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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 31, 1996

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 X No
--- ---

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

Aggregate market value of voting stock held by non-affiliates of registrant as
of November 22, 1996: $11,475,000

Shares of Common Stock outstanding as of November 25, 1996: 5,700,725

DOCUMENTS INCORPORATED BY REFERENCE
NONE







PART I
Item 1. Business

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

Business Overview

The Company is the owner and licensor of the largest group of sofabed
specialty retail stores in the United States, with 125 Jennifer
Convertibles(R) stores located on the Eastern seaboard, in the Midwest, on the
West Coast and in the Southwest as of August 31, 1996 . As of August 31, 1996,
the Company also operated 36 "Jennifer Leather" ("Jennifer Leather") stores.
Of the Jennifer Convertibles(R) stores, as of August 31, 1996, 50 were owned
by the Company and 75 were licensed by the Company.



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NUMBER OF STORES IN OPERATION AS OF AUGUST 31, 1996
================================================================================================
LPS AND
TOTAL OTHER PRIVATE TOTAL
CONVERTIBLES LEATHER COMPANY LICENSEES(1) COMPANY(2) STORES
------------------------------------------------------------------------------------------------

REGION
TRI-STATE AREA
NEW YORK 6 11 17 3 21 41
NEW JERSEY 9 8 17 4 21
CONNECTICUT 4 1 5 2 7
------------------------------------------------------------------------------------------------
SUBTOTAL 19 20 39 9 21 69

ARIZONA 3 3
CALIFORNIA 4 4 22 26
FLORIDA 4 4 9 13
GEORGIA 4 4
ILLINOIS 15 15
INDIANA 3 3 3
KANSAS 1 1 1
MARYLAND 3 1 4 3 7
MASSACHUSETTS 7 5 12 12
MICHIGAN 6 6 6
MISSOURI 4 4 4
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 50 36 86 75 21 182
===============================================================================================


(1) These include certain limited partnership licensees ("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 21 stores are not owned and do not pay royalties to the
Company. They operate in New York (the "Private Stores") and 19 of
such stores are owned by a company (the "Private Company") that, is
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 two 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 19 New York stores are operated in
substantially the same way as the Companyowned stores. See "Notes to
Consolidated Financial Statements - Footnote - Related Party
Transactions."

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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
high-end merchandise to relatively inexpensive models. Each store has a kiosk
devoted to mattress sales. The Jennifer Leather stores specialize in the
retail sale of leather livingroom furniture. In fiscal 1997, the Company also
opened two test Jennifer Living Room stores which sell a broad range of
livingroom furniture, including furniture of the type sold in Jennifer
Convertibles and Jennifer Leather stores. The Company is the largest dealer of
Sealy(R) sofabeds in the United States. Merchandise is displayed in
attractively decorated model room settings in the store designed to show the
merchandise as it would appear in the customer's home. In order to generate
sales, the Company and its licensees rely on the attractive image of the
stores, competitive pricing, prompt delivery and extensive advertising.

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



Fiscal Years

1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----

Company-owned stores
open at end of
period (1)(2)(3)(4) 86 90 55 34 33 33 39 42 31 13
Licensed stores open at
end of period 75 79 113 87 42 15 0 0 0 0
-- -- --- --- -- -- -- -- -- --
Total stores open at
end of period 161 169 168 121 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.


(4) For fiscal 1996, includes 36 Jennifer Leather stores.

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 the Company's stores are of a similar clearly defined style, are
designed as showrooms for the merchandise and are carpeted, well-lighted and
well-maintained. Inventories for delivery are maintained in separate
warehouses. The Company displays a variety of sofabeds and companion pieces
(including cocktail tables) at each Jennifer Convertibles retail location with
carpeting and accessories. In contrast to certain of its competitors that
primarily target particular segments of the

4






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 $5,000. The Company generally features attractive price incentives to
promote the purchase of merchandise. In addition to offering merchandise by
brand name manufacturers, the Company offers merchandise at its Jennifer
Convertibles and Jennifer Leather stores under the "Jennifer" brand name.

Although each style of sofabed, loveseat, chair and recliner is generally
displayed at Jennifer Convertibles stores in one color and fabric, samples of
the other available colors and fabrics are available. On selected merchandise,
up to 2,000 different colors and fabrics are available on selected items for
an additional charge. 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 within a week. Customers who place
orders for items, colors or fabrics not in inventory ("special orders") must
generally wait four to six weeks for delivery, except for Italian leather
merchandise which may take up to 20 weeks. The Company believes that its
delivery times on stocked items and special orders are significantly faster
than the usual delivery times for furniture and that its ability to offer
quick delivery of merchandise represents a significant competitive advantage.

Operations

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

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

An inventory of approximately 70% of the items displayed in the stores,
in the colors and fabrics displayed, is usually stocked at the Private
Company's warehouse facilities (described below.) The Company and its
licensees typically 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.

5







Marketing

The Company and its licensees advertise in newspapers, transit, radio 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 $12,265,000 (11.6 %) of sales
in the fiscal year ended August 31, 1996 as compared to approximately
$15,729,000 (12.5%) 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 is
charged a 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 4,000 square feet.
Stores may be freestanding or part of a strip shopping center.

6







In fiscal 1996, the Company and the LPs closed an aggregate of eight
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 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 stores during fiscal 1996, the
Company does not anticipate closing a significant number of stores during
fiscal 1997 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 to 90 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
Industries, 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 31, 1996, the Company
purchased approximately 79% of its merchandise from Klaussner and
approximately 14% 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

The Company's arrangements with its licensees typically involve providing
the licensee with a license, bearing a royalty of 5% of sales, to use the name
Jennifer Convertibles(R). The Company's existing licensing arrangements are
not uniform and vary from licensee to licensee. Generally, however, the
Company either manages the licensed stores or, if the licensee is a
partnership, has a subsidiary act as general partner of such partnership, in
each case, for 1% of the licensees' profits. The arrangements generally have a
term ranging between 10 and 20 years (and may include options on the
licensee's part to extend the license for additional periods) and involve the
grant of exclusivity as to defined territories. In some cases, the Company
also has an option to purchase the licensee or the licensed stores for a price
based on an established formula or valuation method. Investors in certain
licensees have, in certain

7






circumstances (including a change of control of the Company), the right to put
their investments to the Company for a price based upon an established formula
or valuation method. The Private Company currently provides warehousing,
fabric protection and other services to licensees on substantially the same
basis as such services are provided to the Company and the Company purchases
merchandise for the licensees. The Company also provides certain accounting
services to certain licensees for which it generally charges $6,000 per store,
per annum. As of August 31, 1996, the Company was owed an aggregate of
$15,043,000 for royalties, advances and merchandise by its licensees, a
substantial portion of which was overdue. Of such amount, $9,400,000 due from
the LPs is not shown separately on the Company's financial statements as a
result of the consolidation of the LPs and $5,643,000 due from Unconsolidated
Licensees was reserved against in such financial statements due to doubts as
to collectibility. Most of the investors in the licensees have other
relationships with the Company or its current or former management. See
"Certain Relationships and Related Transactions."

As set forth under "Legal Proceedings," the Memoranda of Understanding
("MOUS") as to the settlement of certain class and derivative litigation
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.

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 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.

8






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, in
August 1996, the Company began to take over certain functions, including
customer service, cash processing, order processing and store support.

Trademarks

The trademarks Jennifer Convertibles(R), Jennifer Leather(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. An application
has been filed for a trademark for "Jennifer Living Rooms." 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 31, 1996, the Company had 418 employees, including seven
executive officers. The Company trains personnel to meet its expansion needs
by having its most effective managers and salespersons train others and
evaluate their progress and potential for the Company. The Company believes
that its employee relations are satisfactory. 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.


9






Competition

The Company competes with other furniture specialty stores, major
department stores, individual furniture stores, discount stores and chain
stores, some of which have been established for a long time in the same
geographic areas as the Company's stores (or areas where the Company or its
licensees may open stores). The Company believes that the principal areas of
competition with respect to its business are store image, price, delivery
time, selection and service. The Company believes that it competes effectively
with such retailers because its stores offer a broader assortment of
convertible sofabeds than most of its competitors and, as a result of volume
purchasing, it is able to offer its merchandise at attractive prices. The
Company also advertises more extensively than many of its competitors and
offers substantially faster delivery on most of its items.


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 31, 1996, the Company and the LPs lease all of their
store locations pursuant to leases which expire between 1997 and 2009. None of
its leases expire until fiscal 1997, at which time eight leases will expire
although the lessee has an option to renew each such lease. The leases are
usually for a base term of at least five years. For additional information
concerning the leases, see Note 9 of "Notes to Consolidated Financial
Statements."

Item 3. 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.


13






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 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 acquire the interest of the
limited partners in the LPs known as Jennifer, LP III, Jennifer, LP IV,
Jennifer, LP V (the "Partnerships"). The Private Company will also purchase
stock of the shareholders of Southeastern Florida Holding Co., Inc.
("S.F.H.C."). The Private Company will assign its Partnership 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 shareholders of S.F.H.C. 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
or the shareholders of S.F.H.C. 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.

14







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), 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, KPMG Peat Marwick ("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.


15






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.


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 31, 1996 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 "pink sheets" or Bulletin Board, as
the case may be. 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)

High Low
----- -----
Fiscal Year 1996:
1st Quarter..................... $3 3/4 $1 13/16
2nd Quarter..................... 3 3/8 2
3rd Quarter..................... 3 1/4 2 1/16
4th Quarter..................... 3 1/4 2


As of November 18, 1996, there were approximately 262 holders of record
and approximately 4,600 beneficial owners for the Common Stock. On November
22, 1996, the closing bid and asked prices of the Common Stock as reported on
the NASDAQ Bulletin Board were $2 3/8 and $2 1/2, 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.


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
8/31/96 8/26/95 8/27/94 8/31/93 8/31/92
------- ------- ------- ------- -------

Operations Data:
Net sales $ 106,041 $ 126,074 $ 97,420 $ 64,348 $ 33,383
----------- ----------- ----------- ----------- -----------

Cost of sales, including store occupancy,
warehousing, delivery and fabric protection 72,708 86,964 67,974 43,898 20,741
Selling, general and administrative expenses 37,618 45,955 34,139 22,652 10,618
Depreciation and amortization 1,852 2,261 2,091 1,583 555
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 952 3,088 3,284 -- --
Loss from store closings 191 1,670 -- -- --
----------- ----------- ----------- ----------- -----------
113,321 140,438 117,574 68,133 31,914
----------- ----------- ----------- ----------- -----------

Operating (loss) income (7,280) (14,364) (20,154) (3,785) 1,469
----------- ----------- ----------- ----------- -----------
Other income (expense)
Royalty income 375 523 644 711 779
Interest income 195 311 473 674 237
Interest expense (47) (48) (61) (640) (164)
Gain on sale of securities -- -- 336 61 --
Other income, net 880 1,670 1,374 696 74
----------- ----------- ----------- ----------- -----------
1,403 2,456 2,766 1,502 926
----------- ----------- ----------- ----------- -----------

(Loss) income before income taxes (benefit),
minority interest and extraordinary item (5,877) (11,908) (17,388) (2,283) 2,395
Income taxes (benefit) 146 160 (322) 113 968
----------- ----------- ----------- ----------- -----------

(Loss) income before minority interest and
extraordinary item (6,023) (12,068) (17,066) (2,396) 1,427
Extraordinary item-utilization of net operating
loss carryforwards -- -- -- -- 748
Minority interest share of losses -- -- 2,449 2,902 --
----------- ----------- ----------- ----------- -----------
Net (loss) earnings ($ 6,023) ($ 12,068) ($ 14,617) $ 506 $ 2,175
=========== =========== =========== =========== ===========

(Loss) earnings per common and common equivalent share:
Before extraordinary item ($ 1.06) ($ 2.12) ($ 2.56) $ 0.09 $ 0.34
Extraordinary item -- -- -- -- 0.16
----------- ----------- ----------- ----------- -----------
Net (loss) earnings per share ($ 1.06) ($ 2.12) ($ 2.56) $ 0.09 $ 0.50
=========== =========== =========== =========== ===========

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

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

8/31/96 8/26/95 8/27/94 8/31/93 8/31/92
------- ------- ------- ------- -------








Store data:
Company-owned stores open
at end of period 86 90 55 34 33
Consolidated licensed stores open
at end of period 64 68 99 73 28
Licensed stores not consolidated
open at end of period 11 11 14 14 14
----------- ----------- ----------- ----------- -----------
Total stores open at end of period 161 169 168 121 75
=========== =========== =========== =========== ===========

8/31/96 8/26/95 8/27/94 8/31/93 8/31/92
------- ------- ------- ------- -------
Balance Sheet Data:
Working capital (deficiency) ($ 15,757) ($ 10,988) $ 1,240 $ 11,573 $ 11,053
Total assets 25,435 33,871 44,922 37,488 28,819
Long-term obligations 230 337 477 118 11,733
Total liabilities 35,741 38,154 37,137 15,305 16,539
(Capital deficiency) stockholders' equity (10,306) (4,283) 7,785 22,183 12,280
(Capital deficiency) stockholders' equity per share ($ 1.81) ($ 0.75) $ 1.37 $ 3.69 $ 2.67


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, 1995 and 1996 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.

- 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)
8/27/94 8/26/95 8/31/96
------- ------- -------
Total operating losses before
capital contributions of LP's $(9,781) $(7,288) $(4,206)
-------- -------- --------

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

Net operating losses $(7,332) $(7,288) $(4,206)
======== ======== ========

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.

Prior to fiscal 1996, the Company relied upon the Private Company to
provide and maintain all data entry processing and other related services that
support its business. Employees of the Private Company provided these services
as well as other related services such as all accounts payable
(nonmerchandise), all payroll preparation services, inventory control
reporting, certain store cash recording and initial review of cash activity
and store customer service. Starting in fiscal 1996, the Company has been
assuming these responsibilities.

The Company has for all fiscal years prior to September 1, 1994
engaged the accounting firm of Jerome I. Silverman Company ("JISCO") to
provide general accounting and tax services. Effective September 1, 1994, the
Company terminated the accounting and tax services of JISCO and hired 19
employees who had previously worked directly for JISCO. This group, under the
direction of a new Executive Vice President and Chief Financial Officer hired
on August 1, 1994, established the Company's general accounting offices.

RESULTS OF OPERATIONS:

FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED TO FISCAL YEAR ENDED AUGUST 26,
1995:

Net sales decreased by 15.9% to $106,041,000 for the fiscal year
ended August 31, 1996 as compared to $126,074,000 for the year ended August
26, 1995. This decrease is mainly attributable to the closing of eight stores
since the prior year period, a physical split of 14 Jennifer Convertibles
stores into both a Jennifer Convertibles store and a Jennifer Leather store
(thereby cannibalizing sales), a reduction in the number of credit promotions
that the Company has been able to offer customers to stimulate business and an
industry-wide softness. Comparable store sales (those open for a full year in
each period) decreased by 16.3% partially as a result of the physical split
described above.

All royalty income earned in the fiscal year ended August 31, 1996 of
$375,000 has been fully reserved due to uncertainty as to the collectibility
of such amounts from the Unconsolidated Licensees.


- 20 -




Cost of sales decreased 16.4% to $72,708,000 for the year ended
August 31, 1996 from $86,964,000 for the fiscal year ended August 26, 1995.
The dollar decrease of $14,256,000 is attributable to the lower sales and
lower occupancy costs due to the closed stores, while the decrease in the cost
of sales as a percentage of sales to 68.6% from 69.0% is essentially due to
lower costs of merchandise. Warehouse expenses of $5,302,000 and fabric
protection services of $2,972,000 provided by the Private Company decreased
from $6,304,000 and $3,804,000, respectively, from the previous year due to
the lower sales volume in the current fiscal year.

Selling, general and administrative expenses were $37,618,000 for the
fiscal year ended August 31, 1996 as compared to $45,955,000 for the fiscal
year ended August 26, 1995, a decrease of $8,337,000 or 18.1% over the prior
year. This decrease was due principally to reductions in salaries and related
benefits of $3,586,000 (principally because of the lower sales volume which
generated lower commissions as well as fewer stores in operation during the
current fiscal year) and lower advertising expenses of $3,464,000. Legal fees
were higher in the current fiscal year by $403,000 to $1,275,000 primarily
because of the new Credit and Security Agreement signed with the Company's
principal supplier, Klaussner Furniture Industries, Inc. (see Liquidity and
Capital Resources below). Accounting fees declined by $421,000 to $313,000 for
the year in part as the result of improved controls installed during the
current fiscal year. Various other store expense categories were reduced due
to the implementation of the Company's cost reduction programs. Selling,
general and administrative expenses as a percentage of sales were 35.5% for
the fiscal year ended August 31, 1996 as compared to 36.5% in the prior year.

The Company's receivables from the Private Company, the
Unconsolidated Licensees and S.F.H.C. increased by $952,000 in the fiscal year
ended August 31, 1996 to $7,324,000. 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 $952,000. In prior years, the Company had reserved the full
amounts due which totalled $6,372,000.

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.

Interest income decreased by $116,000 to $195,000 for the fiscal year
ended August 31, 1996 as compared to the prior year. The decrease reflects the
generally lower level of investments throughout the fiscal year.

Other income decreased to $880,000 in the fiscal year ended August
31, 1996 from $1,670,000 in the prior year. This decrease is primarily
attributable to adjustments related to cancelled customer orders.

Net (loss) in the fiscal year ended August 31, 1996 was $(6,023,000)
compared to a net (loss) of $(12,068,000) in the prior year, a decrease of
loss of $6,045,000. The primary reason for the decreased loss was due to
expense reductions and operating efficiencies the Company was able to achieve
as discussed above together with lower store closing costs and a substantially
lower provision for losses from the Private Company and Unconsolidated
Licensees reflecting the reduced increase in such amount over the prior year.


- 21 -



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%.

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.


- 22 -




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.

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.

LIQUIDITY AND CAPITAL RESOURCES:

As of August 31, 1996, the Company and LP's had an aggregate working
capital deficiency of $15,757,000 compared to a deficiency of $10,988,000 at
August 26, 1995 and had available cash and cash equivalents of $3,600,000
compared to $7,729,000 at August 26, 1995.

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 $952,000 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 $952,000 for the current fiscal year has been
provided. There can be no assurance that the total receivables of $7,324,000
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.

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.


- 23 -



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.

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 fiscal 1996 and 1995, the Company and the LP's closed an aggregate
of 40 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
the significant cost cutting measures undertaken, including, but not limited
to, the closing of stores, the reduction in salaries of certain management
personnel, additional vendor allowances of $1,075,000 and cash payments from
the Private Company in connection with the offset agreements, ($566,000
received November, 1996) the Company anticipates losses for fiscal 1997 but
will have adequate cash flow to fund its operations.

For the year ended August 31, 1996 and year ended August 26, 1995,
the Company and the LP's spent $989,000 and $4,292,000, respectively, for
capital expenditures. The Company anticipates capital expenditures totalling
approximately $625,000 during fiscal 1997 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 31, 1996.


- 24 -





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.

None

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, 1996 are as follows:

Position(s) with the
Name Age Company
- -------------------- --- ------------------------------------
Harley J. Greenfield 52 Chairman of the Board,
Chief Executive Officer
and President
Edward G. Bohn 51 Director
Kevin J. Coyle 52 Director
Edward B. Seidner 42 Director and Executive Vice President
Bernard Wincig 65 Director
George J. Nadel 54 Executive Vice President, Chief
Financial Officer and Treasurer
Rami Abada 37 Executive Vice President and Chief
Operating Officer
Ronald E. Rudzin 34 Senior Vice President - Retail Stores
Leslie Falchook 36 Vice President - Administration
Kevin Mattler 39 Vice President - Store Operations


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

The Board of Directors held seven (7) meetings during the 1996 fiscal
year. None of the directors attended fewer than 75% of the number of meetings
of the Board of Directors or any committee of which he is a member, held
during the period in which he was a director or a committee member, as
applicable.

The Board of Directors has a Stock Option Committee, which as of
August 31, 1996, consisted of Messrs. Greenfield and Seidner. The Stock Option
Committee did not meet 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 31, 1996, consisted of Harley Greenfield, Bernard
Wincig, Edward Bohn and Kevin Coyle. During such fiscal year, the Audit
Committee held nine (9) meetings. The Audit Committee is responsible for
reviewing the adequacy of the structure of the Company's financial
organization and the implementation

25






of its financial and accounting policies. In addition, the Audit Committee
reviews the results of the audit performed by the Company's outside auditors
before the Annual Report to Stockholders is published.

The Company also has a Monitoring Committee consisting of Edward
Bohn, Kevin Coyle and Bernard Wincig to monitor transactions between the
Company and the Private Company.

Set forth below is a biographical description of each director and
executive officer of the Company as of August 31, 1996.

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.

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.


26




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.

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."


27






Item 11. Executive Compensation

SUMMARY COMPENSATION TABLE

The following table sets forth compensation paid for the fiscal years
ended August 31, 1996, August 26, 1995 and August 27, 1994 (or such shorter
period as such employees were employed by the Company) of those persons who
were (i) the chief executive officer at August 31, 1996 and (ii) the four
other most highly compensated executive officers of the Company at August 31,
1996 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, 1996 $352,307 0 0
Chairman of the 1995 400,000 0 0
Board, Chief 1994 0 0 0
Executive Officer
and President

Edward B. Seidner, 1996 $264,231 0
Executive Vice 1995 300,000
President

George J. Nadel 1996 $250,000 0 0
Executive Vice 1995 202,083 50,000(1)
President and Chief 1994 16,667(1) 0
Financial Officer

Leslie Falchook, 1996 $127,712 0 0
Vice President - 1995 144,670 0 0
Administration 1994 144,670 0

Rami Abada 1996 $132,115 0 0
Executive Vice 1995 150,000 0 0
President and Chief 1994 100,000 0 0
Operating Officer

Ronald E. Rudzin 1996 $132,115 0 0
Senior Vice 1995 150,000 0 0
President Retail 1994 100,000 0 0
Stores
28


- ----------

(1) Mr. Nadel joined the Company on August 1, 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.

Non-employee directors currently receive a fee of $10,000 per year,
plus $500 per meeting attended (an aggregate of $82,800 in fiscal 1996).
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 costcutting 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, Rami Abada - $120,000, Ronald E. Rudzin -
$120,000, Leslie Falchook - $116,000 and Kevin Mattler - $96,000.

Stock Option Plans

The Company has Incentive and Non-Qualified Stock Option Plans (the
"Plans"), pursuant to which, as of August 31, 1996, options to purchase an
aggregate of 631,547 shares of Common Stock were outstanding and under which
options to purchase an aggregate of 215,453 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 31, 1996. The Plans are administered by a Stock Option Committee (the
"Committee") consisting of two persons appointed by the Board of Directors. As
of August 31, 1996, 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.

29






OPTION GRANTS IN LAST FISCAL YEAR

No options were granted during the fiscal year ended August 31, 1996.

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 31, 1996 August 31, 1996(1)
Shares Acquired on Value
Name Exercise (#) Realized Unexercisable Exercisable Unexercisable Exercisable
- ---------------------- ------------ -------- ------------- ----------- ------------- -----------

Harley J. Greenfield (2)(4) N/A N/A 30,000 267,047 $0 $0
Edward B. Seidner N/A N/A 0 0 0 0
George J. Nadel(3)(4) N/A N/A 33,332 16,668 0 0
Leslie Falchook(4)(5) N/A N/A 0 20,000 0 0
Rami Abada N/A N/A 0 0 0 0
Ronald E. Rudzin(4)(6) N/A N/A 0 50,000 0 0

- ----------

(1) Amount reflects the market value of the underlying shares of Common
Stock as reported on the Bulletin Board on August 31, 1996 (a bid
price of $2.50) 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, of such
options, 16,668 were exercisable at August 31, 1996.

(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 20,000 options granted on January 25, 1993 to Mr. Falchook
at an exercise price of $13.125 per share. All of such options were
exercisable at August 31, 1996.

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

30






Item 12. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth, as of August 31, 1996, 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 31, 1996
- ---------------- ------------ ---------------

Harley J. Greenfield 1,181,241 (2)(3) 19.8%
Fred J. Love 585,662 (2)(5)(6) 10.3
Edward B. Seidner 553,914 (2)(4) 9.7
Jara Enterprises, Inc. ("Jara") 343,579 (6) 6.0
JCI Consultants, L.P 1,200,000 (3)(7) 17.4
Bernard Wincig 144,573 (8) 2.5
Edward G. Bohn 8,334 (9) 0.1
Kevin J. Coyle 9,584 (9) 0.2
Leslie Falchook 45,000 (10) 0.8
George J. Nadel 16,668 (11) 0.3
Rami Abada 53,000 (12) 1.0
Ronald E. Rudzin 62,500 (13) 1.1
Hans J. Klaussner and Klaussner 1,085,623 (15) 19.0


All directors and executive 1,707,441 (2)(3)(4)(5)(6)(8)(9) 27.9
officers as a group (ten (10) persons) (10)(11)(12)(13)(14)(15)

- ----------

* Less than 0.1%

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

(2) The address of Messrs. Greenfield and Seidner is c/o Jennifer
Convertibles, 419 Crossways Park Drive, Woodbury, New York 11797. The
address of Fred J. Love is One Ames Court, Plainview, New York 11803.
Mr. Greenfield and Mr. Love are brothers-in-law. See "Certain
Relationships and Related Transactions." The shares of Common Stock
owned by Messrs. Greenfield, Seidner and Love and the Private Company
were pledged to Klaussner as part of the Klaussner Transaction. 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")
(which expired in October 1996) 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

31



shares underlying options granted to Mr Greenfield by Mr. 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)
267,047 shares underlying vested options (but does not include 30,000
shares of Common Stock underlying stock options not vested as of August
31, 1996) granted to Mr. Greenfield by the Company, with respect to
which shares Mr. Greenfield would have sole voting and dispositive
power upon exercise of such options. See "Executive Compensation." Does
not include 1,200,000 shares of Common Stock underlying options, which
became exercisable on April 1, 1996, 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 31, 1996 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) Represents 1,200,000 shares of Common Stock underlying exercisable
options.

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



(9) Includes, as to each individual, 8,334 shares of Common Stock
underlying vested options, but does not include, as to each individual,
16,666 shares of Common Stock underlying options granted, which options
have not yet vested.

32







(10) Includes 20,000 shares of Common Stock underlying options which have
vested.

(11) Includes 16,666 shares of Common Stock underlying options which are
exercisable, but does not include 33,334 shares of Common Stock
underlying options which are not currently exercisable.

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

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

(14) Includes 25,000 shares of Common Stock underlying options granted to an
officer of the Company other than a Named Executive Officer, which
options are currently exercisable.

(15) Represents shares pledged to Klaussner by Messrs. Greenfield, Seidner
and Love and Jara pursuant to the Klaussner transaction. Based on
information contained in the Schedule 13D filed by Hans J. Klaussner
and Klaussner, Hans J. Klaussner is the sole stockholder of the parent
of Klaussner and, accordingly, may be deemed the beneficial owner of
shares owned by Klaussner. The principal address of Klaussner is 405
Lewallen Street, Asheboro, North Carolina 27203. Hans J. Klaussner's
address is 7614 Gegenbach, Germany.

Based on the Company's review of reports filed by directors,
executive officers and 10% shareholders of the Company on Forms 3, 4 and 5
pursuant to Section 16 of the Securities and Exchange Act of 1934, all such
reports were filed on a timely basis during fiscal year 1995.



33






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 (the "Jara Notes") 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 31, 1996) 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. During the
fiscal year ended August 31, 1996, Mr. Seidner received approximately $360,000
of interest on the Jara Notes from the Private Company. During the fiscal year
ended August 31, 1996, Mr. Greenfield received approximately $360,000 of
interest on the Jara Notes from the Private Company. With the exception of
6,250 shares owned directly by

34




Mr. Seidner, as of August 31, 1996, the shares of Common Stock directly owned
by Messrs. Love and Seidner were in a voting trust, which expired October 15,
1996, administered by Mr. Greenfield as voting trustee. The shares of Common
Stock owned by Messrs. Greenfield, Love, and Seidner and Jara were pledged to
Klaussner as part of the Klaussner transaction. In November 1994, Mr.
Greenfield and Mr. Seidner sold their interests in the Private Company in
exchange for the Jara Notes and options (the "Buy-Out Options") to purchase
the Common Stock owned by Mr. Love and the Private Company. The Jara Notes are
$10,273,204 in aggregate principal amount ($5,136,602 owned by Mr. Greenfield
and $5,136,602 owned by Mr. Seidner), bear interest at a rate of 7.5% per
annum 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. 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

35




continued to provide warehousing and handling services as described above.
During the fiscal year ended August 31, 1996 the Company and the LPs paid
warehouse fees to the Private Company aggregating approximately $5,302,000.
During the fiscal year ended August 31, 1996, the Private Company purchased
from the Company approximately $10,200,000 of merchandise (net of discounts
and allowances). Under the terms 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 $333,334 of payments on such note during the fiscal year ended August 31,
1996, leaving $305,555 principal amount outstanding as of August 31, 1996.

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 predetermined freight
rates. 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 31, 1996, the Company and
the LPs paid $3,042,000 for freight charges and $2,972,000 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. In March

36




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, 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 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 31,
1996 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 a share of all advertising production costs and costs of
publication of promotional advertising material within the New York area.
During the fiscal year ended August 31, 1996, the Company charged the Private
Company and the Unconsolidated Licensees $2,374,000 for advertising.



37






Jennifer Living Rooms

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

Other Matters

As described under the heading "The Committee" below, a committee of
the Board of Directors consisting of Michael Colnes concluded that the Company
had claims against Messrs. Greenfield, Love, Seidner and the Private Company.
During fiscal 1996, the Company paid legal fees for Harley J. Greenfield of
$44,700 in connection with these matters.

JCI

Related parties of JCI, which is the holder of options to purchase
1,200,000 shares of Common Stock, also own 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 31, 1996,
the Company earned $507,000 of royalties from the Chicago Partnership, which
are not separately shown in the financial statements due to the consolidation
of the LPs for financial statement purposes.

Other Matters

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 31, 1996, such corporation
incurred approximately $160,000 in royalties and $1,443,000 for merchandise
purchases owed to the Company. Such entity did not make any payments to the
Company 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 31, 1996). 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

38



owned a 20% interest in each of two corporations, (until October 1996, when he
acquired the remaining 80% interest in such corporations) which each own a
licensed Jennifer Convertibles store. During the year ended August 31, 1996,
such corporations incurred an aggregate of approximately $80,300 in royalties
and $714,900 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 31,
1996 incurred approximately $34,000 (for Mr. Rudzin's stores) and $100,600
(for Mr. Rudzin's father's stores) of royalties and $308,400 (for Mr. Rudzin's
store) and $892,200 (for Mr. Rudzin's father's stores) for merchandise
purchases. During the fiscal year ended August 31, 1996, Mr. Abada received
$328,000 of salary, severance pay, distributions and other payments from such
licensees and the Private Company and Mr. Rudzin received approximately
$198,000 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,
1995 and 1996 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 $188,500 of
legal fees from the Company and the LPs and an aggregate of approximately
$36,000 from the Private Company during the fiscal year ended August 31, 1996.

In November 1996, Klaussner agreed to give the Company $1,075,000 of
vendor allowances. See also "Business- Sources of Supply" for other
transactions with Klaussner.

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
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

39




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.

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

40



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 31, 1996, 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.

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

41




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.

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.



42




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.

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.


43




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:

(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;

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

44





(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;

(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.

45




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 31, 1996, the Company did
not file Current Reports on Form 8-K.

(c) Exhibits.

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

3.2 - By-Laws of the Company. (Incorporated herein by reference
to Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the year ended August 26, 1995).

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

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

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

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

46




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

10.5 - Agreement of Limited Partnership of Jennifer Chicago, L.P.
(the "Partnership"), dated July 24, 1991 (Incorporated
herein by reference to Exhibit 1 to the Company's Current
Report on Form 8-K dated July 24, 1991 - related to series
of agreements related to Limited Partnership of Jennifer
Chicago L.P.).

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

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

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

10.9 - Amended and restated 1991 Incentive and Non-Qualified
Stock Option Plan (Incorporated herein by reference to
Exhibit 10.29 to the Registration Statement on Form S-2).

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

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

10.12 - Amended and Restated Registration and Sale Agreement dated
as of February 25, 1992 among the Company, JCI, Harley J.
Greenfield, Fred J. Love,

47



Edward B. Seidner and Jara (Incorporated herein by reference
to Exhibit 3 to the Company's Current Report on Form 8-K
dated February 25, 1992).

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

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

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

10.16 - Amendment No. 1 to Warehousing Agreement, dated as of May
28, 1994, amending the Warehousing Agreement referred to in
10.29 and the related Rebate Note. (Incorporated herein by
reference to Exhibit 10.34 to the Company's Annual Report on
Form 10-K for the fiscal year ended August 27, 1994).

10.17 - Amendment No. 1 to Purchasing Agreement, dated as of May
28, 1994, amending the Purchasing Agreement referred to in
10.30. (Incorporated herein by reference to Exhibit 10.35 to
the Company's Annual Report on Form 10-K for the fiscal year
ended August 27, 1994).

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

10.19 - Letter Agreement with JCI Consultant, L.P. (Incorporated
herein by reference to the Company' Current Report on Form
8-K dated August 1, 1994).

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

48



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

10.22 - 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).

10.23 - 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).

10.24 - 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).

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

10.26 - Form of Option, dated November 7, 1994 to purchase Common
Stock from Fred Love, Jara Enterprises, Inc. and certain
subsidiaries to Harley J. Greenfield and Fred Love.
(Incorporated herein by reference to Exhibit 10.44 to the
Company's Annual Report on Form 10-K for the fiscal year
ended August 26, 1995.)

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

10.28 - Credit and Security Agreement, dated as of March 1, 1996,
among Klaussner Furniture Industries, Inc. 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).

11.1 - Statement re computation of Net (Loss) Per Share (for
fiscal years ended August 31, 1996, August 26, 1995 and
August 27, 1994).

49







22.1 - Subsidiaries of the Company. (Incorporated herein by
reference to Exhibit 22.1 on the Company's Annual Report on
Form 10-K for fiscal year ended August 27, 1994.)

(d) Financial Statement Schedules.

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

50




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.







51





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

/s/ Harley J. Greenfield
------------------------
Harley J. Greenfield Chairman of the Board, December 6, 1996
President and Chief
Executive Officer
(Principal Executive
Officer)

/s/ George J. Nadel
------------------------
George J. Nadel Executive Vice President, December 6, 1996
Chief Financial Officer
and Treasurer (Principal
Financial Officer and
Principal Accounting
Officer)

/s/ Edward B. Seidner
------------------------
Edward B. Seidner Director December 6, 1996


/s/ Bernard Wincig
------------------------
Bernard Wincig Director December 6, 1996


/s/ Edward Bohn
------------------------
Edward Bohn Director December 6, 1996


/s/ Kevin J. Coyle
------------------------
Kevin J. Coyle Director December 6, 1996


52








JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Index to Financial Statements




Independent Auditors' Report.........................................F1

Consolidated Balance Sheets at August 31, 1996 and
August 26, 1995 ...................................................F3

Consolidated Statements of Operations for the years ended
August 31, 1996, August 26, 1995 and August 27, 1994.................F4

Consolidated Statements of Stockholders' Equity
(Capital Deficiency) for the years ended August 31, 1996,
August 26, 1995 and August 27, 1994..................................F5

Consolidated Statements of Cash Flows for the years ended
August 31, 1996, August 26, 1995 and August 27, 1994.................F6

Notes to the Consolidated Financial Statements.......................F7





REPORT OF INDEPENDENT AUDITORS



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


We have audited the accompanying consolidated balance sheets of
Jennifer Convertibles, Inc. (the "Company") and subsidiaries as at August 31,
1996 and August 26, 1995, and the related consolidated statements of
operations, stockholders' equity (capital deficiency) and cash flows for the
year ended August 31, 1996. These financial statements are the responsibility
of the Company's management.

We conducted our audits of the consolidated balance sheets as at
August 31, 1996 and August 26, 1995, and the related consolidated statements
of operations, stockholders' equity (capital deficiency) and cash flows for
the year ended August 31, 1996, in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated balance sheets as at August 31, 1996
and August 26, 1995, and the related consolidated statements of operations,
stockholders' equity (capital deficiency) and cash flows for the year ended
August 31, 1996 present fairly, in all material respects, the consolidated
financial position of Jennifer Convertibles, Inc. and subsidiaries at August
31, 1996 and August 26, 1995, and the consolidated results of their operations
and their cash flows for the year ended August 31, 1996, in conformity with
generally accepted accounting principles.

We were engaged to audit the consolidated statements of operations,
stockholders' equity (capital deficiency) and cash flows of the Company for
the years ended August 26, 1995 and August 27, 1994. These financial
statements are the responsibility of the Company's management.

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 Notes 1 and 3, a company owned by three officers of
the Company (the "Private Company") performed purchasing, warehousing and
inventory control, distribution, fabric protection, 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.

F1



The Company did not have an adequate system of internal accounting
controls over the financial information processed for the Company by the
Private Company prior to August 26, 1995. Further, the chief financial officer
of the Company has stated that he was unable to maintain internal controls
over the financial data processed by the Private Company on behalf of the
Company and that the Company was seriously deficient regarding the adequacy of
internal controls that support its operations prior to August 26, 1995. As a
result of this lack of control, the chief financial officer has stated that he
was 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 three paragraphs, we
are unable to express, and we do not express, an opinion on the accompanying
consolidated statements of operations, stockholders' equity (capital
deficiency) and cash flows for the years ended August 26, 1995 and August 27,
1994. No representation to the contrary should be expressly or implicitly
assumed from the issuance of the accompanying financial statements.

As discussed in Note 9, 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 three years and
management's plans for contending with these problems. Attention is also
directed to Notes 1, 3 and 9 with respect to various related party
transactions.



Richard A. Eisner & Company, LLP

New York, New York
November 22, 1996

F2







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


ASSETS


(SEE NOTE 5) August 31, 1996 August 26, 1995
---------------- ----------------

Current assets:
Cash and cash equivalents $ 3,600 $ 7,729
Merchandise inventories 8,221 9,432
Refundable income taxes 23 131
Prepaid expenses 446 761
Accounts receivable 1,588 2,504
Other current assets 8 101
---------------- ----------------
Total current assets 13,886 20,658

Store fixtures, equipment and leasehold improvements,
at cost, net 8,739 9,771
Due from Private Company and Unconsolidated Licensees,
net of reserves of $7,324 and $6,372 at August 31, 1996
and August 26, 1995. -- --

Deferred lease costs and other intangibles, net 1,317 1,839
Goodwill, at cost, net 568 586
Other assets (primarily security deposits) 925 1,017
------------------ -----------------
$ 25,435 $ 33,871
================== =================


LIABILITIES AND (CAPITAL DEFICIENCY)

Current liabilities:
Accounts payable, trade $ 15,746 $ 16,108
Customer deposits 8,875 9,017
Accrued expenses and other current liabilities 5,022 6,521
----------------- ----------------
Total current liabilities 29,643 31,646

Deferred rent and allowances 5,868 6,171
Long-term obligations under capital leases 230 337
----------------- ----------------
Total liabilities 35,741 38,154
----------------- ----------------


Commitments and contingencies

(Capital deficiency)
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 31, 1996
and August 26, 1995 57 57
Additional paid-in capital 22,911 22,911
Notes receivable from warrant holders (300) (300)
Accumulated (deficit) (32,974) (26,951)
----------------- ----------------
(10,306) (4,283)
----------------- ----------------

$ 25,435 $ 33,871
================= ================




Attention is directed to the foregoing Accountants' Report and to
the accompanying Notes to the Consolidated Financial Statements.

F3




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






Year ended Year ended Year ended
August 31, 1996 August 26, 1995 August 27, 1994
--------------- --------------- ---------------

Net sales $106,041 $126,074 $97,420
------------ ----------- -------------

Cost of sales, including store occupancy, warehousing, delivery and fabric
protection (including charges from Private
Company of $11,836, $13,883, and $28,521) 72,708 86,964 67,974
Selling, general and administrative expenses
(including advertising charges
from Private Company of $0,$0 and $3,786) 37,618 45,955 34,139
Depreciation and amortization 1,852 2,261 2,091
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 952 3,088 3,284
Loss from store closings 191 1,670 --
------------ ----------- -------------
113,321 140,438 117,574
------------ ----------- -------------

Operating (loss) (7,280) (14,364) (20,154)
------------ ----------- -------------
Other income (expense):
Royalty income 375 523 644
Interest income 195 311 473
Interest expense (47) (48) (61)
Gain on sale of securities -- -- 336
Other income, net 880 1,670 1,374
------------ ----------- -------------
1,403 2,456 2,766
------------ ----------- -------------
(Loss) before income taxes (benefit)
and minority interest (5,877) (11,908) (17,388)
Income taxes (benefit) 146 160 (322)
------------ ----------- -------------

(Loss) before minority interest (6,023) (12,068) (17,066)
Minority interest share of losses -- -- 2,449
------------ ----------- -------------
Net (loss) ($6,023) ($12,068) ($14,617)
============ ============ =============
(Loss) per common and common equivalent share:

Net (loss) per share ($1.06) ($2.12) ($2.56)
============ ============ ================

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



Attention is directed to the foregoing Accountants' Report and to the
accompanying Notes to the Consolidated Financial Statements.

F4





JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Capital Deficiency)
Fiscal Years ended August 31, 1996, August 26, 1995 and August
27, 1994 (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, 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)

Net (loss) -- -- -- -- (6,023) (6,023)
-------------- ------ ---------- ---------- ---------- ----------

Balances at August 31, 1996 5,700,725 $ 57 $ 22,911 $ (300) $ (32,974) $ (10,306)
============== ====== ========== ========== ========== ==========




Attention is directed to the foregoing Accountants' Report and to the
accompanying Notes to the Consolidated Financial Statements.

F5





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



Year ended Year ended Year ended
August 31, 1996 August 26, 1995 August 27, 1994
--------------- --------------- ---------------

Cash flows from operating activities:
Net (loss) ($6,023) ($12,068) ($14,617)
Adjustments to reconcile net (loss) to net cash (used in) operating
activities:
Depreciation and amortization 1,852 2,261 2,091
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 952 3,088 3,284
Loss from store closings 191 1,670 --
Deferred rent 246 656 2,776
(Gain) on sale of investment securities -- -- (336)
(Gain) on sale of subsidiaries -- -- (102)
Minority interest -- -- (449)
Changes in operating assets and liabilities:
Decrease (increase) in merchandise inventories 1,211 716 (6,276)
Decrease (increase) in refundable income taxes 108 2,127 (1,190)
Decrease (increase) in prepaid expenses 315 956 (1,468)
Decrease (increase) in accounts receivable 916 (785) (1,390)
Decrease (increase) in other current assets 93 1,374 (582)
(Increase)in due from Private Company
and Unconsolidated Licensees (952) (1,256) (5,249)
Decrease (increase) in other assets 46 (567) 685
(Decrease) increase in accounts payable trade (362) 717 13,985
Increase (decrease) in customer deposits (142) (443) 3,812
(Decrease) increase in accrued expenses and
and other current liabilities (1,499) 1,206 3,565
----------- ---------------- -------------
Net cash (used in) operating activities (3,048) (348) (979)
----------- ---------------- -------------

Cash flows from investing activities:
Capital expenditures (989) (4,292) (5,021)
Deferred lease costs and other intangibles 15 (1,580) (1,673)
Sale of investments in government securities, net -- -- 5,431
Decrease (increase) in due from limited partners -- 1,000 (1,000)
----------- ---------------- -------------
Net cash (used in) investing activities (974) (4,872) (2,263)
----------- ---------------- -------------

Cash flows from financing activities:
Issuance of warrants -- -- 211
Exercise of stock options -- -- 8
Payments of obligations under capital leases (107) (140) (70)
----------- ---------------- -------------
Net cash (used in) provided by financing activities (107) (140) 149
----------- ---------------- -------------



Net (decrease)in cash and cash equivalents (4,129) (5,360) (3,093)
Cash and cash equivalents at beginning of year 7,729 13,089 16,182
----------- ---------------- -------------


Cash and cash equivalents at end of year $3,600 $7,729 $13,089
=========== ================ =============


Supplemental disclosure of cash flow information:
Income taxes (refunded) paid during the year $ 108 ($2,127) $1,190
=========== ================ =============


Interest paid $ 47 $48 $61
=========== ================ =============



Supplemental disclosure of noncash transactions:
See Note 7 -Warrants
See Note 9 -Commitments, Contingencies and other Matters


Attention is directed to the foregoing Accountants' Report and to the
accompanying Notes to the Consolidated Financial Statements.

F6







JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements August 31, 1996,
August 26, 1995 and August 27, 1994
(In thousands except for share amounts)

(1) Business and Basis of Preparation

The consolidated financial statements include the accounts of
Jennifer Convertibles, Inc. and subsidiaries (the "Company") and as described
below, certain licensees. The Company is the owner and licensor of domestic
sofabed specialty retail stores that specialize in the sale of a complete line
of sofabeds and companion pieces such as loveseats, chairs and recliners and
specialty retail stores that specialize in the sale of leather furniture. As
at August 31, 1996, 86 Company-owned stores operated under the Jennifer
Convertibles and Jennifer Leather names.

Commencing in the latter part of the fiscal year ended August 31,
1992, the Company began licensing stores to limited partnerships ("LP's") of
which a subsidiary of the Company is the general partner. The Company's
subsidiary made nominal capital contributions to the LP's and the limited
partners contributed approximately $6,660. All of the LP's have had losses
since inception and the Company has made advances to them to fund such losses.
The Company has control of the LP's and, as a result, consolidates the
accounts of the LP's in its financial statements. Included in the Company's
consolidated Statement of Operations are the losses of the LP's in excess of
the limited partners' capital contributions. As at August 31, 1996 and August
26, 1995, the LP's operated 64 and 68 stores under the Jennifer Convertibles
name.

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 at August
31, 1996, 11 stores were operated by such Unconsolidated Licensees and the
results of their operations are not included in the consolidated financial
statements (See Notes 3 and 9).

Also not included in the consolidated financial statements are the
results of operations of 21 stores in the New York Metropolitan Area which are
owned by a company (the "Private Company") which, until November 1994, was
owned by three of the officers/directors/principal stockholders of the
Company. In November 1994, the Private Company redeemed the stock in the
Private Company of two of the principal stockholders (Harley Greenfield and
Edward Seidner) for a note in the amount of $10,273 collateralized by the
assets of the Private Company and due in 2023 (See Note 9). In connection with
such transaction, Fred Love, the remaining principal stockholder, granted
Messrs. Greenfield and Seidner options expiring in November 2004 to purchase
the 585,662 shares of the Company's Common Stock owned by him and the Private
Company for $15.00 per share.



F7







JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)


The Company, the LP's, the Private Company and the Unconsolidated
Licensees have had numerous transactions with each other as more fully
discussed in Note 3. Further, the Company has made advances to the Private
Company and the Unconsolidated Licensees which have been reserved for in full
due to uncertainty of collection. 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
in the last three fiscal years ended Augusut 31, 1996 and operating losses
have continued subsequent to that date 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 9, 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 9.

c) As discussed in Note 9, 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 9, 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.

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 5, the Company has entered into a
credit and security agreement with its largest supplier,
Klaussner Furniture Industries, Inc. ("Klaussner") (which
accounts for approximately 79% 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. Additional allowances of $1,075 have been
obtained for fiscal 1997.

F8






JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)




(2) Summary of Significant Accounting Policies

Principles of Consolidation

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

Fiscal Year

Commencing with the year ended 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 31, 1996 and August 26, 1995, total $-0- and $4,000,
respectively.

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:

8/31/96 8/26/95
------- -------
Showrooms $3,963 $ 4,421
Warehouses 4,258 5,011
------ -------
$8,221 $ 9,432
====== =======

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 31, 1996 and August 26, 1995
amounted to $556 and $538, respectively.




F9







JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)



Deferred Lease and Other Intangible Costs

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

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 $5,868 and $6,171 at August 31, 1996
and August 26, 1995, 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.

(Loss) Per Share

(Loss) per share for the years ended August 31, 1996, August 26,
1995 and August 27, 1994 were computed by dividing the net (loss) by the
weighted average number of shares of Common Stock outstanding. Options and
warrants outstanding are not included because their effect is anti-dilutive.

Advertising

Advertising costs are expensed as incurred.

Concentration of Risks

The Company purchases 93% of its inventory from two suppliers (79%
and 14%, respectively) under normal trade terms. The larger supplier,
Klaussner, has executed a Credit and Security Agreement with the Company (See
Note 5).

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 31, 1996
and August 26, 1995, amounts on deposit with this one bank totalled 86% and
81%, 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.


F10







JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)






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 also provided services relating to purchasing,
distribution, customer service, data entry processing and other related
services. In the fiscal year ended August 31, 1996, all such services have
been transferred to the direct control of the Company's management except for
distribution, inventory control reporting and data processing. 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, lifetime 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
--------------------------------
8/31/96 8/26/95 8/27/94
------- ------- -------
Included in Cost of Sales:
Purchases of inventory $ - $ - $18,230
Freight* 3,042 3,775 2,122
Fabric protection services 2,972 3,804 3,298
Warehousing fees at 5% 5,302 6,304 4,871
Additional warehouse fees (Note 9) 520 - -
------- ------- -------
Total $11,836 $13,883 $28,521
----- ======= ======= =======

*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
9).



F11







JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)

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 years ended August 31, 1996, August 26, 1995 and August 27, 1994
(which only includes the period January 1, 1994 through August 27, 1994)
approximately $10,471, $12,500 and $7,478, respectively, of inventory at cost
was purchased by the Private Company through the Company and $1,900, $3,105
and $2,350, respectively, of inventory at cost 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 certain accrued discounts, the Private Company executed a
promissory note in the amount of $1,000. This note, which bears interest at 8%
per annum, is payable 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 credited to the Private Company on account of discounts for
such period, $692 was credited for the year ended August 26, 1995 and $583 was
credited for the year ended August 31, 1996.

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 year ended August 27, 1994,
$3,786 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 a share of advertising costs which aggregated $2,374,
$2,498 and $1,718 for the years ended August 31, 1996, 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 31, 1996, S.F.H.C. incurred approximately $160, $185 and
$252 in royalties to the Company. Principal and interest payments of
approximately $-0-, $23 and $151 for the three years ended August 31, 1996
were received in connection with a 9% secured note, due December 31, 2001. The
original principal amount of $810 had been reduced to $638 as of August 31,
1996. 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



F12






JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)







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 31,
1996, such corporations incurred approximately $81, $97 and $106 in royalties
to the Company. 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 31, 1996, incurred royalties
aggregating approximately $134, $239 and $283, respectively, to the Company
(See Note 10).

In October 1996, Rami Abada transferred his 20% interest in S.F.H.C.
to individuals who are also limited partners in LP's III, IV and V. In turn,
he received the entire equity interest in the two corporate Unconsolidated
Licensees that were owned in part by such individuals.

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

By agreement dated March 1, 1996, the Private Company and the
Company agreed to continue to offset, on a monthly basis, amounts owed by the
Private Company and certain Unconsolidated Licensees to the Company for
purchasing, advertising and other services and matters against amounts owed by
the Company to the Private Company for warehousing services, fabric
protection, freight and other services and matters. 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:






F13










JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)

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

At August 31, 1996:
Gross amount due $ 1,682 $ 3,341 $ 2,301 $ 7,324
Reserves (1,682) (3,341) (2,301) (7,324)
-------- -------- -------- --------
Net Amount $ -0- $ -0- $ -0- $ -0-
======== ======== ======== ========


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 9 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 was one of the guarantors of a $5,000 bank mortgage on
the Private Company's warehouse facility utilized by the Company. On June 30,
1996, the Private Company completed the sale of such warehouse and the
Company's guarantee was terminated.

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 year ended August
27, 1994. Such options vest at the rate of 30,000 shares per year, subject to
acceleration for changes of control, mergers and similar events.

F14







JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)



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. Such amounts were reduced, effective February
1, 1996 to $320 and $240 per annum, respectively. In addition, they receive
substantial economic benefits from the Private Company.

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. Such
amounts were reduced, effective February 1, 1996 to $120 each per annum. In
addition, they receive substantial economic benefits from the Private Company
and certain Unconsolidated Licensees.

Another director (and stockholder) of the Company received
approximately $188, $336 and $371 in legal fees in 1996, 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 31, August 26,
1996 1995
--------- ---------
Automobiles $ 68 $ 68
Store fixtures and furniture 6,129 6,175
Leasehold improvements 6,434 6,398
Computer equipment 1,026 612
------- -------
13,657 13,253
Less: Accumulated depreciation and
amortization (4,918) (3,482)
------- -------
$ 8,739 $ 9,771
======= =======


At August 31, 1996 and August 26, 1995, equipment cost includes $907
and $907, and accumulated depreciation and amortization includes $465 and $406
on equipment under capital leases.

(5) Credit and Security Agreement with Klaussner:

On March 5, 1996, the Company and Klaussner executed a Credit and
Security Agreement that provides that Klaussner effectively extended the
payment terms for merchandise shipped from 60 days to 81 days and was provided
with the following:


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

b) 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.


F15







JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)




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. The $1,440 is in addition to $3,500 due from the Private Company
to Klaussner outstanding at August 31, 1996, which liability was incurred by
the Private Company prior to January 1, 1994.

(6) 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
-------------------------------
8/31/96 8/26/95 8/27/94
------- ------- -------

Current:
Federal $ - $ - $(593)
State 145 160 271

Deferred:
Federal - - -
State - - -
---- ---- -----

$145 $160 $(322)
==== ==== =====


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
----------------------------------
8/31/96 8/26/95 8/27/94
------- ------- -------
"Expected" tax expense (benefit) (34.0)% (34.0)% (34.0)%

Increase (reduction) in taxes resulting from:

State income tax, net of
federal income tax benefit 1.6 % 1.4 % 1.8 %

Non-deductible items 1.0 % .5 % 7.0 %

Other (2.7)% (1.8)% ( 2.5)%

Change in valuation allowance 36.6 % 35.2 % 25.5 %
------- ------- -------

2.5 % 1.3 % ( 2.2)%
======= ======= =======



F16






JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)

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

August 31, 1996 August 26, 1995
--------------- ---------------
Deferred tax assets:

Federal and state net operating
loss carryforwards $ 5,378 $ 2,336

Reserve for losses on loans and
advances 2,928 2,926

Accrued partnership losses 1,385 2,584

Deferred rent expense 1,326 1,329

Inventory capitalization 216 232

Other expenses for financial
reporting, not yet deductible
for taxes 578 305
-------- -------

Total deferred tax assets, before
valuation allowance 11,811 9,712

Less: Valuation allowance (10,113) (7,969)
-------- -------
Total deferred tax assets $ 1,698 $ 1,743
======== =======

Deferred tax liabilities:

Difference in book and tax basis
of fixed assets $ 1,571 $ 1,473

Other 127 270
-------- -------

Total deferred tax liabilities 1,698 1,743
-------- -------

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 31, 1996 and August 26, 1995, the valuation allowance
increased by $2,144 and $4,202, respectively.

The Company has a net operating loss carryforward of approximately
$13,000, expiring $6,000 in the year 2010 and $7,000 in the year 2011.

(7) Warrants

In the fiscal year ended August 27, 1994, under the terms of the
limited partnership agreements for LP III, LP IV and LP V (see Note 11), the
three limited partners each purchased for $170 five-year warrants to purchase
60,000 shares of the Company's Common Stock at an exercise price of $15.625
per share. Each of the limited partners paid approximately $70 in 1994 and
issued a $100 term note to the Company as payment for the warrants. These
notes bear interest at a rate of 7.12% per annum and, effective September
1996, are payable over ten years (with 10% of principal due annually). For
each annual principal payment which is not made, $10,564 of the warrants shall
be cancelled. The notes receivable from warrant holders are recorded in
(Capital Deficiency).

F17





JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)




(8) Stock Options Plans

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

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

Information regarding the Company's stock options under and outside the
Plans is summarized below:

Number of Shares
----------------------------------
1996 1995 1994
-------- -------- --------

Outstanding, beginning of year... 836,547 736,547 803,697
Granted (at $2.50 to
$15.75 per share).............. - 137,500 50,000

Exercised (at $2.75 per share)... - - (3,000)
Canceled (at $2.75 to $15.75
per share) (25,000) ( 37,500) (114,150)
--------- --------- ---------

Outstanding, end of period (at
$2.50 to $15.75 per share)..... 811,547 836,547 736,547
========= ========= =========

Exercisable, end of period....... 706,883 628,051 545,053
========= ========= =========

See Note 11 with respect to options outstanding held by JCI to
purchase 1,200,000 shares of Common Stock of the Company.

The number of shares of Common Stock reserved for options available
for grant under the Plans was 215,453 at August 31, 1996.

(9) 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 31, 1996:


F18





JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)



Year Ending August
----------------------------------------
1997......................... $11,498
1998......................... 11,080
1999......................... 10,684
2000......................... 10,138
2001......................... 9,466
Thereafter................... 27,104
-------
$79,970

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
$14,166, $15,770 and $12,456, net of sublease income of $170, $301 and $211
for the years ended August 31, 1996, August 26, 1995 and August 27, 1994,
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
----------------------------------------
1997.............................. $ 160
1998.............................. 160
1999.............................. 137
457
Amount representing interest...... (55)
------
Present value of minimum
lease payments................... 402

Less: Current portion............ 172
------
$ 230
======

Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities
are:

8/31/96 8/26/95
------- -------
Advertising $ 958 $1,577
Payroll 744 697
Legal 216 374
Accounting 356 936
Store closings 455 852
Settlement costs 500 500
Sales tax 778 805
Other 1,015 780
------ ------

$5,022 $6,521
====== ======



F19








JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)


Advertising Expense

Advertising expense for the years ended August 31, 1996, August 26,
1995 and August 27, 1994 aggregated $12,265, $15,729 and $11,357,
respectively.

Other

Conclusions of the Independent Committee

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

On November 22, 1994, the same director who was on the Committee
submitted a letter to the President of the Company which contained information
relevant to the (1) Funding of S.F.H.C. (See Note 11) and (2) the funding of
Limited Partnerships (LP's) III through V (See Note 11). The letter
essentially detailed the flow of funds from the Private Company, certain
Unconsolidated Licensees and the Company to S.F.H.C. and its subsidiary
("Summit"). Additionally, it disclosed that as of August 27, 1994, S.F.H.C.
had a receivable from officers of $1,861. It asserted that neither (a) the
payment to fund S.F.H.C.'s purchase of the stock of Summit nor (b) the capital
contributions to LP's III through V were obtained from sources outside the
Company or the Private Company.

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

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

Class Action and Derivative Action Lawsuits

Between December 6, 1994 and January 5, 1995, the Company was served
with 11 class action complaints and six derivative action lawsuits which deal
with losses suffered as a result of the decline in market value of the
Company's stock as well as the Company having "issued false and misleading
statements regarding future growth prospects, sales, revenues and net income".
The ultimate outcome of these matters is not presently determinable (see
below).



F20








JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)







Proposed 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 in the fiscal year
ended August 26, 1995 as part of estimated settlement costs.

Proposed 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 in the
fiscal year ended 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.

Proposed 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.




F21





JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(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% (see L below). 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 ($520 accrued at August 31, 1996). 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. The mortgage obligation on the
Inwood, New York warehouse will not exceed $2,850 at December 31, 1998. To the
extent that such mortgage 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 mortgage by way of set-off against the Private Company's
obligation to the Company for warehousing services (see L below).

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 and LP V 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.



F22





JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)





Although it is not reflected in the Settlement Agreement, it is
currently contemplated that the shareholders of S.F.H.C. 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 of the
Partnerships will retain the Original Warrants (as described below). There are
no signed agreements with the limited partners of the Partnerships and the
shareholders of S.F.H.C. as to the transfers 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 Settlement
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.



F23







JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)





L) (Agreement of Sale of Inwood, New York Warehouse):

On June 30, 1996, the Private Company sold the Inwood, New York
warehouse which has been the principal warehouse in the distribution system.
In connection with this sale, the Settlement Agreement contemplates that 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.

M) (Subordination):

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.

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.



F24








JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)





(10) Sale of Subsidiaries

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

The purchasers assumed the liabilities owed by such stores,
including liabilities owed to the Company, in the form of six ten-year,
non-interest bearing promissory notes with aggregate annual payments of
approximately $150, with additional payments required based upon sales in
excess of certain minimum amounts. The balance of the notes, net of imputed
interest at the rate of 8%, which have been reserved for in full in the
consolidated financial statements, are as follows:

August 31, August 26,
1996 1995
---------- ----------

Notes receivable $ 554 $ 674
Less: imputed interest (120) (186)
------ -----
Notes receivable, net $ 434 $ 488
====== =====


The purchasers of the stores have assumed the Company's obligations
under the store leases. However, the Company remains a guarantor of certain of
the leases and, therefore, is contingently liable for claims arising under the
terms of the respective leases in the aggregate amount of $30.

(11) Other Agreements

JCI Consulting Agreement

On July 29, 1994, the Company reached an agreement with JCI
Consultant, L.P. ("JCI") to terminate a February 25, 1992 consulting agreement
with JCI pursuant to which, among other things, JCI rendered advice on the
establishment and financing of Company-owned and licensed stores. 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.




F25





JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)


JCI has retained all rights in and to the options to purchase
1,200,000 shares of Common Stock at $8.00 per share which were previously
granted to JCI. Such options terminate on March 21, 2001 and become
exercisable on April 1, 1996. Under a ten-year Voting Trust Agreement expiring
March 21, 2001, the Chief Executive Officer and President of the Company will
be the voting trustee for the shares of Common Stock which may be received by
JCI upon the exercise of the option. Furthermore, in connection with the
termination of the Consulting Agreement, JCI agreed that, except for the
aforementioned option shares, it would not at any time acquire, directly or
indirectly, more than 5% of the issued and outstanding shares of Common Stock
of the Company for a period ending July 29, 2000.

Contemporaneous with the granting of the options to JCI, the
Company, JCI, the Principal Stockholders and the Private Company entered into
a registration and sale agreement (the "Registration Agreement") pursuant to
which JCI has certain demand and "piggy-back" registration rights. Subject to
certain exceptions, the Registration Agreement grants a right of first refusal
to the Company to purchase all option shares which are proposed to be sold. If
the Company declines to exercise such right of first refusal, the Principal
Stockholders and the Private Company will have the right of first refusal.

Chicago Partnership Agreement

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

Pursuant to the Partnership Agreement, the limited partner (a party
related to JCI) contributed $990 to the Partnership and agreed to make
additional capital contributions of up to $100. The Company 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 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.

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 1996, 1995 and 1994, 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.

F26





JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)


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 9). The note
is secured by the stock of Summit, bears interest at a rate of 9% per annum
and 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.

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 31, 1996, $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.

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.

F27





JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Continued) August
31, 1996, August 26, 1995 and August 27, 1994
(In thousands except for share amounts)



LP III, LP IV and LP V

The Company has entered into three additional Limited Partnership
Agreements (the "Agreements") establishing LP's III, IV and V 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 put their interest
to the Company for either 100,000 shares of stock of the Company or $1,000
compounded at 25% if there is a change in management, as defined, through the
year 2002. The investors have also purchased, for approximately $510, warrants
("Original Warrants") exercisable between June 1994 and June 1998 to purchase
180,000 shares of the Company's Common Stock at an exercise price of $15.625
per share. As of August 31, 1996, the limited partners have paid approximately
$210 and signed ten year notes to pay $300 as payment for these warrants (See
Note 7).

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. $1,000 was received on December
1, 1994 for LP's IV and V (see Note 9).









F28