer Living Rooms

In September 1996, the Company opened two test "Jennifer Living Rooms"
stores in St. Louis, Missouri. As part of its license with the Private
Company, the Private Company also has the royalty free right to open "Jennifer
Living Rooms" stores in New York. In October 1996, the Private Company began
operating a test store in New York under the name "Jennifer Living Rooms."



40









Other Matters

As described under the heading "The Committee" below, a committee of the
Board of Directors consisting of Michael Colnes concluded that the Company had
claims against Messrs. Greenfield, Love, Seidner and the Private Company.
During fiscal 1995, the Company reimbursed Harley J. Greenfield $493,000 for
legal and accounting fees in connection with the preparation of the response
to the report of such committee.

JCI

Related parties of JCI, which is the holder of options to purchase
1,200,000 shares of Common Stock, also own a majority limited partnership
interest in Jennifer Chicago, L.P. (the "Chicago Partnership"), an LP which
operates, pursuant to a license agreement with the Company, 15 Jennifer
Convertibles stores in the Chicago, Illinois area, and, until the Company
purchased it as of September 1, 1994, Jennifer L.P. II ("L.P. II"), an LP
which operated, pursuant to a license agreement with the Company, 21 Jennifer
Convertible stores in the Detroit, St. Louis, Indianapolis, Milwaukee and
Kansas City metropolitan areas. During the fiscal year ended August 26, 1995,
the Company earned $621,000 of royalties from the Chicago Partnership, which
are not separately shown in the financial statements due to the consolidation
of the LPs for financial statement purposes.

On November 24, 1992, Selig Zises, an affiliate of JCI as well as the
majority limited partner in the Chicago Partnership, agreed to invest an
aggregate of $1,250,000 in L.P. II. The investment was to be made on the same
terms as the investment in the Chicago Partnership. Mr. Zises ultimately
invested $670,000 in L.P. II. Due to disagreements between Mr. Zises and the
general partner of L.P. II, a wholly-owned subsidiary of the Company, and the
Company effective September 1, 1994, the Company purchased Mr. Zises'
interests in L.P. II for $750,000. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

Other Matters

Isabelle S. Silverman, the Company's Vice President - Finance, Treasurer
and Secretary from May 1, 1992 to January 1, 1994, is the daughter-in-law of
Jerome I. Silverman, the sole proprietor of JISCO, an accounting firm which,
until August 27, 1994, provided, through its personnel, substantial
accounting, clerical and administrative services to the Company and the
Private Company. The Company did not pay JISCO any fees during the fiscal year
ended August 26, 1995. Investors in a number of the Company's licensees are
clients of JISCO. In addition, Isabelle Silverman's brother-in-law is the 50%
owner of a corporation which, until December 1, 1994, owned 50% of the
Warehouse. As described under the heading "The Committee" below, a committee
of the Board of Directors consisting of Michael Colnes concluded that the
Company had claims against Jerome I. Silverman and Isabelle Silverman.

Leslie Falchook, the Company's Vice President - Administration and his
brother, who was an officer of the Company from 1986 until 1992, was the owner
of 49% of one of the Private Stores until 1993.

41










In January 1994, Rami Abada, the Company's Executive Vice President and
Chief Operating Officer, and Ronald Rudzin the Company's Senior Vice President
- - Retail Stores, joined the Company. Mr. Abada and Mr. Rudzin each own
interests in certain licensed Jennifer Convertibles stores, which they
acquired while employees of the Private Company. Mr. Abada owned, until
October 1996, a 20% interest in one corporation which owns six licensed
Jennifer Convertibles stores. During the year ended August 26, 1995, such
corporation incurred approximately $185,000 in royalties and $1,613,000 for
merchandise purchases owed to the Company and also made principal and interest
payments to the Company of approximately $23,000 in respect of a 9% secured
note, due December 31, 2001, in the original principal amount of $810,000
(which principal amount was $638,000 as of August 26, 1995). In addition, such
corporation owes the Company $500,000 principal amount under a Revolving
Credit Agreement pursuant to which all available revolving credit loans have
been drawn down. Such loans bear interest at prime plus 3% and were due on
June 1, 1995. Mr. Abada also owned a 20% interest (until October 1996, when he
acquired the remaining 80% interest in such corporations) in each of two
corporations, which each own a licensed Jennifer Convertibles store. During
the year ended August 26, 1995, such corporations incurred an aggregate of
approximately $97,000 in royalties and $749,483 for merchandise purchases owed
to the Company. Mr. Rudzin owns one licensed Jennifer Convertibles store and
his father owns two licensed Jennifer Convertibles stores which during the
fiscal year ended August 26, 1995 incurred approximately $109,000 (for Mr.
Rudzin's stores) and $130,000 for Mr. Rudzin's father's stores) of royalties
and $907,864 (for Mr. Rudzin's store) and $1,123,553 (for Mr. Rudzin's
father's stores) for merchandise purchases. During the fiscal year ended
August 26, 1995, Mr. Abada received $284,172 of salary, severance pay,
distributions and other payments from such licensees and the Private Company
and Mr. Rudzin received $167,923 of salary, distributions and other payments
from such licensees and the Private Company. Amounts owed to the Company by
the corporate licensees referred to above, (each of which is an Unconsolidated
Licensee) have been fully reserved against in the accompanying financial
statements for the 1994 and 1995 fiscal years due to uncertain collectibility.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations." Subject to court approval of the Settlement Agreement, Mr.
Abada and Mr. Rudzin have agreed, from the date of such approval forward, to
personally guarantee the merchandise purchases and royalty obligations of the
Unconsolidated Licensees in which they respectively have an ownership
interest.

The Company uses and the Private Company from time to time, also uses
Wincig & Wincig, a law firm of which Bernard Wincig, a director of the Company
and a stockholder, is a partner. Mr. Wincig received approximately $336,000 of
legal fees from the Company and the LPs and an aggregate of approximately
$412,000 fom the Private Company (representing undistributed profits accrued
over several years from two Private Stores in which Mr. Wincig had a 20%
interest and a payment in respect of the purchase of such 20% interest)
and legal and consulting fees from the Private Company during the fiscal year
ended August 26, 1995. From October 15, 1986 until November 1994, Mr. Wincig's
son, a stockholder and a partner of Wincig & Wincig, was a director of Jara and
was one of three voting trustees of the voting trust established in respect of
Mr. Greenfield's shares in the Private Company.

The Committee Report

On April 12, 1994, the Company's Board of Directors established a
committee consisting of one director, Michael Colnes ("Colnes"), to
investigate (i) allegations set forth in a draft complaint (the "Draft



42









Complaint") delivered to the Company by counsel to Selig Zises and Glenn S.
Meyers and (ii) related party transactions. Colnes was assisted in such
investigation by the law firm of Schulte Roth & Zabel and the accounting firm
of Ernst & Young, LLP. On December 2, 1994, Colnes delivered a summary report
(the "Summary Report") concluding that the Company had meritorious claims
against Harley J. Greenfield, Edward B. Seidner, Fred J. Love, the Private
Company, Isabelle Silverman, and Jerome I. Silverman, a senior advisor to the
Company. On January 26, 1995, Colnes delivered the final report (the "
Committee Report"), which reaffirmed substantially all the conclusions
contained in the Summary Report.

In March 1995, the Company's Board of Directors received the response (the
"Response") to the Committee Report. The Response, which was prepared on
behalf of Mr. Greenfield, by the law firm of Skadden, Arps, Slate, Meagher &
Flom and Ten Eyck Associates, Inc., an independent consulting firm headed by
Ernest Ten Eyck, formerly an assistant chief accountant at the Securities and
Exchange Commission, concluded that there were no valid claims. The Response
stated, among other things, that "Based upon its unrestricted review of the
books and records of both the Private Company and the Company...Ten Eyck found
nothing in the Company-Private Company relationship that appears to be
improper or reflects adversely on the integrity of the senior management of
the Company, including Mr. Greenfield."

Set forth below is a brief summary of those matters as to which the
Committee Report recommended that the Company take legal action and the
Response's reply. As set forth under "Legal Proceedings," in March 1996, the
Company signed a Memorandum of Understanding with designed to settle the
issues raised by the Committee Report. See "Legal Proceedings."

Rebates

A. The Committee Report

The Committee Report concluded that there were meritorious claims relating
to rebates received by the Private Company from merchandise vendors, which
were passed on to the Company, but not to the Company's licensees. The claims
fall into three categories: (i) that the rebates paid to the Company were paid
annually, rather than upon receipt by the Private Company, (ii) that rebates
with respect to licensees were retained by the Private Company rather than
paid to the Company, including, for a short period, rebates with respect to
licensees which had entered into purchasing and warehousing contracts directly
with the Company instead of with the Private Company, and (iii) that, when the
Private Company agreed to transfer the rebates from licensees to the Company
effective as of January 1, 1994 and agreed to give the Company a note (the
"Rebate Note") for $1,000,000 representing the amount of such rebates for
previously delivered merchandise, representatives of the Private Company
misrepresented to the Company's Board of Directors that the Private Company
did not have sufficient funds to pay the Rebate Note, on the basis of which
misrepresentation the Board agreed to accept the Rebate Note rather than
pressing for payment in cash.


43








B. The Response

The Response asserts that the Private Company was not contractually
obligated to pass such rebates along to the Company and that the Committee
Report acknowledged that such rebates were passed along as a matter of
practice and not contract. The Response also asserts that the agreements with
the licensees were quite clear that the licensees were not entitled to such
rebates and that, during all relevant times, the purchasing and warehousing
functions were performed for licensees entirely by the Private Company and
were not and could not have been performed by the Company. The Response
concludes that since the Company was not entitled to the rebates (but only
received them as an accommodation), the Company can not complain about delay
in the payment of such rebates. The Response also takes the position that due
to a miscalculation the Company received approximately $450,000 in excess
rebates for the fiscal years 1988 through 1993 which really belonged to the
Private Company. In addition, the Response states that, since the Private
Company was providing all the services to licensees, it would have been an
unfair windfall for the Company to receive the related rebates. As to the
Rebate Note, the Response argues that (1) since the Company is not entitled to
rebates there was no misrepresentation and asserts that the Private Company
had no obligation to pay the $1,000,000 at all, and (2) the Note bears
interest, provides for an increased interest rate in the event of default and
is being paid in a timely manner.



Fabric Protection



A. The Committee Report



The Private Company provides fabric protection services, including a
life-time warranty, to those customers of the Company and its licensees who
purchase such services. Approximately 2/3 of the revenues from fabric
protection are retained by the Company and its licensees. The remaining 1/3
(approximately $3,300,000 and $3,800,000 paid by the Company and the LPs for
the years ended August 27, 1994 and August 26, 1995, respectively) was paid to
the Private Company and has been used, according to the Response, to cover the
cost of fabric protection and warranty services and to fund the provision of
additional services to the Company and the LPs which the Private Company was
not obligated to provide. The Committee Report concluded that since the
Company's Board of Directors had never approved the arrangement, the Company
had a claim against the Private Company for an amount equal to the profit made
by it for providing such services.



B. The Response



The Response cites provisions of Delaware law to the effect that a related
party transaction does not need to be approved by the disinterested members of
the Board if the transaction is fair. The Response states, based on a survey
of the prices charged for fabric protection by a number of non-affiliated
third parties (which do not provide a life-time warranty) and certain
consultants, that the price charged by the Private Company is "not only fair,
but generous." Accordingly, the Response concludes that the Company has no
claim for damages regarding fabric protection.


44










Freight Charges



A. The Committee Report



The Private Company charges the Company and its licensees for delivery of
merchandise from the manufacturer to its warehouse at a price equal to the
manufacturer's freight rate for such delivery. The Original Warehousing
Agreement was silent as to freight charges, other than for the statement that
purchasing should be done "at cost." The warehousing agreement and purchasing
agreement, each entered into in December 1993 (the "New Agreements"),
specifically provided that the freight delivery component of cost should be
based on the manufacturer's freight rate. From time to time, the Private
Company hires independent truckers to deliver merchandise to its warehouse at
a price less than the manufacturer's freight rate. The Committee Report
concluded that the Company has a claim for the difference between the freight
rate and the amount charged by the independent truckers.



B. The Response



The Response states that the Private Company actually charged the Company
significantly less than "cost" for freight, primarily because the Private
Company did not separately bill the Company for certain costs which it incurs
for delivering merchandise from the central warehouse in New York to satellite
warehouses or local distribution or staging areas in territories outside of
New York. Accordingly, the Response concludes that the Private Company has not
made any money on freight charges to the Company.



Assumption of Purchasing Responsibilities



A. The Committee Report



In connection with the Company's assumption from the Private Company of
the merchandise purchasing function, effective January 1, 1994, the Committee
Report claimed that Messrs. Greenfield, Love, Seidner and Silverman and Mrs.
Silverman (i) misled the Company's Board of Directors that assuming the
purchasing function would not entail additional cost (in connection with the
transfer of the purchasing function, two new officers were appointed to the
Company and six former employees of the Private Company, with salaries
aggregating $166,000 per annum, became employees of the Company) and (ii)
caused licensees to pay receivables of approximately $4,300,000 to the Private
Company instead of to the Company, thereby allowing the receivable from the
licensees (which the Committee Report believed to be insolvent) to grow.


45









B. The Response



The Response argues that there was no misrepresentation and that, among
other things, disclosure in the Company's prior public filings had clearly
indicated that the assumption of the purchasing function would involve
additional costs. In addition, the Response notes that the addition of certain
of the six employees was unrelated to the assumption of the purchasing
function. The Response also states, among other things, that payments of
receivables by licensees were made, as is customary, on the basis of oldest
receivables first. Amounts due to the Private Company that were paid were for
periods prior to December 31, 1993 and amounts due to the Company were for the
period subsequent to January 1, 1994.



Pass Through of Credit From Supplier



A. The Committee Report



According to the Committee Report, a principal supplier to the Company,
the Private Company and the licensees gave a credit to the Private Company of
$50,000 for each new Jennifer Convertibles store opened between September 1991
and February 1994, for a total of $3,500,000. The Committee concluded that
this transaction was not disclosed to the Company's Board of Directors and
that the Private Company should have passed such loans on to the Company's
licensees, and that the Company was damaged by its failure to do so.



B. The Response



The Response indicates that the arrangement between the Private Company
and its supplier was never intended to be passed along to the Company's
licensees. Pursuant to the Purchasing Agreements with the licensees, the
Private Company bore most of the risk of carrying inventory and the terms upon
which such licensees purchased from the Private Company, including payment
terms, were set forth in the contracts with such licensees. In addition,
because the credit was actually a loan which bore interest at 3% above prime,
the Private Company did not benefit from, and the Company was not damaged by,
the failure to pass the credit along to the licensees.



Use of Rebates and Supplier Credit to Develop Warehouses



A. The Committee Report



The Committee Report states that the use by the Private Company of
licensee rebates and supplier credits for which the Committee Report concluded
(as set forth above) the Company had a claim in order to extend the Private
Company's warehouse system was a usurpation of corporate opportunity which
belonged to the Company.


46










B. The Response



The Response states that for the reasons discussed earlier the Company
does not have a valid claim for the credits or the rebates and that, in any
event, the warehousing function has always been performed by the Private
Company since the Company's inception, and the Company has not had, until
recently, the financing to open its own warehouse or the inclination to use
such financing to open warehouses instead of stores. The Response, therefore,
concludes that there was no usurpation of corporate opportunity.



Other Claims



A. The Committee Report



Among other things, the Committee Report also concluded that the Company
had claims for breach of fiduciary duty against the principal officers of the
Company relating to the obstruction of its work by denying it full access to
the books and records of the Private Company and for improper delegation of
authority by Messrs. Greenfield, Seidner and Love to Mr. Silverman.



B. The Response



The Response contends there is no support for the claim as to obstruction
against Mr. Greenfield (who on several occasions voiced his support of Colnes'
request for access) and indicates that Delaware law permits delegation of
certain duties.





The Colnes Letter



On or about November 22, 1994, Colnes sent a letter to Harley Greenfield
as President of the Company, calling Mr. Greenfield's attention to certain
information which had come to Colnes' attention during the previous few days
through his work on the Committee (the "Letter").



The Letter reviewed certain transactions recorded on the books and records
of S.F.H.C., the owner of six licensee stores, the Private Company and its
affiliates, the Company, and certain LPs (LPs III through V). Based on his
review of the transactions, the Letter sets forth the following conclusions:



47










(a) "It appears... that Private Company funds [totalling $300,000] were
used by S.F.H.C. to acquire the stock of Summit"2 Investment Group, Inc.
("Summit") from the Company, and that "no funds were contributed by the
purported stockholders of S.F.H.C. to the acquisition of the stock of Summit;"



(b) S.F.H.C. made a loan of $1,000,000 on behalf of one of its purported
shareholders to invest in LP III, which funds were required by S.F.H.C. for
its operations and not otherwise available for personal use by S.F.H.C.
shareholders; and further, that S.F.H.C. was able to pay a total of more than
$1,000,000 due from it to the Private Company by allowing its accounts payable
to the Company to accumulate from zero to more than $1,000,000, most of which
was older than 30 days;



(c) "It appears... that [$500,000 in] Company funds were used by S.F.H.C.
and ... shareholders for capital contributions to LPs IV and V and that no
funds were contributed by either the limited partners of LPs III through V or
the purported stockholders of S.F.H.C.; and further, that Private Company
funds [totalling $1,100,000] were used for additional capital contributions to
LPs IV and V."



On April 3, 1995, Jerome I. Silverman, as accountant to the Private
Company, responded to Mr. Greenfield regarding the various matters raised in
the Letter (the "Silverman Response").



The Silverman Response states that the funding for S.F.H.C. and LPs III
through V was consistent with the requirement that 80% or more of the equity
interest in each of these entities be owned by parties who were not affiliated
with either the Company or the Private Company, in order to enable the Company
to take advantage of the accounting technique of off-balance sheet financing.



With respect to the specific transactions discussed in the Letter, and its
conclusions as summarized in (a), (b), and (c) above, the Silverman Response
states:



(a) The cash portion of the purchase price which S.F.H.C. paid for Summit
[$270,000] represented only 20% of the equity of Summit (and therefore
S.F.H.C.) and was put up by Mr. Abada, who personally borrowed those funds
from the Private Company pursuant to a loan collateralized by 50,000 shares of
Common Stock. The remaining 80% in S.F.H.C. is owned by three other
individuals who are not affiliated with either the Company or the Private
Company, and that 80% equity interest was acquired for an interest-bearing
note from S.F.H.C. to the Company which is being paid on a current basis;



(b) At the time the $1,000,000 loan from S.F.H.C. was made to a
shareholder to fund his capital contribution to LP III, the Private Company
still had responsibility for purchasing and there were no trade accounts
payable from S.F.H.C. to the Company;

- --------
2 SFHC was created for the specific purpose of acquiring Summit.


48










(c) The $500,000 in loans from the Company to S.F.H.C. was consistent with
the loans made to other licensees of the Company and was contemplated by the
"Use of Proceeds" section in the Prospectus for the Debenture offering and the
revolving credit agreement, and the decision as to the manner in which those
funds were used was within the authority of the shareholders of S.F.H.C. or
Mr. Silverman as their duly authorized representative; and further, the
Private Company funds used for the additional capital contributions to LPs IV
and V were secured by promissory notes from the limited partners of those LPs
to the Private Company.

49











PART IV





Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K



(a) Financial Statements. See the Index immediately following the
signature page.



(b) Reports on Form 8-K.



During the quarter ended August 26, 1995, the Company filed one
Current Report on Form 8-K, dated June 13, 1995, reporting on the
following:



Item 5. - Other Events with respect to its results for fiscal 1994,
the first half of fiscal 1995, and the initiation of a formal
investigation by the Securities and Exchange Commission.



(c) Exhibits.



3.1 - Certificate of Incorporation of the Company (Incorporated
herein by reference to Exhibit 3.1 to the Company's
Registration Statement - File Nos. 33-22214 and 33-10800
(the "Registration Statement")



3.2 - By-Laws of the Company



4.1 - Form of Underwriter's Warrant for the purchase of shares of
Common Stock (Incorporated herein by reference to Exhibit 4.2
to the Company's Registration Statement on Form S-2 -
File No. 33-47871 (the "Registration Statement on Form S-2"))



10.1 - Incentive and Non-Qualified Stock Option Plan, as amended
(Incorporated herein by reference to Exhibit 10.4 to the
Registration Statement)



10.2 - Warehousing and Purchasing Agreement, dated as of November
3, 1986, between the Company and the Private Company
(Incorporated herein by reference to Exhibit 10.10 to the
Registration Statement)



50











10.3 - License Agreement, dated as of November 3, 1986, between the
Company and Jennifer Convertibles, Inc., a New York
corporation (Incorporated herein by reference to Exhibit 10.11
to the Registration Statement)



10.4 - Advertising Agreement, dated as of November 3, 1986 between
the Company and the Private Company (Incorporated herein by
reference to Exhibit 10.12 to the Registration Statement)



10.5 - Voting Trust Agreement, effective as of October 15, 1986, among
Harley J. Greenfield, Fred J. Love, and Edward B. Seidner
(Incorporated herein by reference to Exhibit 10.13 to the
Registration Statement)



10.6 - Option Agreement, date June 29, 1988, among the Company, IDC
and JCI (Incorporated herein by reference to exhibit 10.7 to
the Registration Statement)



10.7 - Amendments to the Warehousing and Purchasing Agreement
referred to in 10.2 (Incorporated herein by reference to
Exhibit 10.21 to the Registration Statement)



10.8 - Agreement, dated March 21, 1991, between JCI Consultant, L.P.
and Jennifer Convertibles, Inc. (Incorporated herein by
reference to Exhibit 1 to the Company's Current Report on
Form 8-K dated March 21, 1991 - series of agreements with JCI
Consultant L.P.)



10.9 - Stock Option Agreement, dated March 21, 1991, between Jennifer
Convertibles, Inc. and JCI Consultant L.P. (Incorporated herein
by reference to Exhibit 2 to the Company's Current Report on
Form 8-K dated March 21, 1991)



10.10 - Voting Trust Agreement, dated March 21, 1991, between Harley J.
Greenfield, Jennifer Convertibles, Inc. and JCI Consultant L.P.
(Incorporated herein by reference to Exhibit 3 to the Company's
Current Report on Form 8-K dated March 31, 1991)



10.11 - Registration and Sales Agreement, dated March 21, 1991, between
Jennifer Convertibles, Inc. JCI Consultant, L.P., Harley J.
Greenfield, Fred J. Love, Edward B. Seidner and Jara
Enterprises, Inc. (Incorporated herein by reference to
Exhibit 4 to the Company's Current Report on Form 8-K dated
March 21, 1991)


10.12 - Agreement of Limited Partnership of Jennifer Chicago, L.P. (the
"Partnership"), dated July 24, 1991 (Incorporated herein by
reference to Exhibit 1 to the


51









Company's Current Report on Form 8-K dated July 24, 1991 -
related to series of agreements related to Limited Partnership
of Jennifer Chicago L.P.)



10.13 - Purchase Option Agreement, dated July 24, 1991, between Jennifer
Convertibles, Inc. and the limited partner of the Partnership
(Incorporated herein by reference to Exhibit 2 to the Company's
Current Report on Form 8-K dated July 24, 1991)



10.14 - Omnibus Agreement, dated July 24, 1991, between Jennifer
Convertibles, Inc. and the Partnership (Incorporated herein by
reference to Exhibit 3 to the Company's Current Report on Form
8-K dated July 24, 1991)



10.15 - Warehousing and Purchasing Agreement, dated July 24, 1991,
between Jennifer Convertibles Inc., and the Partnership
(Incorporated herein by reference to Exhibit 4 to the
Company's Current Report on Form 8-K dated July 24, 1991)



10.16 - Amendment to Employment Agreement with Harley Greenfield
dated November 15, 1991. (Incorporated herein by reference to
Exhibit 10.33 to the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1991)



10.17 - Employment Agreement with Harley J. Greenfield, dated April 6,
1992 (Incorporated herein by reference to Exhibit 10.1 to the
Registration Statement on Form S-2)



10.18 - Employment Agreement with Isabelle Silverman, dated May 12, 1992
(Incorporated herein by reference to Exhibit 10.2 to the
Registration Statement on Form S-2)



10.19 - Employment Agreement with Leslie Falchook, dated May 1, 1992
(Incorporated herein by reference to Exhibit 10.3 to the
Registration Statement on Form S-2)



10.20 - 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)



10.21 - Amendment to Stock Option Agreement dated February 25, 1992
between the Company and JCI (Incorporated herein by reference
to Exhibit 1 to the Company's Current Report on Form 8-K dated
February 25, 1992)



52











10.22 - Letter Agreement dated February 25, 1992 among the Company,
JCI and Harley J. Greenfield, amending a Voting Trust
Agreement (Incorporated herein by reference to Exhibit 2 to
the Company's Current Report on Form 8-K dated February 25,
1992)



10.23 - Amended and Restated Registration and Sale Agreement dated
as of February 25, 1992 among the Company, JCI, Harley J.
Greenfield, Fred J. Love, Edward B. Seidner and Jara
(Incorporated herein by reference to Exhibit 3 to the
Company's Current Report on Form 8-K dated February 25, 1992)



10.24 - Letter Agreement dated February 25, 1992 between the Company
and JCI. (Incorporated herein by reference to Exhibit 4 to the
Company's Current Report on Form 8-K dated February 25, 1992)



10.25 - Consulting Agreement dated November 4, 1991 between the
Company and the Ladenburg, Thalmann & Co., Inc. (Incorporated
herein by reference to Exhibit 10.34 to the Registration
Statement on Form S-2)



10.26 - New Warehousing Agreement dated May 13, 1992 among Jennifer
Purchasing and Warehousing, Inc. Jennifer - New York, Inc. and
the Company. (Incorporated herein by reference to Exhibit
10.35 to the Registration Statement on Form S-2)



10.27 - The Company's Current Report on Form 8-K dated February 18, 1993
(Incorporated herein by reference to Exhibit 10.27 on Form 10-K
for 1994)


10.28 - The Company's Current Report on Form 8-K dated September 20,
1994 (Incorporated herein by reference to Exhibit 10.28 to Form
10-K for 1994)



10.29 - The Company's Current Report on Form 8-K dated May 5, 1995.
(Incorporated herein by reference to Exhibit 10.29 to Form 10-K
for 1994)


10.30 - Credit Agreement dated August 31, 1993 by and between Jennifer
Convertibles, Inc. and IBJ Schroder Bank and Trust Company
(Incorporated herein by reference to Exhibit 10.30 to Form 10-K
for 1994)


10.31 - Warehousing Agreement, dated as of December 31, 1993,
between Jennifer Convertibles, Inc. and Jennifer Warehousing,
Inc. (Incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ending
February 26, 1994)


10.32 - Purchasing Agreement, dated as of December 31, 1993, between
Jennifer Convertibles, Inc. and Jara Enterprises, Inc.
(Incorporated herein by reference to


53










the Company's Quarterly Report on Form 10-Q for the quarterly
period ending February 26, 1994)



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



10.34 - Amendment No. 1 to Warehousing Agreement, dated as of May
28, 1994, amending the Warehousing Agreement referred to in
10.29 and the related Rebate Note (Incorporated herein by
reference to Exhibit 10.34 on Form 10-K for 1994)



10.35 - Amendment No. 1 to Purchasing Agreement, dated as of May 28,
1994, amending the Purchasing Agreement referred to in 10.30
(Incorporated herein by reference to Exhibit 10.35 on Form 10-K
for 1994)


10.36 - License Agreement, dated as of October 28, 1993, among
Jennifer Convertibles Licensing Corp. and Jara Enterprises,
Inc. (Incorporated herein by reference to Exhibit 2 to the
Company's Current Report on Form 8-K dated November 30, 1993)



10.37 - Letter Agreement terminating the Agreements referred to in
10.8 and 10.24. (Incorporated herein by reference to the
Company' Current Report on Form 8- K dated August 1, 1994)



10.38 - Agreement, dated as of May 19, 1995, among Jennifer
Convertibles, Inc., Jennifer Purchasing Corp., Jara
Enterprises, Inc. and the licensees signatory thereto.



10.39 - Agreement, dated as of November 1, 1995, among Jennifer
Convertibles, Inc., Jennifer Purchasing Corp., Jara
Enterprises, Inc. and the licensees signatory thereto.



10.40 - Settlement Agreement, dated as of March 8, 1996, between
Jennifer Convertibles, Inc. and Jara Enterprises, Inc.
(Incorporated by reference to Exhibit 3 to the Company's
Current Report on Form 8-K dated March 18, 1996).



10.41 - Memorandum of Understanding for Settlement of Jennifer
Convertibles Securities Litigation (Incorporated by reference
to Exhibit 1 to the Company's Current Report on Form 8-K dated
March 18, 1996).


54









10.42 - Memorandum of Understanding for Settlement of Certain
Derivative Claims (Incorporated by reference to Exhibit 2 to
the Company's Current Report on Form 8-K dated March 18,
1996).



10.43 - Form of Note, dated November 1994, made by Jara Enterprises,
Inc. to Harley J. Greenfield and Edward B. Seidner



10.44 - 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



10.45 - Form of Subordination Agreement, dated as of August 9, 1996,
by Harley J. Greenfield and Edward B. Seidner



10.46 - Credit and Security Agreement, dated as of March 1, 1996,
among Klaussner Furniture Corp. and Jennifer Convertibles,
Inc. and the other signatories thereto (Incorporated by
reference to Exhibit 4 to the Company's Current Report on Form
8-K dated March 18, 1996).


10.47 - Agreement, dated as of March 1, 1996, among Jennifer
Convertibles, Inc., Jennifer Purchasing Corp., Jara Enterprises,
Inc. and the Licensees signatory thereto.



11.1 - Statement re: Computation of Net (Loss) Earning per share
(for fiscal years ended August 26, 1995, August 27, 1994 and
August 31, 1993)



22.1 - Subsidiaries of the Company (Incorporated herein by reference to
Exhibit 22.1 on Form 10-K for 1994)



(d) Financial Statement Schedules.



All Schedules are omitted for the reason that they are not required
or are not applicable, or the required information is shown in the
consolidated financial statements or notes thereto.

55









SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.





JENNIFER CONVERTIBLES, INC.





By: /s/ Harley J. Greenfield
____________________________

Harley J. Greenfield, Chairman

of the Board, President and

Chief Executive Officer





Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated below.







58










NAME POSITION DATE
- ---- -------- ----

/s/ Harley J. Greenfield
- ------------------------
Harley J. Greenfield Chairman of the Board, October 31, 1996
President and Chief
Executive Officer
(Principal Executive
Officer)


/s/ George J. Nadel
- ------------------------
George J. Nadel Executive Vice President, October 31, 1996
Chief Financial Officer and
Treasurer (Principal
Financial Officer and
Principal Accounting
Officer)



/s/ Edward B. Seidner
- ------------------------
Edward B. Seidner Director October 31, 1996



/s/ Bernard Wincig
- ------------------------
Bernard Wincig Director October 31, 1996



/s/ Edward Bohn
- ------------------------
Edward Bohn Director October 31, 1996



/s/ Kevin J. Coyle
- ------------------------
Kevin J. Coyle Director October 31, 1996




59









JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Index to Financial Statements




Independent Auditors' Disclaimer of Opinion..........................F1


Report of Management.................................................F3


Consolidated Balance Sheets at August 26, 1995 and
August 27, 1994......................................................F4


Consolidated Statements of Operations for the years ended
August 26, 1995, August 27, 1994 and August 31, 1993.................F5


Consolidated Statements of Stockholders' Equity
(Capital Deficiency) for the years ended August 26, 1995,
August 27, 1994 and August 31, 1993..................................F6


Consolidated Statements of Cash Flows for the years ended
August 26, 1995, August 27, 1994 and August 31, 1993.................F7


Notes to the Consolidated Financial Statements.......................F8







REPORT OF INDEPENDENT AUDITORS


Board of Directors and Stockholders
Jennifer Convertibles, Inc.
Woodbury, New York

We were engaged to audit the accompanying consolidated balance sheets of
Jennifer Convertibles, Inc. (the "Company") and subsidiaries as at August 26,
1995 and August 27, 1994, and the related consolidated statements of operations,
stockholders' equity (capital deficiency) and cash flows for the two years then
ended. These financial statements are the responsibility of the Company's
management.

The financial statements as at and for the year ended August 31, 1993,
before restatement to consolidate the limited partnerships referred to in the
seventh paragraph hereof, were audited by other auditors who originally issued
an unqualified report thereon dated November 12, 1993. On May 2, 1995, such
auditors withdrew their opinion stating that information had come to their
attention causing them to believe that they could no longer rely on management's
representations.

We were not engaged to audit the financial statements of the Company as
at and for the year ended August 27, 1994 until subsequent to that date. The
Company was unable to furnish us with documentation to enable us to satisfy
ourselves as to the opening balances for such year. In addition, certain
significant records and documents pertaining to the year ended August 31, 1994
could not be located. Further, the Company recorded significant charges and
credits in the fiscal year ended August 26, 1995 as to which it was unable to
furnish us with sufficient documentation to enable us to determine whether any
portion of such charges and credits was applicable to the year ended August 27,
1994.

As discussed in Note 3, a company owned by three officers of the Company
(the "Private Company") performed purchasing, warehousing and inventory control,
distribution, fabric protection, customer service, store cash management,
advertising, data processing and other services on behalf of the Company for all
or part of the periods covered by the accompanying financial statements.
Effective January 1, 1994, the Company began providing the purchasing and
advertising services for itself, the Private Company and other affiliates. The
Private Company was unable to provide us with documentation for certain of the
transactions performed by the Private Company on behalf of the Company.

The Company does not have an adequate system of internal accounting
controls over the financial information processed for the Company by the Private
Company. Further, the chief financial officer of the Company has stated that he
is unable to maintain internal controls over the financial data processed by the
Private Company on behalf of the Company and that the Company is seriously
deficient regarding the adequacy of internal controls that support its
operations. As a result of this lack of control, the chief financial officer has
stated that he is unable to provide certain representations we requested
regarding the Company's statements of operations and cash flows for the year
ended August 26, 1995 and the financial statements as at and for the year ended
August 27, 1994.










Because of the matters discussed in the preceding four paragraphs, we
are unable to express, and we do not express, an opinion on the accompanying
financial statements as at August 26, 1995 and August 27, 1994, and for the two
years then ended. No representation to the contrary should be expressly or
implicitly assumed from the issuance of the accompanying financial statements.

As discussed in Note 1, in 1993 the Company did not consolidate the
limited partnerships in which it was the general partner. At the end of fiscal
1994, it was determined that the limited partnerships were controlled by the
Company which was funding their losses in excess of the limited partners'
investment. Accordingly, the limited partnerships have been consolidated for
fiscal 1994 and the 1993 financial statements have been restated from those
previously issued to include the accounts of the limited partnerships.

As discussed in Note 8, in December 1994 and January 1995, the Company
and certain of its officers became defendants in class and derivative actions.
The Company is attempting to settle the above litigations and has agreed to
terms which, subject to the execution of definite agreements and court approval,
would settle the class action and derivative litigations. Further, in May 1995,
the Securities and Exchange Commission commenced an investigation relating to
the aforementioned matters. The outcome of these matters is not presently
determinable and an unfavorable outcome could have a material adverse affect on
the Company's ability to continue as a going concern.

Attention is directed to Note 1 with respect to various operational
problems which the Company has experienced in the past two years and
management's plans for contending with these problems. Attention is also
directed to Notes 1, 3, 8 and 12 with respect to various related party
transactions.


Richard A. Eisner & Company, LLP
New York, New York
December 22, 1995

With respect to Note 12
September 26, 1996










Jennifer Convertibles, Inc.
419 Crossways Park Drive
Woodbury, New York 11797


October 28, 1996




REPORT OF MANAGEMENT:

Management is responsible for the preparation, integrity and objectivity of the
Company's financial statements and all other financial information included in
this report as well as maintaining a system of internal controls as a
fundamental requirement for the operational and financial integrity of results.

Management and the Audit Committee of the Board of Directors recognizes the
seriousness and significance of the problems enumerated in the Report of
Independent Auditors. We are now managing the financial functions that have
previously been provided by the Private Company. The accounting professional
staff has been strengthened over the last year and a new internal audit
function has been added. A new Steering Committee has been established which is
headed by one of our independent directors charged with responsibility for
reviewing, examining and modifying the various data processing programs that
support our business. Additionally, settlement of the class action lawsuits and
derivative litigations, along with the new operating agreements with the
Private Company, as described elsewhere, eliminates the burden and expense of
these matters.

Based upon the steps undertaken as described above, we believe that substantial
progress has been made to eliminate the problems identified in the Auditors'
Report.

Very truly yours,

JENNIFER CONVERTIBLES, INC.

/S/ HARLEY GREENFIELD


Harley Greenfield,
President, Chief Executive Officer


/S/ GEORGE J. NADEL


George J. Nadel,
Executive V.P., Chief Financial Officer






F3










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


ASSETS
August 26, 1995 August 27, 1994

Current assets:
Cash and cash equivalents $ 7,729 $ 13,089
Merchandise inventories 9,432 10,148
Due from limited partners - 1,000
Refundable income taxes 131 2,258
Prepaid expenses 761 1,717
Accounts receivable 2,504 1,719
Other current assets 101 1,475
------------ ----------
Total current assets 20,658 31,406

Store fixtures, equipment and leasehold improvements,
at cost, net 9,771 8,701
Due from Private Company and Unconsolidated Licensees,net of reserves of
$6,372 and $3,284 at August 26, 1995
and August 27, 1994. - 1,832

Deferred lease costs and other intangibles, net 1,839 1,929
Goodwill, at cost, net 586 604
Other assets (primarily security deposits) 1,017 450
============ ==========
$ 33,871 $ 44,922
============ ==========


LIABILITIES AND (CAPITAL DEFICIENCY) STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable, trade $ 16,108 $ 15,391
Customer deposits 9,017 9,460
Accrued expenses and other current liabilities 6,521 5,315
------------ ----------
Total current liabilities 31,646 30,166

Deferred rent and allowances 6,171 6,494
Long-term obligations under capital leases 337 477
------------ ----------
Total liabilities 38,154 37,137
------------ ----------


Commitments and contingencies

(Capital deficiency) stockholders' equity:
Preferred stock, par value $.01 per
share. Authorized 1,000,000 shares;
no shares issued - -
Common stock, par value $.01 per share.
Authorized 10,000,000 shares; issued and
outstanding 5,700,725 shares at August 26, 1995
and August 27, 1994 57 57
Additional paid-in capital 22,911 22,911
Notes receivable from warrant holders (300) (300)
Accumulated (deficit) (26,951) (14,883)
------------ ----------
(4,283) 7,785
------------ ----------

$ 33,871 $ 44,922
============ ==========


Attention is directed to the foregoing Accountant's Disclaimer of Opinion and to
the accompanying Notes to the Consolidated Financial Statements.



F4









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





Year ended Year ended Year ended
August 26, 1995 August 27, 1994 August 31, 1993
--------------- --------------- ---------------




Net sales $126,074 $97,420 $64,348
-------------- -------------- -------------

Cost of sales, including store occupancy,
warehousing, delivery and fabric protection
(including charges from Private Company of
$13,883, $28,521, and $37,085) 86,964 67,974 43,898
Selling, general and administrative expenses
(including advertising charges
from Private Company of $0, $3,786 and $7,158) 45,955 34,139 22,652
Termination of consulting agreement,
legal and other costs 500 6,604 -
Write off of purchased limited partners' interests - 3,482 -
Provision for losses on amounts due from
Private Company and Unconsolidated Licensees 3,088 3,284 -
Loss from store closings 1,670 - -
Depreciation and amortization 2,261 2,091 1,583
-------------- -------------- -------------
140,438 117,574 68,133
-------------- -------------- -------------

Operating (loss) (14,364) (20,154) (3,785)
-------------- -------------- -------------
Other income (expense)
Royalty income 523 644 711
Interest income 311 473 674
Interest expense (48) (61) (640)
Gain on sale of securities - 336 61
Other income, net 1,670 1,374 696
-------------- -------------- -------------
2,456 2,766 1,502
-------------- -------------- -------------
(Loss) before income taxes (benefit)
and minority interest (11,908) (17,388) (2,283)
Income taxes (benefit) 160 (322) 113
-------------- -------------- -------------

(Loss) before minority interest (12,068) (17,066) (2,396)
Minority interest share of losses - 2,449 2,902
-------------- -------------- -------------

Net (loss) earnings ($12,068) ($14,617) $506
============== ============== =============



(Loss) earnings per common and common
equivalent share:

Net (loss) earnings per share ($2.12) ($2.56) $0.09
============== ============== =============

Weighted average number of common
and common equivalent shares 5,700,725 5,700,725 6,013,000
============== ============== =============



Attention is directed to the foregoing Accountant's Disclaimer of Opinion and
to the accompanying Notes to the Consolidated Financial Statements.



F5











JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Capital Deficiency)
Fiscal Years ended August 26, 1995, August 27, 1994 and Year ended August 31, 1993
(In thousands, except for share data)




Common stock Additional Notes receivable
---------------------------- paid-in from warrant Accumulated
Shares Par value capital holders (deficit) Totals
------ ---------- ------- -------------- ------------ ------


Balances at August 31, 1992 4,383,469 $ 44 $ 13,008 $ - $ (772) $ 12,280

Conversion of debentures, net
of related costs 1,314,256 13 9,384 - - 9,397
Net earnings - - - - 506 506
---------- ------- ----------- --------- ----------- ---------

Balances at August 31, 1993 5,697,725 57 22,392 - (266) 22,183

Exercise of outstanding stock
options for cash 3,000 - 8 - - 8
Issuance of warrants
in connection with limited
partnership agreements - - 511 (300) - 211

Net (loss) - - - - (14,617) (14,617)
---------- ---------- -------------- --------- -------------- ---------

Balances at August 27, 1994 5,700,725 57 22,911 (300) (14,883) 7,785

Net (loss) - - - - (12,068) (12,068)
---------- ---------- -------------- --------- -------------- --------------

Balances at August 26, 1995 5,700,725 $ 57 $ 22,911 (300) $ (26,951) $ (4,283)
========== ========== ============== ========= ============== ==============



Attention is directed to the foregoing Accountant's Disclaimer of Opinion and to
the accompanying Notes to the Consolidated Financial Statements.


F6










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

Year ended Year ended Year ended
August 26, 1995 August 27, 1994 August 31, 1993

Cash flows from operating activities:
Net (loss) earnings ($12,068) ($14,617) $506
Adjustments to reconcile net (loss) earnings
to net cash provided by operating activities:
Depreciation and amortization 2,261 2,091 1,583
Acquisition of limited partnership interests - (3,000) -
Writeoff of purchased limited partnership interests - 3,482 -
Provision for losses on amounts due from
Private Company and Unconsolidated Licensees 3,088 3,284 -
Loss from store closings 1,670 - -
Deferred rent 656 2,776 1,947
(Gain) on sale of investment securities - (336) (61)
(Gain) on sale of subsidiaries - (102) (480)
Minority interest - (449) 449
Changes in operating assets and liabilities:
Decrease (increase) in merchandise inventories 716 (6,276) (1,538)
Decrease (increase) in refundable income taxes 2,127 (1,190) (1,068)
Decrease (increase) in prepaid expenses 956 (1,468) -
(Increase) in accounts receivable (785) (1,390) -
Decrease (increase) in other current assets 1,374 (582) (408)
(Increase) decrease in due from Private Company
and Unconsolidated Licensees (1,256) (5,249) 1,633
(Increase) decrease in other assets (567) 685 173
Increase in accounts payable trade 717 13,985 178
(Decrease) increase in customer deposits (443) 3,812 2,831
Increase in accrued expenses and
and other current liabilities 1,206 3,565 600
------------ ----------- ------------
Net cash (used in) provided by operating activities (348) (979) 6,345
------------ ----------- ------------

Cash flows from investing activities:
Capital expenditures (4,292) (5,021) (3,894)
Deferred lease costs and other intangibles (1,580) (1,673) -
Sale of investments in government securities, net - 5,431 2,904
Decrease (increase) in due from limited partners 1,000 (1,000) 985
------------ ----------- ------------
Net cash (used in) investing activities (4,872) (2,263) (5)
------------ ----------- ------------

Cash flows from financing activities:
Issuance of warrants - 211 -
Exercise of stock options - 8 -
Payment of debt conversion costs - - (405)
Payments of obligations under capital leases (140) (70) (304)
------------ ----------- ------------
Net cash (used in) financing activities (140) 149 (709)
------------ ----------- ------------

Net (decrease)increase in cash and cash equivalents (5,360) (3,093) 5,631
Increase in cash due to consolidation of limited partnerships - - 529
Cash and cash equivalents at beginning of year 13,089 16,182 10,022
------------ ----------- ------------

Cash and cash equivalents at end of year $7,729 $13,089 $16,182
============ =========== ============



Supplemental disclosure of cash flow information:

Income taxes paid (refunded) during the year ($2,127) $1,190 $1,171
============ =========== ============

Interest paid $48 $61 $673
============ =========== ============




Supplemental disclosure of noncash transactions:
See Note 6 -(Capital Deficiency)/Stockholders' Equity
See Note 8 -Commitments and Contingencies

Attention is directed to the foregoing Accountant's Disclaimer of Opinion and
to the accompanying Notes to the Consolidated Financial Statements.




F7




















JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)

(1) Business and Basis of Preparation

The consolidated financial statements include the accounts of
Jennifer Convertibles, Inc. and subsidiaries (the "Company") and as described
below, certain licensees. The Company is the owner and licensor of sofabed
specialty retail stores that specialize in the sale of a complete line of
sofabeds and companion pieces such as loveseats, chairs and recliners and
specialty retail stores that specialize in the sale of leather furniture. As at
August 26, 1995, 90 Company-owned stores operated under the Jennifer
Convertibles, Jennifer Leather or Elegant Living names.

Commencing in the latter part of the fiscal year ended August 31,
1992, the Company began licensing stores to limited partnerships ("LP's") of
which a subsidiary of the Company is the general partner. The Company's
subsidiary made nominal capital contributions to the LP's and the limited
partners contributed approximately $6,710. All of the LP's have had losses
since inception and the Company has made advances to them to fund such losses.
For the fiscal years ended August 31, 1992 and 1993, the Company did not
consolidate the operations of the LP's and recorded losses only to the extent
of its nominal capital contributions. As at August 31, 1993, the Company had a
receivable of approximately $3,400 for advances made to the LP's. In November
1994, it was determined that the Company had control of the LP's and, as a
result, under generally accepted accounting principles, should consolidate the
accounts of the LP's in its financial statements. Accordingly, the accompanying
financial statements include the accounts of the LP's as well as those of the
Company and its subsidiaries. The 1993 financial statements have been restated
to consolidate the LP's which had the effect of recording in the Company's
consolidated statement of operations the losses of the LP's in excess of the
limited partners' capital contributions. See below for the effect of the
restatement.

As at August 26, 1995 and August 27, 1994, the LP's operated 68 and
99 stores under the Jennifer Convertibles name, the operations of which are
included in the consolidated financial statements.

During the year ended August 27, 1994 and subsequent thereto, the
Company purchased the interest of certain limited partners (who had made
capital contributions aggregating $2,670) for $3,000, which was $3,482 in
excess of such limited partners' capital accounts at August 27, 1994. Such
amount has been charged to operations in the year ended August 27, 1994.

The Company has also licensed stores to parties which may be deemed
affiliates ("Unconsolidated Licensees"). Under the applicable license
agreements, the Company is entitled to a royalty of 5% of sales. As of August
26, 1995, the Company had made advances to such Unconsolidated Licensees
aggregating $4,477, which has been reserved for in full due to the uncertainty
of collection. As at August 26, 1995, 11 stores were operated by such
Unconsolidated Licensees and the results of their operations are not included
in the consolidated financial statements (See Notes 3 and 10).

F8











JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)




Also not included in the consolidated financial statements are the
results of operations of 24 stores in the New York Metropolitan Area which are
owned by a company (the "Private Company") which, until November 1994, was
owned by three of the officers/directors/principal stockholders of the Company.
In November 1994, the Private Company redeemed the stock in the Private Company
of two of the principal stockholders (Harley Greenfield and Edward Seidner) for
a note in the amount of $10,273 collateralized by the assets of the Private
Company and due in 2023 (See Note 12). In connection with such transaction,
Fred Love, the remaining principal stockholder, granted Messrs. Greenfield and
Seidner options expiring in November 2004 to purchase the 585,662 shares of the
Company's Common Stock owned by him and the Private Company for $15.00 per
share.

The Company, the LP's, the Private Company and the Unconsolidated
Licensees have had numerous transactions with each other as more fully
discussed in Note 3. Because of the numerous related party transactions, the
results of operations are not necessarily indicative of what they would be if
all transactions were with independent parties.

The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company incurred net losses of
$12,068 in the year ended August 26, 1995 and $14,617 in the year ended August
27, 1994 and operating losses have continued subsequent to those dates with the
Company's equity and working capital being further depleted. Additionally, the
Company is involved in the following unresolved matters which may have a
significant impact on the Company's operations:

a) As discussed in Note 8, a report by an independent committee
of the Board of Directors appointed to investigate a
complaint relating to transactions between the Company and
the Private Company which may result in claims by the
Company.

b) The Company has been served with 11 class action
complaints and six derivative action lawsuits as
discussed in Note 8.

c) As discussed in Note 8, on May 3, 1995, the Securities and
Exchange Commission advised the Company that it had commenced
a formal investigation into the affairs of the Company.

Management has addressed the aforementioned issues, as
follows:

o As discussed in Note 12, the Company has agreed to terms
which, subject to definitive agreements and court approval,
would not only settle the class action and derivative
litigations but change its operating relationship with the
Private Company and resolve outstanding disputes relating to
transactions between the Company and the Private Company.



F9











JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)

o Approximately 40 unprofitable stores have been closed in
1995 and 1996 and expense reduction plans have been
implemented in 1996 throughout all operational areas of the
Company.

o As discussed in Note 12, the Company has entered into a
credit and security agreement with its largest supplier,
Klaussner Furniture Industries, Inc. ("Klaussner") (which
accounts for approximately 73% of the Company's purchases of
merchandise) which, based on current terms, effectively
extended the payment terms for merchandise shipped from 60
days to 81 days.

As indicated above, the Company has restated its financial statements
as at August 31, 1993 and for the year then ended to include the accounts of
the LP's in which the Company is the general partner. Presented below is the
effect of such restatement on previously reported results:

Net sales (as previously reported) $38,704
Net sales of LP's 25,644
-------
Net sales, as restated $64,348
=======
Earnings before taxes (as
previously reported) $ 4,730
Losses of LP's (4,111)
-------
Earnings before taxes, as restated $ 619
=======

The financial statements for the year ended August 31, 1993, before
the above restatement, were reported upon by BDO Seidman. On May 2, 1995, BDO
Seidman advised the Company that "information has come to our attention that
causes us to conclude that we can no longer rely on management's
representations and, accordingly, we are hereby withdrawing our opinion on the
1993 consolidated financial statements...(of the Company) expressed in our
report dated November 19, 1993". They further advised that "this information
causes us to believe that the 1993 financial statements may be materially
misstated as a result of the accounting for the Company's investment in
Jennifer L.P. III".

(2) Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of
Jennifer Convertibles, Inc., its subsidiaries and the LP's. A subsidiary of the
Company is the general partner of each of the LP's.

Fiscal Year

Commencing with the year ending August 27, 1994, the Company has
adopted a fiscal year ending on the last Saturday in August which would be
either 52 or 53 weeks long. Previously, the fiscal year ended on August 31.

Cash and Cash Equivalents

The Company considers all short-term, highly liquid instruments with
a maturity of three months or less to be cash equivalents. Cash equivalents,
consisting principally of money market instruments and United States Treasury
bills as of August 26, 1995 and August 27, 1994, total $4,000 and $6,325,
respectively.


F10











JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)

Merchandise Inventories

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

8/26/95 8/27/94
-------- ---------
Showrooms $4,421 $ 4,685
Warehouses 5,011 5,463
------ -------
$9,432 $10,148
====== =======

Vendor discounts and allowances in respect to merchandise purchased by the
Company are included as a reduction of inventory and cost of sales.

Store Fixtures, Equipment and Leasehold Improvements

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

Goodwill

Goodwill consists of the excess of cost of the Company's investments
in certain subsidiaries over the fair value of net assets acquired. Impairment
is assessed based on cash flows of the related stores. Goodwill is being
amortized over forty years from the acquisition date using the straight-line
method. Accumulated amortization at August 26, 1995 and August 27, 1994
amounted to $538 and $521, respectively.

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.

Pre-opening costs are expenses associated with the opening of new
stores which are deferred and amortized over a one year period.

Deferred Rent and Allowances

Pursuant to certain of the Company's leases, rent expense charged to
operations differs from rent paid because of the effect of free rent periods
and work allowances granted by the landlord. Accordingly, the Company has
recorded deferred rent and allowances of $6,171 and $6,494 at August 26, 1995
and August 27, 1994, respectively. 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.

Revenue Recognition

Sales are recognized upon delivery of the merchandise to the customer. A
minimum deposit of 50% is typically required upon placing a sales order.


F11













JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)


(Loss) Earnings Per Share

(Loss) earnings per share for the years ended August 26, 1995, August
27, 1994 and August 31, 1993 were computed by dividing the net (loss) earnings
by the weighted average number of shares of Common Stock and Common Stock
equivalents outstanding where applicable during the period using the modified
treasury stock method. Fully diluted earnings per share for the year ended
August 31, 1993, based on assumed conversion of convertible subordinated
debentures, is not presented as the effect is antidilutive.

Advertising

Advertising costs are expensed as incurred.

Concentration of Risks

The Company purchases 95% of its inventory from two suppliers (73%
and 22%, respectively) under normal trade terms. The larger supplier, Klaussner
Furniture Industries, Inc. has executed a Credit and Security Agreement with
the Company (See Note 12).

The Company utilizes many local banks as depositories for cash
receipts received at its showrooms. Such funds are transferred weekly to
concentration accounts maintained at one commercial bank. At August 26, 1995
and August 27, 1994, amounts on deposit with this one bank totalled 81% and
24%, respectively, of total cash.

Use of Estimates

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

Recent Pronouncements

In October 1995, the Financial Accounting Standards Board issued SFAS
No.
123, "Accounting for Stock-Based Compensation" which is effective for the
Company's 1996 financial statements. SFAS No. 123 allows companies to either
account for stock-based compensation under the new provisions of SFAS No. 123 or
under the provisions of APB No. 25, but requires pro forma disclosure in the
footnotes to the financial statements as if the measurement provisions of SFAS
No. 123 had been adopted. At this time, the Company intends to continue
accounting for its stock-based compensation in accordance with the provisions of
APB No. 25. As such, the adoption of SFAS No. 123 will not impact the financial
position or results of operations of the Company.

(3) Related Party Transactions

Prior to January 1, 1994, merchandise was purchased and warehoused
for the Company and the LP's by the Private Company under a 15-year Warehousing
Agreement dated November 3, 1986. In connection with this agreement, the
Private Company

F12












JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)

also provided services relating to purchasing, distribution, customer service,
data entry processing and other related services. Such agreement did not
preclude the Company from purchasing merchandise directly from other parties or
using other warehousing facilities. Pursuant to this agreement, the Company was
obligated to pay for inventory at the Private Company's cost, net of vendor
discounts and allowances but the LP's did not receive the vendor discounts and
allowances. On January 1, 1994, the Company assumed the purchasing
responsibility (see below). The Company and LP's pay a monthly warehousing fee
based on 5% of the retail sales prices and fabric protection revenue collected
from customers. Additionally, the Private Company provides fabric protection,
warranty services and freight services at pre-determined rates. The Company's
cost of sales includes these charges. Revenue from customers for fabric
protection services is included in net sales.

Indicated below are the amounts charged by the Private Company:

Year Ended
--------------------------------
8/26/95 8/27/94 8/31/93
Included in Cost of Sales:
Purchases of inventory $ - $18,230 $31,545
Freight* 3,775 2,122 -
Fabric protection services 3,804 3,298 2,323
Warehousing fees 6,304 4,871 3,217
------- ------- -------
Total $13,883 $28,521 $37,085
----- ======= ======= =======

*For periods prior to January 1, 1994, freight was included in the purchases of
inventory.

The Company has negotiated new operating arrangements with the
Private Company, subject to execution of definitive agreements and court
approval of the settlement of various class and derivative actions (See Note
12).

The Company and the LP's rely upon the Private Company to provide and
maintain substantially all data entry processing and other related services
that support their business. These services provided to the Company are staffed
by employees of the Private Company. Other related services principally include
all accounts payable (non-merchandise), all payroll preparation services,
inventory control reporting and certain store cash management activity.
Additionally, customer service and lifetime fabric guarantees to customers,
when purchased, are provided by the Private Company.

Effective January 1, 1994, the Company assumed the responsibility
from the Private Company for purchasing merchandise for itself, the LP's, the
Unconsolidated Licensees and the Private Company. The Company acquired from the
Private Company the inventory that was in the warehouse on January 1, 1994 for
$2,575, which was the Private Company's cost basis for such inventory. During
the year ended August 26, 1995 and the year ended August 27, 1994 (which only
includes the period January 1, 1994 through August 27, 1994) approximately
$12,500 and $7,478, respectively, of inventory was purchased by the Private
Company through the Company and $3,105 and $2,350, respectively, of inventory
was purchased by the Unconsolidated Licensees through the Company. In addition,
effective January 1, 1994, the Private Company transferred to the Company the
right to receive the benefit of any vendor discounts and allowances in respect
to merchandise purchased by the Company on behalf of the LP's and certain other
licensees. The Company had always been entitled to the benefit of such
discounts in respect to merchandise purchased by the Company for its stores. To
evidence its obligation for the discounts that had accrued with respect to
merchandise purchased by the Company, the Private Company executed a promissory
note in the amount of $1,000. This note, which bears interest at 8% per annum,
is payable


F13












JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)


in equal monthly installments over three years commencing August 1, 1994. In
addition, since the Private Company retained the right to receive the benefit
of any discounts refunded or credited by suppliers in respect of merchandise
purchased by the Private Company through the Company, for the period January 1,
1994 through August 27, 1994, an amount equal to $471 was remitted to the
Private Company on account of discounts for such period, and $692 was remitted
for the year ended August 26, 1995.

Prior to January 1, 1994, the Company was party to Advertising
Agreements with the Private Company. Pursuant to these agreements, the Company
could elect, on a case-by-case basis, to participate in particular joint
advertising programs with the Private Company for a fee not to exceed 8% of the
aggregate sales of the Company's New Jersey and Connecticut stores. Such fee
was based on an equitable portion (as defined in the Advertising Agreements) of
the Private Company's costs. The Company had a similar agreement for its stores
located in New York, except that such stores paid a flat 8% of sales for
advertising. During the years ended August 27, 1994 and August 31, 1993, $3,786
and $7,158, respectively, was allocated under the Advertising Agreements. The
amount expended under the Advertising Agreements for the fiscal year ended
August 27, 1994 only includes the period September 1, 1993 through December 31,
1993, which was the period such agreements were in effect.

Effective January 1, 1994, the Company assumed the responsibility of
advertising for itself, the LP's, the Unconsolidated Licensees and the Private
Company. Under the new arrangement, the Private Company and Unconsolidated
Licensees are charged an amount which approximates their pro rata share of
advertising costs which aggregated $2,498 and $1,718 for the years ended August
26, 1995 and August 27, 1994, respectively.

Two executive officers of the Company own interests in certain
Unconsolidated Licensee stores. Rami Abada, Executive Vice President and Chief
Operating Officer of the Company, owns a 20% interest in Southeastern Florida
Holding Corp. ("S.F.H.C.") which owns six licensed stores. During the three
years ended August 26, 1995, S.F.H.C. incurred approximately $185, $252 and
$340 in royalties to the Company. Principal and interest payments of
approximately $23 and $151 for the two years ended August 26, 1995 and nothing
for the year ended August 31, 1993 were received in connection with the 9%
secured note, due December 31, 2001. The original principal amount of $810 had
been reduced to $638 as of August 26, 1995. In addition, S.F.H.C. owes the
Company $500 under a Revolving Credit Agreement pursuant to which the entire
available revolving credit loan has been drawn down. Such loan bears interest
and is payable at prime plus 3% but has not been paid. The same executive also
owns a 20% interest in two other corporations that are also part of the
Unconsolidated Licensees. During the three years ended August 26, 1995, such
corporations incurred approximately $97, $106 and $92 in royalties to the
Company (See Note 12). Ronald Rudzin, Senior Vice President - Retail Stores of
the Company, owns one licensed store and his father owns two licensed stores
which, during the three years ended August 26, 1995, incurred royalties
aggregating approximately $239, $283 and $294, respectively, to the Company
(See Note 9).

By agreement (the "Offset Agreement") dated November 1, 1995, the
Private Company and the Company acknowledged that as of August 26, 1995 the
Private Company owed the Company $9,268, certain Unconsolidated Licensees owed
the Company $2,118 for merchandise purchased (of which $1,866 was past due) and
the Company owed the Private Company $11,455 for warehousing fees, freight and
fabric protection services. In addition, the Private Company agreed to assume
the obligations of certain Unconsolidated Licensees in the amount of $1,866 and
to offset the amounts owed to the Company by the Private Company and such
licensees against the amounts owed to the Private Company by the Company.


F14











JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements -(Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)



By agreement dated March 1, 1996, the Private Company and the Company
agreed to continue to offset, on a monthly basis, amounts owed by the Private
Company and certain Unconsolidated Licensees to the Company for purchasing,
advertising and other services and matters against amounts owed by the Company
to the Private Company for warehousing services, fabric protection, freight and
other services and matters. The proposed settlement agreement contemplates that
the Offset Agreement will be modified to provide that to the extent either
party owes the other an amount in excess of $1,000 for current obligations,
such excess will be paid in cash.

All amounts due from the Private Company and Unconsolidated Licensees
are fully reserved since these entities have losses and capital deficiencies.

In connection with the uncertainty of collectibility and in
consideration of the potential additional financial support that the Company
may provide to the Private Company and the Unconsolidated Licensees, the
Company will account for subsequent transactions with these entities on an
offset basis. However, if the result of the offset is a receivable due from
them, then such net amount will be generally recognized only at the time when
cash is received from these entities. A reserve has been provided in the
consolidated financial statements for amounts due from these entities, as
follows:

Unconsolidated
Licensees
Private (Other Than
Company S.F.H.C.) S.F.H.C. Totals

At August 26, 1995:
Gross amount due $ 2,410 $ 1,167 $ 2,795 $ 6,372
Reserves (2,410) (1,167) (2,795) (6,372)
-------- -------- -------- --------
Net Amount $ -0- $ -0- $ -0- $ -0-
======== ======== ======== ========

At August 27, 1994:

Gross amount due $ 1,832 $ 972 $ 2,312 $ 5,116
Reserves -0- (972) (2,312) (3,284)
-------- -------- -------- --------
Net Amount $ 1,832 $ -0- $ -0- $ 1,832
======== ======== ======== =======

The Private Company has stated that, if the settlement described in
Note 12 is not consummated, it may assert claims of approximately $1,200
against the Company for various additional amounts owed from prior years. The
Company believes the claims are either without merit or would be exceeded by
the amount of counter-claims the Company would make under such circumstances.
Accordingly, the Company has not provided for any losses that may occur as a
result of this assertion.

Until October 28, 1993, the Private Company owned certain trademarks
and had granted the Company a royalty-free license to use and to sublicense and
franchise the use of such trademarks throughout the world, except New York
State. On October 28, 1993 the Licensor, for nominal consideration, assigned
these trademarks to the Company. The Company then granted the Private Company a
perpetual, royalty-free license to use and to sublicense and franchise the use
of such trademarks in the State of New York. The license is exclusive in such
territory, subject to certain exceptions.

The Company is one of the guarantors of a $5,000 bank mortgage on the
Private Company's warehouse facility utilized by the Company which is payable
in quarterly installments with a lump sum due in October 1999. The Company has
guaranteed a portion of the debt equal, at any time, to 60% of the aggregate

F15










JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)






amount of the debt then outstanding (See Note 12 - Subsequent Events - Credit
and Security Agreement with Klaussner, paragraph B). The Company is entitled to
an annual fee of 1/2 of 1% of the amount guaranteed from the Private Company.
The principal stockholders of the Company and the Private Company have agreed
to indemnify the Company against any loss under the guarantee. In June 1988,
the Company received a ten-year option to purchase the warehouse facility. The
option price for the facility is its original appraised value of approximately
$9,000 increasing by $900 each year during the option period.

Effective September 1, 1991, the Company entered into a five-year
employment agreement with its President and Chief Executive Officer, Harley
Greenfield, pursuant to which he agreed to devote his full time to the business
of the Company and not to compete during the term of his employment agreement
or for a period of one year thereafter. In lieu of cash compensation, the
President was granted options to purchase 150,000 shares of Common Stock at
$8.375 per share, the market value on the date of grant and therefore no
compensation charge was recorded in the fiscal years ended August 27, 1994 and
August 31, 1993. Such options vest at the rate of 30,000 shares per year,
subject to acceleration for changes of control, mergers and similar events.

Effective September 1, 1994, Harley Greenfield, the President and
Chief Executive Officer, and Edward Seidner, who became an Executive Vice
President on such date, began receiving a salary of $400 and $300 per annum,
respectively, from the Company. In addition, they receive substantial economic
benefits from the Private Company.

Effective January 1, 1994, Rami Abada, Executive Vice President and
Chief Operating Officer, and Ronald Rudzin, Senior Vice President - Retail
Stores, each began receiving a salary of $150 per annum from the Company. In
addition, they receive substantial economic benefits from the Private Company
and certain Unconsolidated Licensees.

Another director (and stockholder) of the Company received
approximately $336 and $371 in legal fees in 1995 and 1994, respectively.
Further, he owned, until May 1995, a 20% interest in each of two Private Company
stores, and receives substantial economic benefits from the Private Company.

(4) Store Fixtures, Equipment and Leasehold Improvements:

August 26, August 27,
1995 1994
------- -------

Automobiles $ 68 $ 88
Store fixtures and furniture 6,175 6,190
Leasehold improvements 6,398 4,850
Computer equipment 612 429
------- -------
13,253 11,557
Less: Accumulated depreciation and
amortization 3,482 2,856
------- -------
$ 9,771 $ 8,701
======= =======


At August 26, 1995 and August 27, 1994, equipment cost includes $907
and $870, and accumulated depreciation and amortization includes $406 and $328
on equipment under capital leases.


F16










JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)










(5) Income Taxes

Effective September 1, 1993, the Company adopted Statement of
Financial
Accounting Standards No. 109, "Accounting for Income Taxes". The cumulative
effect of this accounting change did not have a material effect on the financial
condition or results of operations for the Company.

Components of income tax expense (benefit) are as follows:


Year Ended
--------------------------------
8/26/95 8/27/94 8/31/93
------- ------- -------
Current:
Federal $ - $(593) $113
State 160 271 -

Deferred:
Federal - - -
State - - -
---- ------ ----
$160 $(322) $113
==== ====== ====


Expected tax expense (benefit) based on the statutory rate is
reconciled with actual tax expense (benefit) as follows:

Percent of Pre-Tax Earnings (Loss)
Year Ended
----------------------------------
8/26/95 8/27/94
------- -------
"Expected" tax expense (benefit) (34.0)% (34.0)%

Increase (reduction) in taxes resulting from:

State income tax, net of
federal income tax benefit 1.4 % 1.8 %

Non-deductible items .5 % 7.0 %

Other (1.8)% ( 2.5)%

Change in valuation allowance 35.2 % 25.5 %
------- -------
1.3 % ( 2.2)%
======= =======

The difference in 1993 between the expected income tax expense and
the actual income tax expense is due principally to the deduction of state
income taxes and the deferred gain on sale of subsidiaries.

F17










JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)





The principal components of deferred tax assets, liabilities and the
valuation allowance are as follows:
August 26, 1995 August 27, 1994
--------------- ---------------
Deferred tax assets:

Federal and state net operating
loss carryforwards $ 2,336 $ -

Reserve for losses on loans and
advances 2,926 1,314

Accrued partnership losses 2,584 2,491

Deferred rent expense 1,329 1,265

Inventory capitalization 232 216

Other expenses for financial
reporting, not yet deductible
for taxes 305 260
-------- -------

Total deferred tax assets, before
valuation allowance 9,712 5,546

Less: Valuation allowance (7,969) (3,767)
-------- -------

Total deferred tax assets $ 1,743 $ 1,779
======== =======

Deferred tax liabilities:

Difference in book and tax basis
of fixed assets $ 1,473 $ 1,342

Other 270 437
-------- -------

Total deferred tax liabilities 1,743 1,779
-------- -------

Net deferred tax assets $ -0- $ -0-
======== =======

The Company's deferred tax asset has been fully reserved since it is
considered more likely than not that the amount will not be realized. During
the years ended August 26, 1995 and August 27, 1994, the valuation allowance
increased by $4,202 and $3,767, respectively.

The Company has a net operating loss carryforward of approximately
$5,800 expiring in the year 2010.

(6) (Capital Deficiency) / Stockholders' Equity

In 1992, the Company issued $11,500 principal amount of 8 1/2%
Convertible Subordinated Debentures ("Debentures") due July 15, 2002. The
Debentures were convertible into Common Stock at any time prior to maturity at
a conversion price of $8.75 per share. Additionally, the Company issued to the
underwriter (the "Debenture Underwriter") warrants to purchase 100,000 shares
of Common Stock exercisable for a period of four years commencing July 1992, at
a price equal to 120% of the closing price of the Common Stock on July 8, 1992
($8,375).

F18











JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)

On January 18, 1993, the Company redeemed all $11,500 principal
amount of its Debentures in exchange for the issuance of 1,314,256 shares of
Common Stock. In connection with this transaction, the Debenture Underwriter
and another consultant to the Company, JCI Consultant, L.P. (See Note 10),
received $173 and $180, respectively, for financial consulting services.
Debenture conversion costs of $494, including legal fees, accounting fees and
miscellaneous fees, were paid by the Company in connection with the conversion.
Stockholders' equity was increased by the $11,500 principal amount of
Debentures converted into Common Stock, net of the related unamortized debt
costs of $1,609 and the conversion costs of $494.

In the fiscal year ended August 27, 1994, under the terms of the
limited partnership agreements for LP III, LP IV, LP V, LP VI, LP VII and LP
VIII (see Note 10), the three limited partners each purchased for $170
five-year warrants to purchase 60,000 shares of the Company's Common Stock at
an exercise price of $15.625 per share. Each of the limited partners paid
approximately $20 in 1994 and issued a $150 term note to the Company as payment
for the warrants. These notes bear interest at a rate of 6% per annum and are
payable in three annual installments of $50 each commencing in June 1994. The
notes receivable from warrant holders are recorded in Stockholders' Equity
(Capital Deficiency) and were not paid in accordance with the terms of the note
(See Note 12).

(7) Stock Options Plans

In November 1986, the Company adopted an Incentive and Non-Qualified
Stock Option Plan (the "1986 Plan") under which 150,000 shares of Common Stock
were reserved for issuance to selected management and other key employees of
the Company. The Amended and Restated 1991 Incentive and Non-Qualified Stock
Option Plan (the "1991 Plan" and together with the 1986 Plan hereinafter
referred to as the "Plans") was adopted by the Company in September 1991 and
amended in April 1992. Under the 1991 Plan, 700,000 shares of Common Stock were
reserved for issuance to selected management and other key employees of the
Company. The terms of both Plans are substantially similar. The exercise price
with respect to qualified incentive options may not be less than 100% of the
fair market value of the Common Stock at the date of grant.

From time to time, the Company grants additional stock options
outside of the Plans to individuals or entities in recognition of contributions
made to the Company.

Information regarding the Company's stock options under and outside the
Plans is summarized below:
Number of Shares
-------------------------------
1995 1994 1993
------- ------- -------

Outstanding, beginning of year... 736,547 803,697 559,547
Granted (at $2.50 to
$15.75 per share).............. 137,500 50,000 244,150

Exercised (at $2.75 per share)... - (3,000) -
Canceled (at $2.75 to $15.75
per share) ( 37,500) (114,150) -
-------- --------- --------

Outstanding, end of period (at
$2.50 to $15.75 per share)..... 836,547 736,547 803,697
========= ========= =========

Exercisable, end of period....... 628,051 45,053 548,931
========= ========= =========

See Note 10 with respect to options outstanding held by JCI to
purchase 1,200,000 shares of Common Stock of the Company.

F19










JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)






The number of shares of Common Stock reserved for options available
for grant under the Plans was 190,453 at August 26, 1995.

(8) Commitments, Contingencies and Other Matters

Leases

The Company and LP's lease retail store locations under operating
leases for varying periods through 2009 which generally are renewable at the
option of the lessee. Certain leases contain provisions for additional rental
payments based on increases in certain indexes. Future minimum lease payments
and future minimum sublease rentals for all noncancelable leases with initial
terms of one year or more consisted of the following at August 26, 1995:

Year Ending August
----------------------------------------
1996......................... $ 12,030
1997......................... 12,034
1998......................... 11,521
1999......................... 10,959
2000......................... 10,222
Thereafter................... 38,567
95,333
---------
Sub-lease income............. ( 3,003)
---------
$ 92,330
=========

The Company has guaranteed the lease obligation of the California
warehouse which is operated by the Private Company. The annual lease obligation
for this location is $133 and the lease expires on September 30, 1998.

Rental expense for all operating leases amounted to approximately
$15,770, $12,456 and $7,097, net of sublease income of $301, $211 and $197 for
the years ended August 26, 1995, August 27, 1994 and August 31, 1993,
respectively.

The Company and LP's have long-term capital leases for certain
equipment. The leases are for periods of three to five years with an option to
purchase at the end of the lease periods for a nominal price.

The following is a schedule of future lease payments for the capital
leases:

Year Ending August
----------------------------------------
1996..............................$ 194
1997.............................. 160
1998.............................. 160
1999.............................. 137
---------
651
Amount representing interest...... ( 97)
---------
Present value of minimum
lease payments................... 554

Less: Current portion............ 217
---------
$ 337
=========

F20










JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)

Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities are:

8/26/95 8/27/94
------- -------

Advertising $1,577 $ 112
Payroll 697 300
Legal 374 1,589
Accounting 936 1,365
Store closings 852 -
Settlement costs 500 -
Sales tax 805 592
Other 780 1,357
------ ------

$6,521 $5,315
====== ======

Advertising Expense

Advertising expense for the years ended August 26, 1995, August 27,
1994 and August 31, 1993 aggregated $15,729, $11,357 and $7,158, respectively.

Other

Conclusions of the Independent Committee

A draft complaint ("Complaint") on behalf of an unnamed plaintiff was
delivered to the Company in March 1994. The Complaint raised certain issues and
potential causes of action that may exist in favor of the Company against the
Private Company and others. The Company's President advised the Board of
Directors that, in his view, the Complaint was without merit. The Board
appointed an independent committee (the "Committee") consisting of one director
to investigate the allegations in the Complaint and certain other matters.

On November 22, 1994, the same director who was on the Committee
submitted a letter to the President of the Company which contained information
relevant to the (1) Funding of S.F.H.C. (See Note 10) and (2) the funding of
Limited Partnerships (LP's) III through V (See Note 10). The letter essentially
detailed the flow of funds from the Private Company, certain Unconsolidated
Licensees and the Company to S.F.H.C. and its subsidiary ("Summit") (See Note
10) regarding these transactions. Additionally, it disclosed that as of August
27, 1994, S.F.H.C. had a receivable from officers of $1,861. It asserted that
neither (a) the payment to fund S.F.H.C.'s purchase of the stock of Summit nor
(b) the capital contributions to LP's III through V were obtained from sources
outside the Company or the Private Company".

On December 2, 1994, the Board of Directors of the Company received
the Summary Report of Counsel to the Independent Committee which, amongst other
matters, concluded that it "has reviewed many significant related party
transactions and recommends to the Board that the Company assert claims to
recover damages for harm caused the Company". On January 26, 1995, the Board of
Directors received the "Final Report of Counsel to the Independent Committee of
the Board of Directors" which reached the same conclusions and recommendations.



F21










JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)





On March 10, 1995, the Board of Directors received the "Response of
Harley Greenfield to the January 26, 1995 Final Report of Counsel to the
Independent Committee" that asserted that there were no valid claims. On April
3, 1995, it received a similar response from a financial consultant to the
Company to the letter dated November 22, 1994 from Michael Colnes to Harley
Greenfield that asserted that there was nothing improper.

Class Action and Derivative Action Lawsuits

Between December 6, 1994 and January 5, 1995, the Company was served
with eleven class action complaints and six derivative action lawsuits which
deal with losses suffered as a result of the decline in market value of the
Company's stock as well as the Company having "issued false and misleading
statements regarding future growth prospects, sales, revenues and net income".

The Company and its counsel are attempting to resolve the lawsuits
but they can not presently determine the ultimate outcome of such resolutions
and its impact on the Company's financial condition and results of operations
(See Note 12).

Securities and Exchange Commission Investigation

On December 9, 1994, the Company was advised that the Securities and
Exchange Commission (SEC) was conducting an inquiry of the Company's affairs
"to determine whether there have been violations of the federal securities
laws". The SEC requested that the Company voluntarily provide certain documents
in connection with its December 2, 1994 press release "concerning the
adjustment in the valuation of certain subsidiaries on the Company's balance
sheet". Since that date, the SEC has also requested the Final Report of Counsel
to the Independent Committee of the Board of Directors and the November 22,
1994 letter from a director of the Company to the President (as more fully
described above). Additionally, the SEC requested the "responses" to these
documents and the Company furnished them with the "Response of Harley
Greenfield to the January 26, 1995 Final Report of Counsel to the Independent
Committee" dated March 10, 1995 and the "Response of Jerome I. Silverman to the
letter dated November 22, 1994 from Michael Colnes to Harley Greenfield" dated
April 3, 1995.

On May 3, 1995 the SEC commenced a formal investigation into the
affairs of the Company. Subpoenas have been issued to the Company and certain
of its current and former management to furnish various contracts and
accounting records which have been complied with. The outcome of the SEC
investigation is not presently determinable.

NASDAQ Suspension

Effective April 17, 1995, the NASDAQ Listing Qualifications Committee
(the "Qualifications Committee") reviewed the request of the Company for an
extension of its current exception to the filing requirements for continued
listing on the NASDAQ National Market. The Qualifications Committee determined
to deny the Company's request and accordingly, the Company's Common Stock was
delisted from the NASDAQ stock market.


F22











JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)

(9) Sale of Subsidiaries

In September 1990, the Company sold two of its stores to a licensee of a
New York store, and effective December 27, 1990, the Company sold four of its
stores for the assumption of certain liabilities and $10 in cash per store to
the same licensee. During the fiscal year ending August 27, 1994, one of the
purchasers of such stores, formerly an employee of the Private Company, became
an executive officer of the Company. The Company also entered into a ten-year
license agreement with the purchasers pursuant to which such stores pay the
Company a royalty of 5% of their sales for the right to use the "Jennifer
Convertibles" name (See Note 3).

The purchasers assumed the liabilities owed by such stores, including
liabilities owed to the Company, in the form of six ten-year, non-interest
bearing promissory notes with aggregate annual payments of approximately $150,
with additional payments required based upon sales in excess of certain minimum
amounts. Due to the lack of significant cash consideration at the date of
sales, the Company accounted for the sales using the cost recovery method until
the fourth quarter of 1993. During that quarter cumulative aggregate principal
payments exceeded 25% of the value of the non-interest bearing notes discounted
at an interest rate of 8% per annum. Based upon this substantive investment by
the purchasers, the Company recognized the gain on the sales of $480 which is
included in other income in the accompanying 1993 consolidated statement of
operations. The balance of the notes, net of imputed interest at the rate of
8%, are as follows:

August 26, August 27,
---------- ----------
1995 1994
------ ------


Notes receivable $ 674 $ 810
Less: imputed interest (186) (270)
------ -----
Notes receivable, net $ 488 $ 540
====== =====


The purchasers of the stores have assumed the Company's obligations
under the store leases. However, the Company remains a guarantor of the leases
and, therefore, is contingently liable for claims arising under the terms of
the respective leases in the aggregate amount of $35.

(10) Other Agreements

JCI Consulting Agreement

On July 29, 1994, the Company reached an agreement with JCI
Consultant, L.P. ("JCI") to terminate a February 25, 1992 consulting agreement
with JCI pursuant to which, among other things, JCI rendered advice on the
establishment and financing of Company-owned and licensed stores. The
consulting fees were to have been paid at the rate of $10 per month through
February 1996, plus an amount each fiscal quarter through August 2010 equal to
the greater of (i) $100 or (ii) 10% of the Company's consolidated pre-tax
income for such quarter, until such time as an aggregate of $7,980 in
consulting fees had been paid. Under the terms of the termination agreement,
the Company paid $2,500 and JCI waived the right to receive any further
consulting fees of approximately $6,500, (the remaining portion of the $7,980)
which might otherwise have become payable over the term of the Consulting
Agreement.

F23










JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)





JCI no longer has the right to nominate one person to the Company's
Board of Directors but has retained all rights in and to the options to
purchase 1,200,000 shares of Common Stock at $8.00 per share which were
previously granted to JCI. Such options terminate on March 21, 2001 and become
exercisable on April 1, 1996, subject to acceleration under certain
circumstances. Under a ten-year Voting Trust Agreement expiring March 21, 2001,
the Chief Executive Officer and President of the Company will be the voting
trustee for the shares of Common Stock which may be received by JCI upon the
exercise of the option. Furthermore, in connection with the termination of the
Consulting Agreement, JCI agreed that, except for the aforementioned option
shares, it would not at any time acquire, directly or indirectly, more than 5%
of the issued and outstanding shares of Common Stock of the Company for a
period ending July 29, 2000.

Contemporaneous with the granting of the options to JCI, the Company,
JCI, the Principal Stockholders and the Private Company entered into a
registration and sale agreement (the "Registration Agreement") pursuant to
which JCI has certain demand and "piggy-back" registration rights. Subject to
certain exceptions, the Registration Agreement prohibits JCI from selling or
transferring, or otherwise disposing of any of the option shares without the
prior written consent of the Company until March 1996. In addition, subject to
certain exceptions, the Registration Agreement grants a right of first refusal
to the Company to purchase all option shares which are proposed to be sold. If
the Company declines to exercise such right of first refusal, the Principal
Stockholders and the Private Company will have the right of first refusal.

In connection with the offering of the Debentures (see Note 6), JCI
received a fee of $230 for its assistance in introducing the Company to the
Debenture underwriter and for negotiating certain of the terms of the
Debentures offering. JCI also received $180 for financial consulting services
in connection with the redemption of the Debentures.

Chicago Partnership Agreement

In July, 1991, the Company entered into agreements pursuant to which a
limited partnership, Jennifer Chicago, L.P. (the "Chicago Partnership"), was
established for the purpose of operating Jennifer Convertibles stores in the
Chicago, Illinois metropolitan area. Pursuant to a 20-year License Agreement,
the Company receives a royalty of 5% of sales from the Chicago Partnership's
stores and has given the Chicago Partnership the exclusive right to open
Jennifer Convertibles stores in the defined territory.

Pursuant to the Partnership Agreement, the limited partner (a party
related to JCI) contributed $990 to the Partnership and agreed to make
additional capital contributions of up to $100. The Company made a capital
contribution of $10. Under the Partnership Agreement, allocations and
distributions shall, subject to certain exceptions, be made 99% to the limited
partners and 1% to the General Partner. The Company has consolidated and
recorded the operating losses of the Partnership in excess of limited partner's
capital contributions in the Consolidated Statements of Operations (see Note
1). Under a Purchase Option Agreement, the Company has the right, commencing
July 24, 1996, to purchase all the limited partners' interests in the
Partnership for a price equal to the fair market value thereof, as determined
by one or more investment bankers selected by the Company and the limited
partners. Also, the limited partners can put their interests to the Private
Company if certain executives of the Company and the Private Company own less
than 700,000 shares of the Company's common stock.


F24










JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)





Summit Agreement

On October 9, 1990, the Company and a wholly-owned subsidiary entered
into a series of agreements with Crown Investment Group, Ltd. ("Crown"), an
affiliate of Klaussner, and its wholly-owned subsidiary, Summit, pursuant to
which six licensed stores were established in Florida. Under a licensing
agreement, the Company receives a 5% royalty on sales by the Florida stores.
Pursuant to a management agreement, the Company provides management services,
subject to limitations, to the Florida stores and will receive, each fiscal
year, a fee equal to 1% of the consolidated net pre-tax income of Summit and
its subsidiaries. During fiscal 1995, 1994 and 1993, Summit and its
subsidiaries had a consolidated net loss. Pursuant to a Put Agreement, Crown
had the right, subject to certain conditions, to put all the capital stock of
Summit to the Company for 180,000 shares of the Company's Common Stock.

Pursuant to an agreement dated December 30, 1991 between Crown and
S.F.H.C., Crown sold to the Company all of the capital stock in Summit in
exchange for 180,000 shares of Common Stock of the Company. Simultaneously, the
Company sold the Summit capital stock to S.F.H.C. in exchange for $270 in cash
and a note in the principal amount of $810 (See Notes 3 and 12). The note is
secured by the stock of Summit, bears interest at a rate of 9% per annum is
payable over ten years in equal monthly installments of $10. An individual who
is an officer and stockholder of S.F.H.C. became an executive officer of the
Company in 1994. Such officer is indebted to the Private Company in the amount
of $300 in connection with the purchase by S.F.H.C. of Summit (See Note 3 for a
discussion of reserves established for these amounts).

On June 1, 1993, S.F.H.C. and the Company entered into a Revolving
Credit Agreement which allows S.F.H.C. to borrow up to $500 from the Company.
The revolving credit loans bear interest at the prime rate plus 3.0%, and are
payable in full on June 1, 1995. As of August 26, 1995 and August 27, 1994,
$500 had been advanced, and has been fully reserved for (See Note 3 for a
discussion of reserves established for these amounts). The operations of this
entity are not consolidated in the Company's Consolidated Statements of
Operations.

Second Limited Partnership Agreement

In November 1992, Jennifer L.P. II (the "Second Partnership") was
established by the Company for the purpose of operating Jennifer Convertibles
stores in the Detroit, St. Louis, Indianapolis, Milwaukee and Kansas City
metropolitan areas on the same terms as the Chicago Partnership (see above).
The Company has recorded the operating losses of the partnership in excess of
the limited partners' capital contributions in the Consolidated Statements of
Operations until the date of acquisition (see Note 1). On September 1, 1994,
the Company purchased the entire limited partnership interest in the Second
Partnership for $750 which was written off in the fiscal year ended August 27,
1994.

Elegant Partnership

In early 1993, the Company's subsidiary became a general partner in a
limited partnership ("Elegant Partnership") formed for the purpose of test
marketing specialty retail home furnishing stores, operating under the names
"Elegant Living" ("Elegant Living") and "Jennifer Leather" ("Jennifer
Leather"). The Elegant Living stores specialized in the sale of upholstered
living room furniture. The Jennifer Leather stores specialized in the sale of
leather furniture.

F25










JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)


The Elegant Partnership's limited partner made a capital contribution
to the Partnership of $2,000. The Company has recorded the operating losses of
the partnership in excess of the limited partners' capital contributions in the
Consolidated Statements of Operations until the date of acquisition (see Note
1). Effective November 30, 1993, the Company acquired for $2,250, the limited
partner's interest in the Elegant Partnership through the Private Company,
which had owned the option to acquire such interest from the limited partner
for $2,250. Such amount was written off in the fiscal year ended August 27,
1994. The Company acquired five Jennifer Leather and four Elegant Living
stores.

The limited partner is an affiliate of Klaussner. Pursuant to the
terms of the purchase agreement, the proceeds were used to fully liquidate that
limited partner's debt to a bank which debt was guaranteed by Messrs.
Greenfield, Love and Seidner.

LP III, LP IV, LP V, LP VI, LP VII and LP VIII Partnership Agreements

The Company has entered into six additional Limited Partnership
Agreements (the "Agreements") establishing LP's III, IV, V, VI, VII and VIII
which require the limited partners to invest $1,000 in each partnership. The
Agreements call for the opening of 25 Jennifer Convertible stores in each
partnership. Under the terms of the Agreements, the Company is to receive a fee
of $10 per store, plus a royalty of 5% of the partnership's sales. The Company
has recorded the operating losses of the LP's in excess of the limited partners
capital contributions in the Consolidated Statements of Operations (see Note
1). The Company has also provided a $500 revolving credit loan to each of the
operating LP's. These loans bear interest at the prime rate plus 3%. As part of
the Agreements, the Company received options to purchase the limited partners'
interest commencing January 1999 at a price of five times the partnership's
earnings before income taxes for the prior year, as defined. Also, pursuant to
the agreement, the limited partners' can require the Company to purchase their
interest at the aforementioned price formula commencing January 1998. Also, the
limited partners can put their interest to the Company for either 100,000
shares of stock of the Company or $1,000 compounded at 25% if there is a change
in management, as defined, through the year 2002. The investors have also
purchased, for approximately $510, warrants exercisable between June 1994 and
June 1998 to purchase 180,000 shares of the Company's Common Stock at an
exercise price of $15.625 per share. As of August 26, 1995 and August 27, 1994,
the limited partners have paid approximately $60 and signed three year notes to
pay $150 per year as payment for these warrants (See Note 12).

As of August 27, 1994, capital contributions from the limited
partners of $1,000 had been received for L.P. III, $500 had been received for
L.P. IV and $500 had been received for L.P. V and $50 had been received for
L.P. VI. A total of $100 has been received as funding for LP VII and LP VIII,
but such LP's had no operations in the fiscal years ended August 26, 1995 and
August 27, 1994. $1,000 was received on December 1, 1994 for LP's IV and V (see
Note 8 Conclusions of the Independent Committee and Note 12).

(11) Revolving Credit Loan

On August 31, 1993, the Company entered into a bank credit agreement
whereby the Company can borrow up to $2,000 under a revolving credit loan that
expires August 30, 1996. The interest rate is equal to the higher of the
Federal funds rate in effect on such date as the funds are borrowed plus 1.5%
or the prime rate in effect on such date plus 1%. Borrowings are collateralized
by inventory. The Company has not drawn down on the line of credit. On February
23, 1995, the Company was advised that it was in default under the terms of the
Revolving Credit Agreement because of its failure to file financial statements.


F26










JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)






Such default triggered a cross-default in connection with the Company's
guarantee of the bank mortgage on the Private Company's warehouse facility as
described in Note 3 and suspended the Company's ability to borrow any amount
under the revolving credit agreement. On March 5, 1996, the Company terminated
this bank credit agreement (See Note 12).

(12) Subsequent Events

Settlement of Derivative Litigation:

In March 1996, the Company signed a Memorandum of Understanding
("Derivative Memorandum") for the purpose of settling all of the claims
involving those parties in the derivative litigation. The Derivative Memorandum
is subject to a settlement of all claims against the Company, its present
and/or former officers, directors, certain accountants, consultants and
representatives, the Private Company, its present and/or former officers,
directors, employees, accountants, consultants and/or representatives and the
discontinuance of the class action litigation presently pending. It also is
conditioned upon mutual releases between the Company and the Private Company.
Attorney's fees will be funded by an insurance carrier for one of the
defendants other than the Company for $500. The Private Company will pay $165
in cash and the Company will pay the remaining portion of fees and expenses in
("Preferred Stock"). The Preferred Stock will have an aggregate value of $130,
paying an annual dividend of 7% and convertible into Common Stock (at such time
as the Company's Common Stock trades at $7.00 per share or higher) at $7.00 per
share. This settlement is subject to execution of definitive documents and
final court approval. In accordance with FASB Statement No. 5, the $130 value
of the Preferred Stock has been accrued at August 26, 1995 as part of estimated
settlement costs.

Settlement of Class Action Litigation:

In March 1996, the Company and the parties in the class action
litigation signed a Memorandum of Understanding ("Class Memorandum") which is
subject to a Stipulation of Settlement to be submitted to the court for final
approval.

The Class Memorandum provides for the payment to certain members of
the class and their attorneys of an aggregate maximum amount of $7,000 in cash
and Preferred Stock having a value of $370. (Terms and conditions of such
Preferred Stock are described above.) The cash portion of the settlement will
be funded entirely by insurance company proceeds. In accordance with FASB
Statement No. 5, the $370 value of the Preferred Stock has been accrued at
August 26, 1995.

The proposed settlement of the class action litigation is a claims
made settlement. All claimants who purchased the Company's Common Stock during
the period from December 9, 1992 through December 2, 1994 and who held their
stock through December 2, 1994, will be entitled to participate in the
settlement.

Settlement with the Private Company:

The Company signed an agreement ("Settlement Agreement") with the
Private Company subject to execution of definitive agreements and court
approval and settlement of the derivative and class action litigation. The
Settlement Agreement restructures the relationship between the Private Company
and the Company in order to reduce and eliminate any alleged actual or
potential conflicts of interest.


F27










JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)



A) (Warehouse Services):

The Settlement Agreement contemplates that until December 31, 1997,
the Company will pay the Private Company for all services under the warehousing
agreement 8.3% of the retail sales prices, less the costs of certain services
that will be assumed by the Company previously provided by the Private Company,
but no lower than 7.2% of sales. For 1998, the fee will be 7.2%. Upon the
effective date, the Company will no longer pay the Private Company separately
for "fabric protection" services. The Company has also agreed to pay an
additional warehouse fee during the calendar year 1996 if the total retail
sales of the Company are less than $135 million. The Company will pay the
Private Company $65 for each million dollar shortfall in annual sales, adjusted
quarterly based upon current sales projections, up to $650. The Company has
also agreed to pay a re- delivery fee to the Private Company of 3% of selling
price for customer deliveries that have to be re-delivered to customers under
certain circumstances. In 1997 and 1998, if an annual sales level of $140
million is achieved, the Private Company will pay back 50% of previous
shortfall payments in each of such years. To the extent the shortfall is not so
repaid in full, starting on January 1, 1999, the Private Company will repay the
balance of the shortfall over seven years without interest.

B) (Assignment of Real Property Interests of Warehouses):

The Settlement Agreement contemplates that, effective January 1,
1999, the Company will receive all real property interests in the various
warehouses serving the business along with the leasehold interests subject to
mortgages and other security agreements. Such mortgage obligations will not
exceed $2,850 at December 31, 1998. To the extent that the aggregate of all
such mortgages is less than this amount as of that date, the Company will pay
the Private Company the difference between $2,850 and the actual amount of such
mortgages by way of set-off against the Private Company's obligation to the
Company for warehousing services.

C) (Warehouse Services to the Private Company):

Commencing January 1, 1999, the Company will provide the Private
Company all warehousing services for 2% of the Private Company's delivered
retail selling prices, plus a fee for "fabric protection" services.

D) (Freight Charges):

The Company will continue to pay all freight charges (for inventory
delivered to warehouses) through December 31, 1998, based upon an agreed
schedule with the Private Company.

E) (Assignment of Interest in Certain Limited Partnerships and
Other Corporate Licensee):

The Private Company will purchase the interests of the limited
partnerships known as LP III, LP IV, LP V, LP VI, LP VII and LP VIII and the
equity interest of the shareholders of S.F.H.C. and assign these interests to
the Company. The Company, in turn, will release the limited partners and the
shareholders, officers and directors of S.F.H.C. from all claims and/or
obligations owed to the Company.


F28










JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)







Although it is not reflected in the Settlement Agreement, it is
currently contemplated that the limited partners of the Partnerships will
receive new ten year warrants to purchase an aggregate of 180,000 shares of
Common Stock at $7.00 per share. It is also contemplated that the limited
partners will also retain the Original Warrants. There is no signed agreement
with the limited partners as to the transfer of the Partnerships and S.F.H.C.
described above and there can be no assurance that the Private Company will be
able to obtain such agreements. If the Private Company is unable to obtain such
agreements and to make the transfer, the settlement will not be consummated on
the various terms outlined herein or possibly, at all.

F) (Inter-Company Accounts):

The Private Company will pay the Company under the offset agreement
(described in J, below) $1,400 in resolution of certain inter-company account
balances as of August 26, 1995 at $17 per month to be applied toward principal
and interest at 6%, until repaid.

G) (License of Computer Programs):

Commencing January 1, 1999, the Private Company will license the
Company to use and change the Private Company's computer programs without fee.
The Company will also assume the obligations and personnel of the Computer
Department, presently maintained by the Private Company.

H) (Warranty and Fabric Protection):

Upon execution of the Settlement Agreement, the Company will be
responsible for any claims for breach of warranty relating to "fabric
protection" in connection with sales by both the Company and the Private
Company.

I) (Amounts Due From Officers of S.F.H.C. of $1,200):

The Private Company will assume and pay $1,200 of the debt of the
officers of S.F.H.C. owed to S.F.H.C. This amount will be paid to the Company
in 84 equal monthly installments, without interest, beginning January 1, 1999.

J) (Offset Agreements):

On November 1, 1995 and March 1, 1996, the Company and the Private
Company entered into offset agreements. Such offset agreements permit the two
companies to offset their current obligations to each other for merchandise
purchases, warehouses fees, fabric protection fees and freight. The agreement
contemplates that amounts owing in excess of $1,000 at any time will be paid in
cash. As part of the offset agreement, the Private Company agreed to assume
certain liabilities owed to the Company by the Unconsolidated Licensees.

K) (Royalties):

The Unconsolidated Licensees will pay to the Company any royalties
owed under the offset agreement. The Private Company will pay royalties owed of
$100 for stores that the Unconsolidated Licensees have closed commencing
January 1, 1999 in 84 equal monthly installments without interest.



F29










JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)




Credit and Security Agreement with Klaussner:

On March 5, 1996, the Company and Klaussner executed a Credit and
Security Agreement that provides the following:

A) Klaussner effectively extended the payment terms for merchandise shipped from
60 days to 81 days and was provided with the following:

1) A security interest in all the Company's assets including accounts
receivable, inventory, store fixtures and equipment, as well as the
assignment of leaseholds, trademarks and a licensee agreement to
operate the Company's business in the event of default and non-payment
of the Company's guaranty.

2) The common stock holdings of Harley Greenfield, Edward Seidner and
Fred Love, President of the Private Company have been pledged along
with the pledge of the Private Company's stock interest in the
Company.

B) In addition, Klaussner agreed to lend $1,440 to the Private Company. The
$1,440 was used to pay down the mortgage obligation of the warehouse
corporation. In this connection, the Company's guarantee to the mortgagor was
reduced to the lesser of 60% of the mortgage or $1,440 and the Company's bank
revolving credit agreement was terminated. The mortgage obligation has a new
maturity date of June 30, 1996. The $1,440 is in addition to $3,500 due from
the Private Company to Klaussner outstanding at August 26, 1995, which
liability was incurred by the Private Company prior to January 1, 1994.

Agreement of Sale of Inwood, New York Warehouse:

On March 7, 1996, the Private Company entered into an agreement
("Agreement") of sale for the Inwood, New York warehouse which has been the
principal warehouse in the distribution system. The Agreement contemplates
that, if consummated, the Company will receive from the Private Company
payments of $25 per month for 84 months commencing January 1, 1999. The
Agreement also contemplates that, effective December 1, 1996, the warehouse fee
will be reduced to 7.2% of the retail sales prices and fabric protection
revenue collected from customers. The Company's guarantee will be extinguished
upon full payment of the related mortgage.

On June 30, 1996, the Private Company completed the sale of the
Inwood, New York warehouse and the Company's guarantee was terminated.

Partnership Restructuring Agreements

On September 26, 1996, a Partnership Restructuring Agreement ("PRA")
was signed which had an effective date of November 1994. This PRA eliminated
the Agreements for LP's VI, VII and VIII and took $50 of the original capital
contributions for these LP's (total $150) and applied such funds as a payment
towards the original Warrants received by the limited partners in connection
with LP's III, IV and V. This transaction has been reflected in the financial
statements at August 27, 1994 and August 26, 1995. In addition, the warrant
notes aggregating $300 for the remaining 180,000 original Warrants have been
extended for ten years (with 10% of principal due annually) and will bear
interest at 7.12% per annum. For each annual principal payment which is not
made, 10,564 of the outstanding original Warrants shall be cancelled.


F30











JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued)
August 26, 1995, August 27, 1994 and August 31, 1993
(In thousands except for share amounts)



Subordination of Private Company Indebtedness to Harley Greenfield and
Edward Seidner

Subject to court approval of the Settlement Agreement, Messrs.
Greenfield and Seidner have agreed to subordinate, until January 1, 1999 their
right to receive payments in respect of the $10,273 owed to them by the Private
Company, if the Private Company is in default in the payment of any cash
obligation to the Company arising after August 7, 1996 after giving effect to
any offsets as between Messrs. Greenfield and Seidner and the Private Company.
Such subordination does not apply to any distribution in respect of a
disposition of substantially all of the assets of the Private Company.



F31