<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 3, 1999
REGISTRATION NO. 333-81987
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO THE
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SLEEPMASTER L.L.C.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEW JERSEY 2500 22-3341313
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
<TABLE>
<S> <C> <C>
SLEEPMASTER FINANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 2500 22-3652420
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
2001 LOWER ROAD
LINDEN, NEW JERSEY 07036
(732) 381-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
C/O JAMES P. KOSCICA
EXECUTIVE VICE PRESIDENT AND SECRETARY
2001 LOWER ROAD
LINDEN, NEW JERSEY 07036
(732) 381-5000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPY TO:
LANCE C. BALK
KIRKLAND & ELLIS
153 EAST 53RD STREET
NEW YORK, NEW YORK 10022-4675
TELEPHONE: (212) 446-4800
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON ANY DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON THE DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
<TABLE>
<S> <C> <C>
PALM BEACH BEDDING COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
FLORIDA 2500 59-0833393
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
HERR MANUFACTURING COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
PENNSYLVANIA 2500 28-1414913
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
LOWER ROAD ASSOCIATES, LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
NEW JERSEY 2500 22-3578078
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
<PAGE> 3
PROSPECTUS
SEPTEMBER , 1999
SLEEPMASTER L.L.C.
AND
SLEEPMASTER FINANCE CORPORATION
OFFER FOR ALL OUTSTANDING 11% SENIOR SUBORDINATED NOTES DUE 2009
IN AGGREGATE PRINCIPAL AMOUNT OF $115,000,000
IN EXCHANGE FOR 11% SERIES B SENIOR SUBORDINATED NOTES DUE 2009
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON
[ ,] 1999
UNLESS EXTENDED.
TERMS OF EXCHANGE NOTES
MATURITY:
- - May 15, 2009.
REDEMPTION:
- - We may redeem the exchange notes at any time on or after May 15, 2004.
- - Before May 15, 2002, we may be able to redeem up to 35% of the exchange notes
with the proceeds of public offerings of equity in Sleepmaster L.L.C.
MANDATORY OFFER TO REPURCHASE:
- - If we sell all or substantially all of our assets or experience specific kinds
of changes in control, we may be required to repurchase the exchange notes.
SECURITY:
- - The exchange notes and the guarantees by our guarantor subsidiaries are
unsecured.
GUARANTEES:
- - If we cannot make payments on the exchange notes when due, our guarantor
subsidiaries must make them instead.
RANKING:
- - These exchange notes and the subsidiary guarantees rank:
1. behind all of our and our guarantor subsidiaries' current and future senior
indebtedness;
2. equal with all of our and our guarantor subsidiaries' other current and
future senior subordinated indebtedness; and
3. ahead of all of our and our guarantor subsidiaries' other current and
future indebtedness that expressly provides that it is not senior to these
exchange notes and the subsidiary guarantees.
INTEREST:
- - Fixed annual rate of 11%.
- - Paid every six months on May 15 and November 15.
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the exchange notes or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
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PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 9
Use of Proceeds............................................. 17
Capitalization.............................................. 18
Unaudited Pro Forma Consolidated Financial Data............. 19
Selected Historical Financial and Other Data................ 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 26
Business.................................................... 35
Management.................................................. 48
Security Ownership.......................................... 52
Relationships and Related Transactions...................... 54
Description of Indebtedness................................. 58
Description of the Notes.................................... 62
Exchange Offer.............................................. 109
United States Federal Income Tax Considerations............. 116
Plan of Distribution........................................ 117
Legal Matters............................................... 118
Experts..................................................... 118
Available Information....................................... 118
Index to Financial Statements............................... F-1
</TABLE>
------------------------
<PAGE> 5
PROSPECTUS SUMMARY
The following summary contains basic information about this exchange offer
and highlights the most important features of this exchange offer. For a more
complete understanding of this exchange offer, we encourage you to read this
entire document and the documents we have referred you to.
In addition, our management has estimated the market share percentages
provided in this prospectus. We believe these estimates to be reliable, but
these numbers have not been verified by an independent source.
THE OLD NOTE OFFERING
Old Notes.................. We sold the old notes to Merrill Lynch & Co. and
First Union Capital Markets, the initial
purchasers, on May 18, 1999. Merrill Lynch & Co.
and First Union Capital Markets subsequently resold
the old notes to qualified institutional buyers
under Rule 144A of the Securities Act of 1933.
Exchange and Registration
Rights Agreement......... We, Merrill Lynch & Co. and First Union Capital
Markets entered into a registration rights
agreement on May 18, 1999. The registration rights
agreement granted Merrill Lynch & Co. and First
Union Capital Markets and any subsequent holders of
the old notes exchange and registration rights. We
intend that the exchange offer satisfy those
exchange and registration rights. The exchange and
registration rights we granted will terminate upon
the consummation of our exchange offer.
THE EXCHANGE OFFER
Securities Offered......... Up to $115,000,000 of 11% series B senior
subordinated notes due 2009. The terms of the
exchange notes and old notes are identical in all
material respects, except for transfer restrictions
and registration rights relating to the old notes.
The Exchange Offer......... We are offering to exchange the old notes for a
principal amount equal to the principal amount of
exchange notes. Old notes may be exchanged only in
integral principal multiples of $1,000.
Expiration Date; Withdrawal
of Tender.................. Our exchange offer will expire 5:00 p.m. New York
City time, on [ ], 1999, or a later date
and time if we choose to extend this exchange
offer. You may withdraw your tender of old notes at
any time prior to the expiration date. We will
return any old notes not accepted by us for
exchange for any reason at our expense as promptly
as possible after the expiration or termination of
our exchange offer.
Conditions to the
Exchange Offer........... Based on an interpretation by the staff of the
Securities and Exchange Commission in no-action
letters issued to third parties, we believe that
you may offer for resale, resell or otherwise
transfer the exchange notes without complying with
the registration and prospectus delivery provisions
of the Securities Act of 1933, provided that:
- the exchange notes are acquired in the
ordinary course of your business,
1
<PAGE> 6
- you do not intend to participate and have no
arrangement or understanding with any person
to participate in the distribution of the
exchange notes and
- you are not our "affiliate" within the
meaning of Rule 405 under the Securities Act
of 1933.
Our obligation to accept for exchange, or to issue
the exchange notes in exchange for, any old notes
is subject to:
- customary conditions relating to compliance
with any applicable law,
- any applicable interpretation by any staff
of the Securities and Exchange Commission,
or
- any order of any governmental agency or
court of law.
We currently expect that each of the conditions
will be satisfied and that no waivers will be
necessary. See "The Exchange Offer -- Conditions."
Procedures for Tendering
Old Notes................ Each holder of old notes wishing to accept the
exchange offer must complete, sign and date the
Letter of Transmittal, or a facsimile. The holder
must mail or otherwise deliver the Letter of
Transmittal, or facsimile, together with the old
notes and any other required documentation, to the
exchange agent at the address in the section "The
Exchange Offer" under the heading "Procedures for
Tendering Old Notes."
Use of Proceeds............ We will not receive any proceeds from the exchange
of notes according to the terms of our exchange
offer.
Exchange Agent............. United States Trust Company of New York is serving
as the exchange agent in connection with our
exchange offer.
Federal Income Tax
Consequences............. Sleepmaster has received an opinion from Kirkland &
Ellis that exchange of old notes in accordance with
the terms of this exchange offer will not be a
taxable event to you for federal income tax
purposes. See "United States Federal Income Tax
Considerations."
2
<PAGE> 7
THE EXCHANGE NOTES
The following is a brief summary of the terms of the exchange notes. The
terms of the exchange notes are identical to the terms of the old notes, except
that the old notes offered differed with respect to their transfer restrictions
and their registration rights. For a more complete description of the terms of
the exchange notes, see "Description of the Notes" in this prospectus.
Issuers....................... Sleepmaster L.L.C. and Sleepmaster Finance
Corporation
Total Amount of Exchange Notes
Offered..................... Up to $115.0 million aggregate principal amount
of 11% Series B Senior Subordinated Notes due
2009.
Maturity...................... May 15, 2009.
Interest...................... Annual rate -- 11%
Payment Frequency -- every six months on May 15
and November 15
First payment -- November 15, 1999.
Guarantees.................... Each of our domestic subsidiaries will fully
and unconditionally guarantee the exchange
notes on a senior subordinated basis. We wholly
own each guarantor subsidiary. Future domestic
subsidiaries also will be required to guarantee
the exchange notes if those subsidiaries
guarantee any of our debt.
If we cannot make payments on the exchange
notes when they are due, the guarantor
subsidiaries must make them instead.
The guarantor subsidiaries are also guarantors
of our new credit facility and are liable with
us on a senior basis for obligations incurred
under the new credit facility.
We pledged all of the capital stock of
Sleepmaster, our guarantor subsidiaries and 65%
of the capital stock of our non-guarantor
subsidiary to secure the obligations under our
new credit facility. We and the guarantor
subsidiaries also granted security interests
in, or liens on, substantially all other
tangible and intangible assets of Sleepmaster
and our guarantor subsidiaries.
These exchange notes will be, and the
subsidiary guarantees are senior subordinated
debts, ranking:
- behind all of our and our guarantor
subsidiaries' current and future senior
debt;
- equal with all of our and our guarantor
subsidiaries' other senior subordinated
debt; and
- ahead of all of our and our guarantor
subsidiaries' other current and future
subordinated debt.
Ranking....................... In addition, the exchange notes effectively
will rank junior to all liabilities of our
non-guarantor subsidiaries. Because the
exchange notes are junior in right of payment
to senior debt, in the event of bankruptcy,
liquidation or dissolution, holders of the
exchange notes will not receive any payment
until holders of senior debt and guarantor
senior debt have been paid in full.
3
<PAGE> 8
As of June 30, 1999, after giving effect to
this offering of exchange notes and our use of
the net proceeds from the old note offering and
borrowings related to the acquisitions of Herr
and Star and related costs,
- we had outstanding $6.4 million of
senior debt (consisting of our guarantee
of guarantor senior debt),
- the guarantors had outstanding $6.4
million of guarantor senior debt and
- our nonguarantor subsidiary had no debt.
As of June 30, 1999, the amount of additional
senior debt and additional total debt that we
and the guarantors may incur is $30.9 million.
Optional Redemption........... We may redeem some or all of the exchange notes
at any time on or after May 15, 2004, at the
redemption prices in the Section "Description
of Notes" under the heading "Optional
Redemption."
Public Equity Offering
Optional Redemption......... Before May 15, 2002, we may redeem up to 35% of
the exchange notes with the net proceeds of a
public equity offering at the redemption price
described in the Section "Description of Notes"
under the heading "Optional Redemption," if at
least 65% of the exchange notes issued remain
outstanding after the redemption.
Transfer Restrictions......... The exchange notes are new securities, and
there is currently no established market for
them. We do not intend to list the exchange
notes on any securities exchange.
Change of Control Optional
Redemption.................. Upon change of control events described in the
Section "Description of Notes" under the
heading "Optional Redemption" under the
sub-heading "Change of Control Call," we may
elect to redeem all, but not some, of the
exchange notes at par, together with accrued
interest, plus an applicable premium based on a
discount rate calculated using the interest
rate of a Treasury security maturing on the
first redemption date plus 50 basis points;
provided, however, that the redemption price
shall be no less than 105.5%.
Change of Control............. Upon change of control events described in the
Section "Description of Notes" under the
heading "Purchase of Notes Upon a Change of
Control," each holder of exchange notes may
require us to repurchase some or all of its
exchange notes at a purchase price equal to
101% of the principal amount, plus accrued
interest.
Basic Covenants of the
Indenture..................... We will issue the exchange notes under an
indenture with United States Trust Company of
New York, as trustee. The indenture governing
the exchange notes contains covenants that,
among other things, place limits on our ability
and the ability of our subsidiaries to:
- borrow money,
- pay dividends on, redeem or repurchase
our capital stock,
4
<PAGE> 9
- make restricted payments and
investments,
- issue or sell capital stock of
restricted subsidiaries,
- use assets as security in other
transactions,
- in the case of our restricted
subsidiaries, prohibit the payment of
dividends or other payments to us,
- guarantee debt,
- engage in transactions with affiliates,
- create unrestricted subsidiaries, and
- sell assets in excess of specified
amounts or merge with or into other
companies.
These covenants are subject to important
exceptions and qualifications, which are
described under the heading "Description of the
Notes" in this prospectus.
RISK FACTORS
See "Risk Factors" beginning on page 9 and the other information in this
prospectus for a discussion of factors you should carefully consider before
deciding to invest in the exchange notes.
5
<PAGE> 10
SLEEPMASTER L.L.C.
OVERVIEW
We are a leading manufacturer and distributor of a full line of
conventional bedding, mattresses and box springs marketed under the well-known
brand names of Serta, Serta Perfect Sleeper, Sertapedic and Masterpiece. Serta,
Inc., through its licensees, is the second largest manufacturer of conventional
bedding products in the United States, with a domestic market share of
approximately 17% in 1998. We are the second largest Serta licensee in North
America with approximately a 22% market share in our domestic licensed
territories on a pro forma basis in 1998.
Our licensed territories consist of:
- the metropolitan New York area, including Fairfield County in
Connecticut, and southern New York State,
- the State of New Jersey,
- eastern Pennsylvania, including the metropolitan Philadelphia area,
- the metropolitan Wilmington, Delaware area, including Cecil County in
Maryland,
- the State of Florida, except for seven counties in the Florida panhandle,
and
- substantially all of Ontario, Canada.
We distribute our products through a variety of channels, including bedding
chains, furniture retailers, department stores, wholesale buying clubs and
contract customers. We operate from manufacturing facilities located in Linden,
New Jersey, Lancaster, Pennsylvania, Riviera Beach, Florida and Concord,
Ontario, Canada.
RECENT ACQUISITIONS
We recently completed a number of acquisitions, including:
- Palm Beach Bedding Company, which owns the license to manufacture Serta
products in Florida except for seven counties in the Florida panhandle,
on March 3, 1998,
- Herr Manufacturing Company, which owns the license to manufacture Serta
products in eastern Pennsylvania and southern New York, on February 26,
1999, and
- Star Bedding Products Limited, which owns the license to manufacture and
sell Serta products in substantially all of Ontario, Canada, on May 18,
1999.
RECENT DEVELOPMENTS
On May 18, 1999, Sleepmaster and Sleepmaster Finance Corporation issued
$115,000,000 of 11% senior subordinated notes due 2009. Sleepmaster used a
portion of the proceeds of the old note offering to prepay the existing credit
facility, redeem the series A and series B senior subordinated notes due 2007,
and acquire substantially all of the assets of Star. Also, on May 18, 1999, we
entered into a new $25.0 million, six-year revolving senior credit facility. The
new credit facility is secured by substantially all of our domestic assets and
is guaranteed by all of our domestic restricted subsidiaries. We intend to use
borrowings under this new credit facility for working capital, general corporate
purposes and permitted acquisitions.
------------------------
Sleepmaster Finance Corporation is a wholly-owned subsidiary of Sleepmaster
L.L.C. formed solely for the purpose of acting as co-issuer of the notes.
Sleepmaster Finance Corporation has no material assets or operations.
The address of Sleepmaster L.L.C., Lower Road Associates, LLC and
Sleepmaster Finance Corporation is 2001 Lower Road, Linden, New Jersey 07036,
and our telephone number is (732) 381-5000. Herr Manufacturing Company is
located at 18 Prestige Lane, Lancaster, PA 17603. Herr can be reached by
telephone at (717) 392-4168. Star Bedding Products Limited is located at 53
Courtland Avenue, Concord, Ontario, LYK 3T2, Canada. Star can be reached by
telephone at (905) 761-1343. Palm Beach Bedding Company is located at 3774
Interstate Park Road North, Riviera Beach, FL 33404. Palm Beach can be reached
by telephone at (561) 840-8491.
6
<PAGE> 11
SUMMARY CONDENSED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents our summary condensed consolidated financial
data. The condensed financial data for the fiscal years ended December 31, 1998,
December 31, 1997 and December 31, 1996 has been derived from, and should be
read in conjunction with, the audited consolidated financial statements of
Sleepmaster and its subsidiaries. The condensed financial data for the six
months ended June 30, 1999 and 1998 is unaudited but, in our opinion, includes
all adjustments, consisting only of normal recurring adjustments considered
necessary for the fair presentation of this information. The results of
operations for interim periods are not necessarily indicative of the results to
be expected for the full year.
The following table also presents certain summary unaudited pro forma
financial data of Sleepmaster and its subsidiaries. The unaudited pro forma
financial data for the year ended December 31, 1998 and for the six months ended
June 30, 1999 has been derived from the unaudited pro forma financial data and
the notes thereto included elsewhere in this prospectus. The summary unaudited
pro forma financial data should be read in conjunction with the historical
consolidated financial statements of Sleepmaster and its subsidiaries and
accompanying notes thereto, "Unaudited Pro Forma Consolidated Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The summary unaudited pro forma financial data is provided for
informational purposes only and does not purport to be indicative of the
financial position or results of operations that would have actually been
obtained had the acquisitions of Palm Beach, Herr and Star and the old note
offering, including the application of the net proceeds therefrom, been
completed on the dates indicated or to project Sleepmaster and its subsidiaries'
results of operations for any future date or period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- -----------------
1996 1997 1998 1998 1999
-------- -------- --------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales................................. $59,763 $67,472 $110,251 $47,503 $73,987
Gross profit.............................. 22,265 25,024 41,263 17,495 27,917
Selling, general and administrative
expenses............................... 14,130 15,044 25,794 11,108 18,208
Amortization of intangibles............... 644 644 1,223 559 836
Operating income.......................... 7,491 9,336 14,246 5,828 8,873
Interest expense, net (a)................. 2,578 4,663 7,096 3,424 4,876
Other (income) expense, net............... 216 (97) (18) (8) (36)
Income before income taxes and
extraordinary items.................... 4,697 4,770 7,168 2,412 4,033
Net income (loss)......................... 4,606 2,757 4,148 1,390 (851)
OTHER DATA:
Gross margin.............................. 37.3% 37.1% 37.4% 36.8% 37.7%
Adjusted EBITDA(b)........................ $ 8,534 $10,429 $ 16,335 $ 6,774 $10,365
Adjusted EBITDA margin.................... 14.3% 15.5% 14.8% 14.3% 14.0%
Depreciation and amortization............. $ 1,043 $ 1,093 $ 2,089 $ 946 $ 1,492
Capital expenditures...................... $ 167 $ 572 $ 1,095 $ 559 $ 1,971
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31, SIX MONTHS ENDED
1998 JUNE 30, 1999
----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
PRO FORMA FINANCIAL DATA:
Net sales................................................. $151,702 $82,464
Gross profit.............................................. $ 57,670 $31,192
Gross margin.............................................. 38.0% 37.8%
Adjusted EBITDA(b)........................................ $ 23,146 $11,852
Adjusted EBITDA margin.................................... 15.3% 14.4%
Depreciation and amortization............................. $ 3,642 $ 1,908
Capital expenditures...................................... $ 2,061 $ 1,973
Ratio of Adjusted EBITDA to cash interest expense......... 1.79x 1.82x
</TABLE>
(continued on following page)
7
<PAGE> 12
(a) Interest expense, net includes the amortization of deferred debt issuance
costs of $391, $170 and $281 for the years ended 1996, 1997 and 1998,
respectively, and $211 and $291 for the six months ended June 30, 1998 and
1999, respectively.
(b) Adjusted EBITDA represents, for any period, net income before interest
expense, income taxes, depreciation and amortization and other non-operating
income/expense. Adjusted EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to service and/or incur
indebtedness. We believe that presentation of Adjusted EBITDA may be helpful
to investors. However, Adjusted EBITDA should not be considered an
alternative to net income as a measure of Sleepmaster's operating results or
to cash flows as a measure of liquidity. In addition, although the Adjusted
EBITDA measure of performance is not recognized under generally accepted
accounting principles, it is widely used by industrial companies as a
general measure of a company's operating performance because it assists in
comparing performance on a relatively consistent basis across companies
without regard to depreciation and amortization, which can vary
significantly depending on accounting methods (particularly where
acquisitions are involved) or non-operating factors such as historical cost
bases. Because Adjusted EBITDA is not calculated identically by all
companies, the presentation in this prospectus may not be comparable to
other similarly titled measures of other companies.
8
<PAGE> 13
RISK FACTORS
You should carefully consider the following risk factors in addition to the
other information in this prospectus before you decide to purchase these notes.
SUBSTANTIAL LEVERAGE -- WE WILL HAVE SUBSTANTIAL DEBT FOLLOWING THIS OFFERING
AND, WE MAY NOT HAVE SUFFICIENT CASH FROM CASH FLOW FROM OPERATIONS AND
AVAILABLE BORROWINGS UNDER OUR NEW CREDIT FACILITY IN ORDER TO PAY INTEREST ON
OUR DEBT WHICH COULD PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE
EXCHANGE NOTES.
We will be highly leveraged after this offering. The following chart
presents
(1) our debt senior to the exchange notes, our total debt, our total debt
as a percentage of capitalization as of June 30, 1999 and
(2) our ratio of earnings to fixed charges for the year ended December 31,
1998 and the six months ended June 30, 1999 after giving pro forma
effect to the acquisition of Herr and Star and the old note offering,
including the application of the net proceeds therefrom.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1999
---------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Senior debt........................................... $ 6.4
Total debt............................................ $ 121.4
Total debt as a percentage of capitalization.......... 100.6%
</TABLE>
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ------------------
<S> <C> <C>
Pro forma ratio of earnings to fixed charges.......... 1.42x 1.46x
</TABLE>
We may incur additional debt in the future as described in the Section entitled
"Description of the Notes" under the subheading "Limitation on Indebtedness",
including secured debt, although the amount we can incur will be limited by our
existing and future debt agreements.
Our high level of debt could have important consequences to noteholders,
including:
- limiting our ability to obtain additional financing to fund our growth
strategy, working capital, capital expenditures, debt service
requirements or other purposes,
- limiting our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of these funds to
make principal payments and fund debt service,
- increasing our vulnerability to adverse economic and industry conditions,
particularly compared to competitors who may be less leveraged than we
are, and
- increasing our vulnerability to interest rate increases because
borrowings under our bank credit facilities are at variable interest
rates.
Our ability to pay interest on the exchange notes and to satisfy our other
debt obligations will depend upon, among other things, our future operating
performance and our ability to refinance debt when necessary. Each of these
factors is to a large extent dependent on economic, financial, competitive and
other factors beyond our control. If, in the future, we cannot generate
sufficient cash from operations to make scheduled payments on the exchange notes
or to meet our other obligations, we will need to restructure or refinance our
debt, obtain additional debt or equity financing, reduce or delay capital
expenditures or sell assets. We cannot assure you that our business will
generate cash flow, or that we will be able to obtain funding, sufficient to
satisfy our debt service requirements, including our payments on these exchange
notes.
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<PAGE> 14
SUBORDINATION -- YOUR RIGHT TO RECEIVE PAYMENTS ON THESE EXCHANGE NOTES IS
JUNIOR TO ALL OF OUR EXISTING AND FUTURE SENIOR DEBT AND POSSIBLY ALL OF OUR
FUTURE BORROWINGS. FURTHER, THE GUARANTEES OF THESE EXCHANGE NOTES ARE JUNIOR TO
ALL OUR GUARANTOR SUBSIDIARIES EXISTING AND FUTURE SENIOR DEBT AND POSSIBLY ALL
THEIR FUTURE BORROWINGS.
The exchange notes will rank behind and be subordinate to all of our
existing and future senior debt and the guarantees will rank behind and be
subordinate to guarantor senior debt. In addition, the exchange notes
effectively will rank behind all liabilities of our nonguarantor subsidiaries.
If we become bankrupt, liquidate or dissolve, our assets would be available
to pay obligations on the exchange notes only after all payments had been made
on our senior debt. Similarly, if one of our subsidiary guarantors becomes
bankrupt, liquidates or dissolves, that subsidiary's assets would be available
to pay obligations on its guarantee only after payments have been made on its
guarantor senior debt. Because our senior debt must be paid first, you may
receive less than holders of senior debt in any bankruptcy proceeding,
liquidation or dissolution. In any of these cases, we cannot assure you that
sufficient assets will remain to make any payments on the exchange notes. See
"Description of the Notes -- Ranking."
If a payment default occurs with respect to our designated senior debt, we
cannot make payments on the exchange notes unless we cure the default or the
holder of the senior debt waives the default. Moreover, if any non-payment
default exists under our designated senior debt, we cannot make any cash
payments on the exchange notes for a period of up to 179 days in any 365 day
period, unless we cure the default, the holder of the senior debt waives the
default or rescinds acceleration of the debt, or we repay the debt in full. See
"Description of the Notes -- Ranking."
RESTRICTIONS IMPOSED BY THE NEW CREDIT FACILITY AND THE INDENTURE -- THE NEW
CREDIT FACILITY AND THE INDENTURE IMPOSE SIGNIFICANT OPERATING RESTRICTIONS ON
OUR BUSINESS.
The new credit facility restricts our ability to, among other things:
- incur additional debt,
- pay dividends and make distributions,
- create liens,
- guarantee other debt,
- merge or consolidate with third parties,
- prepay subordinated debt,
- enter into transactions with affiliates,
- make capital expenditures,
- repurchase stock,
- enter into sale and leaseback transactions, and
- transfer and sell assets.
The indenture restricts our ability to, among other things:
- incur additional debt,
- pay dividends and make distributions,
- create liens,
- guarantee other debt,
- merge or consolidate with third parties,
- enter into transactions with affiliates,
- repurchase stock and
- transfer and sell assets.
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<PAGE> 15
For information regarding our fixed charge coverage ratio under the notes
which we must meet in order to incur additional debt under the indenture, please
turn to the section entitled "Description of the Notes" and look under the
heading "Covenants" and the subheading "Limitation on Indebtedness" on page 70.
For information regarding various ratios we are required to meet under the new
credit facility, please turn to the Section entitled "Description of
Indebtedness" look under the heading "The New Credit Facility" and the
subheading "Affirmative, Negative and Financial Covenants" on page 59.
SECURITY -- THE EXCHANGE NOTES WILL NOT BE SECURED BY ANY OF OUR ASSETS AND THE
NEW CREDIT FACILITY WILL BE SECURED BY SUBSTANTIALLY ALL OF OUR ASSETS.
The exchange notes will not be secured by any of our assets. However, the
new credit facility will be secured by substantially all of the assets of
Sleepmaster and its domestic subsidiaries. Additionally, the terms of the
indenture and the instruments governing Sleepmaster and its subsidiaries' other
debt permit Sleepmaster and its subsidiaries to incur additional secured debt.
If we become insolvent or are liquidated, or if payment under any of the
instruments governing our secured debt is accelerated, the lenders under those
instruments would be entitled to exercise the remedies available to a secured
lender under applicable law and pursuant to instruments governing the debt.
Accordingly, the lenders will have a prior claim on our assets. In any event,
because the exchange notes will not be secured by any of our assets, it is
possible that there would be no assets remaining from which claims of the
holders of the notes could be satisfied or, if any assets remained, the assets
might be insufficient to satisfy the claims in full.
INTEGRATION OF THE RECENT ACQUISITIONS -- WE MAY NOT HAVE SUFFICIENT MANAGEMENT
AND FINANCIAL RESOURCES TO INTEGRATE AND CONSOLIDATE THE RECENTLY ACQUIRED
SUBSIDIARIES AND ANY FUTURE ACQUISITIONS, AND WE MAY BE UNABLE TO OPERATE
PROFITABLY OUR CONSOLIDATED COMPANY.
We acquired Palm Beach on March 3, 1998, Herr on February 26, 1999 and Star
on May 18, 1999. The integration and consolidation of the recently acquired
companies and any future acquisitions have required and will continue to require
substantial management and financial resources. The diversion of these resources
and the increased size of Sleepmaster and its subsidiaries may make it more
difficult for us to operate our business as we have in the past. While we
believe that our financial and management resources are sufficient to accomplish
any integration of the recently acquired companies, we may not have sufficient
funds and management may not have the time to accomplish this integration and
any attempt to integrate the recently acquired companies may reduce our focus on
Sleepmaster's New Jersey-based business and thus affect the New Jersey business
operations.
In addition, the increased size of our consolidated company following our
recent acquisitions may pose different and greater operational challenges than
we have experienced in the past. We had net sales of $67.5 million in fiscal
year 1997 compared to pro forma net sales of $151.7 million in fiscal year 1998.
We believe that the recently acquired subsidiaries will enhance our competitive
position and the business prospects of Sleepmaster and its subsidiaries.
However, due to our increased size and entry into new markets about which we are
less familiar we cannot assure you that competitive advantages will be realized,
that the combination of Sleepmaster and its subsidiaries and the recently
acquired companies will be successful or that management will be able to
profitably operate Sleepmaster and its subsidiaries following any integration.
Any future acquisitions may result in significant transaction expenses and risks
associated with entering new markets in addition to the integration and
consolidation risks described above. As was the case with our newly acquired
subsidiaries, we may not have sufficient management and financial resources to
integrate any future acquisitions and we may be unable to profitably operate
Sleepmaster and its subsidiaries.
FUTURE ACQUISITIONS -- WE MAY NOT BE ABLE TO SUCCESSFULLY IDENTIFY AND CLOSE
FUTURE ACQUISITIONS.
We may not be able to successfully identify and close future acquisitions.
We engage in evaluations of potential acquisitions continuously and are in
various stages of discussion regarding these possible acquisitions. Currently,
there are no executed agreements or letters of intent with respect to any
material acquisition.
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<PAGE> 16
Although other potential acquisition candidates fit our acquisition
criteria, we may not be able to complete any acquisitions in the future or
identify those candidates that would result in the most successful combinations.
In addition, we may not be able to complete future acquisitions at acceptable
prices and terms, and increased competition for acquisition candidates could
result in fewer acquisition opportunities and higher acquisition prices. Also,
in order to acquire any Serta licensee, we would need the approval of the Serta
board of directors and/or shareholders depending on the structure of the
acquisition. The magnitude, timing and nature of future acquisitions will depend
upon various factors, including:
- availability of suitable acquisition candidates,
- competition with other bedding manufacturers for suitable acquisitions,
- the negotiation of acceptable terms,
- our financial capabilities,
- the availability of skilled employees to manage and operate the acquired
companies,
- our ability to obtain the approval of the Serta board of directors or
shareholders regarding the acquisition of any Serta licensee, and
- general economic and business conditions.
We expect to finance acquisitions with cash on hand, through issuance of
debt or equity securities, including the exchange notes, and through borrowings
under credit arrangements, including pursuant to the new credit facility.
However, we may not be able to obtain additional financing in order to finance
future acquisitions. The ability to obtain debt or equity financing is subject
to market conditions. Using cash to complete acquisitions could substantially
limit our operating or financial flexibility. If we are unable to obtain
financing on acceptable terms, we may be required to reduce significantly the
scope of our presently anticipated expansion, which could have a significant
negative affect on our profitability.
INFORMATION SYSTEMS AND ACCOUNTING PERSONNEL -- ANY FAILURE TO IMPLEMENT OUR NEW
MANAGEMENT INFORMATION SYSTEMS AND HIRE ADDITIONAL PERSONNEL COULD HAVE A
SIGNIFICANT NEGATIVE EFFECT ON OUR ABILITY TO RUN OUR BUSINESS.
As a result of our recent growth we will need to upgrade our management
information systems. We intend to invest up to approximately $2.0 million in
total to replace and upgrade our domestic computer system software and hardware
during fiscals 1999 and 2000. Implementation of these new systems is expected to
be completed at our Linden, New Jersey facility in the third quarter of fiscal
1999 and will later be expanded to our other facilities. Moreover, given our
growth we may need to hire additional accounting personnel and upgrade our
accounting reporting systems to that required of a public company. Any failure
to fully implement our new systems could harm us by preventing us from meeting
our customers' requirements for electronic data interchange, which could cause
us to lose business and make it more difficult to get new business. Any failure
to hire additional accounting personnel could result in current personnel not
having adequate time to fulfill all of the duties Sleepmaster and its
subsidiaries require. Any failure to upgrade our accounting reporting systems
could result in delays in the completion of our financial statements, which
could make it difficult for us to meet our reporting obligations.
DEPENDENCE ON KEY SALES PERSONNEL -- LOSS OF KEY SALES PERSONNEL AND OR FAILURE
TO IDENTIFY AND RECRUIT HIGHLY QUALIFIED MANAGEMENT PERSONNEL COULD MAKE IT MORE
DIFFICULT FOR US TO GENERATE CASH FLOW FROM OPERATIONS AND SERVICE OUR DEBT.
Our success depends in large part on the services of our senior management
team. The loss of any of our key sales executives, including Charles Schweitzer
and Michael Reilly, could harm many of our client relationships, and thus our
sales. The employment agreements of most of our key executives expire on
November 1, 2001. However, employment agreements with key officers of our
recently acquired subsidiaries expire in February 2001, May 2002 and February
2004. We do not maintain key person life insurance policies on any of our
executive officers.
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<PAGE> 17
Our ability to manage our anticipated growth will also depend on our
ability to identify, hire and retain additional qualified management personnel.
In addition, as is typical in our industry, from time to time we experience
difficulty in finding employees to work in our factories. We may be unsuccessful
in attracting and retaining such personnel and failure could harm our
manufacturing ability and thus our sales.
COMPETITION -- THE HIGH LEVEL OF COMPETITION IN THE BEDDING INDUSTRY COULD MAKE
IT DIFFICULT FOR US TO GENERATE SUFFICIENT CASH FLOW TO SERVICE OUR DEBT.
The bedding industry is highly competitive, and we encounter competition
from several manufacturers in the domestic market. Three manufacturers,
including Serta, account for 54% of domestic wholesale mattress and box spring
shipments. The remaining 46% consists of six second tier companies and
approximately 800 independent and local regional manufacturers. Sealy and
Simmons are larger, have greater financial resources and spend more on
advertising than we do and may be better able to withstand a change in market
conditions within the bedding industry. In addition, their size and resources
enable them to target our markets through extensive advertising to gain market
share. We cannot assure you that we will be able to maintain or improve our
competitive position in the markets in which we compete.
CONCENTRATION OF CUSTOMERS -- A REDUCTION OR TERMINATION OF PURCHASES BY OUR TOP
TEN CUSTOMERS, WHICH ACCOUNT FOR A SIGNIFICANT AMOUNT OF OUR NET SALES, COULD
SIGNIFICANTLY REDUCE OUR ABILITY TO GENERATE SUFFICIENT CASH FLOW TO PAY
INTEREST ON THE EXCHANGE NOTES WHEN DUE.
We depend upon a decreasing number of significant customers for a large
percentage of our sales. The customer base of Sleepmaster and its subsidiaries
is concentrated. Specifically,
- sales to our largest customer (Sleepy's) accounted for approximately 10%
of sales in 1998 on a pro forma basis; and
- sales to our top ten customers accounted for approximately 46% of our net
shipments in 1998 on a pro forma basis.
We have recently experienced a substantial decline in sales to one of our
customers, Dial-a-Mattress. Dial-a-Mattress has informed us that it has reduced
purchases of our mattresses because of our unwillingness to sell them
Masterpiece mattresses. While we believe that Dial-a-Mattress will reconsider
its decision, we cannot assure you that this will be the case.
Our business also depends upon the financial viability of our customers,
who operate mainly within the retail industry. In recent years, the retail
bedding industry has experienced
(1) an increase in market share by larger retailers and
(2) a trend toward consolidation.
As a result, our retail customer base is decreasing and more of our retail sales
volume is becoming concentrated in these larger, consolidated retailers.
In addition, some of our customers have operated, and two customers
currently operate, under the protection of the federal bankruptcy laws. In the
future, retailers in the United States may consolidate, undergo restructurings
or reorganizations, or realign their affiliations, any of which could decrease
the number of stores that carry our products or increase the ownership
concentration within the retail industry. Some of these retailers may decide to
carry only one brand of mattress products which significantly reduce our
customer base and decrease our profitability. In addition, a significant
decrease or interruption in business from any of our significant retail
customers could result in write-offs or in the loss of future business and could
significantly reduce our profitability.
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<PAGE> 18
DEPENDENCE ON LEGGETT & PLATT -- WE DEPEND HEAVILY UPON LEGGETT & PLATT FOR
INNER SPRING UNITS.
Leggett & Platt is our primary vendor, supplying us with approximately 43%
of our raw materials in 1998, including inner spring units which are necessary
components in 85% of our mattresses. We do not have a contract with Leggett &
Platt. Although we attempt to reduce the risks of dependence on a single
external source, if Leggett & Platt were to discontinue or delay supplying our
inner spring units for any reason, the discontinuance or delay would impair our
ability to manufacture mattresses and box springs.
FLUCTUATIONS IN THE COST OF RAW MATERIALS -- FLUCTUATIONS IN THE COST OF RAW
MATERIALS COULD HARM US.
Possible fluctuations in the cost of raw materials could also adversely
affect our company. The major raw materials that we purchase for our production
process are innersprings, insulator pads, fabrics and roll goods consisting of
foam, fiber and non-wovens. The price and availability of these raw materials
are subject to market conditions affecting supply and demand. Our profitability
may be significantly negatively affected by increases in raw material costs to
the extent we are unable to pass on these higher costs to our customers.
DEPENDENCE ON SERTA -- WE DEPEND SIGNIFICANTLY ON CERTAIN INTELLECTUAL PROPERTY
THAT WE LICENSE FROM SERTA.
We license several trademarks from Serta, Inc., including the names Serta
and Perfect Sleeper, for use on mattresses and box springs. The loss or any
limitation on our right to use these names would significantly negatively affect
our ability to compete effectively with other companies.
There can be no assurance that the actions taken by us and Serta to
establish and protect the Serta trademarks will be adequate to protect their
value or to prevent imitation by others. Moreover, others may assert rights in,
or claim ownership of, the Serta trademarks and we may not be able to
successfully resolve those conflicts. Negative publicity related to the Serta
trademarks or our products or Serta products of other Serta licensees could have
a significant negative impact on our profitability, cash flow and ability to
service our debt.
Serta has the ability to terminate any of our licenses if we:
- fail to comply with Serta's by-laws, including the requirement to pay
royalties to Serta,
- fail to meet product specifications, or
- attempt to assign the license without the approval of the Serta board of
directors or, if board approval is not obtained or if the board takes no
action, the Serta shareholders. Under the license agreements, an
assignment is deemed to occur upon a change of control (including through
public equity offerings which result in a sale of more than 50% of our
equity) or upon the occurrence of bankruptcy events.
Although none of our licenses have been terminated in the past, and
although we have no reason to believe that any of our licenses will be
terminated in the future, there can be no assurance that a termination will not
occur. Any termination would have a significant negative impact on our
profitability cash flow and ability to service our debt.
EMPLOYEE MATTERS -- THE COLLECTIVE BARGAINING AGREEMENT COVERING EMPLOYEES AT
OUR LINDEN, NEW JERSEY FACILITY EXPIRES ON APRIL 30, 2000 AND STAR'S COLLECTIVE
BARGAINING AGREEMENT COVERING EMPLOYEES AT OUR CONCORD, ONTARIO, CANADA FACILITY
EXPIRES ON DECEMBER 31, 1999. THE EXPIRATION OF THESE AGREEMENTS AND ANY
EMPLOYEE WORK STOPPAGES OR STRIKES COULD IMPAIR OUR BUSINESS.
We could be adversely affected by employee work stoppages or strikes. As of
June 30, 1999, we had 795 full-time employees. We employ approximately 365
employees pursuant to collective bargaining agreements with the United Steel
Workers Union. Union contracts typically have a three-year term and we are
periodically in negotiation with this union. Although we believe our overall
relations with our union employees to be generally satisfactory, we may at some
point be subject to work stoppages and possibly
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<PAGE> 19
strikes by some of our employees. Any work stoppages or strikes could decrease
our cash flow and ability to service our debt.
CONTROLLING SHAREHOLDERS -- THE INTERESTS OF OUR CONTROLLING INTEREST HOLDERS
MAY BE IN CONFLICT WITH YOUR INTERESTS AS A HOLDER OF EXCHANGE NOTES. THIS COULD
RESULT IN CORPORATE DECISION MAKING THAT INVOLVES DISPROPORTIONATE RISKS TO THE
HOLDERS OF THE EXCHANGE NOTES, INCLUDING OUR ABILITY TO SERVICE OUR INDEBTEDNESS
OR PAY THE PRINCIPAL AMOUNT OF OUR INDEBTEDNESS WHEN DUE.
The interests of our controlling interest holders may be in conflict with
your interests as a holder of exchange notes. We are over 99.9% owned by
Sleepmaster Holdings L.L.C. Sleepmaster Holdings L.L.C. in turn is owned 74% by
Sleep Investor L.L.C. and 26% by our senior executives on a fully diluted basis.
Sleep Investor L.L.C. in turn is owned in part by Citicorp Venture Capital,
Ltd., CCT Partners IV, L.P., an affiliate of Citicorp Venture Capital, PMI
Mezzanine Fund, L.P. and other Citicorp Venture Capital investors. As a result,
Citicorp Venture Capital, CCT and the other Citicorp Venture Capital investors
own approximately 44% of our membership interests on a fully diluted basis.
Circumstances may occur in which the interests of Citicorp Venture Capital and
these other investors, as members of Sleepmaster Holdings and Sleep Investor and
as holders of exchange notes that rank behind these exchange notes, could be in
conflict with the interests of the holders of the exchange notes. In addition,
Citicorp Venture Capital and these other investors may have an interest in
pursuing acquisitions, divestitures or other transactions that, in their
judgment, could enhance their equity investment, even though these transactions
might involve disproportionate risks to the holders of the exchange notes.
YEAR 2000 ISSUE -- IF WE, OR THIRD PARTIES WITH WHICH WE DO BUSINESS, FAIL TO
COMPLY WITH YEAR 2000 REMEDIATION REQUIREMENTS, SLEEPMASTER AND ITS SUBSIDIARIES
COULD HAVE OPERATIONAL DIFFICULTIES THAT COULD INCREASE OUR COSTS OF DOING
BUSINESS, DECREASE OUR CASH FLOWS FROM OPERATIONS AND MAKE IT MORE DIFFICULT FOR
US TO SERVICE OUR DEBT.
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century for the year. For example, software
with date-sensitive functions that is not year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results. Currently, many computer systems and software
products are coded to accept only two-digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, many companies'
software and computer systems may need to be upgraded or replaced in order to
comply with the "Year 2000" requirements. If we, or third parties with which we
do business, fail to make each of our software systems Year 2000 compliant in a
timely manner, our cost of doing business could increase while our cash flow
from operations decreases. For a detailed discussion of our Year-2000 compliance
effort and the possible harm we could suffer, please see the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and look under the heading "Impact of the Year 2000 Issue" on page
34.
FINANCING CHANGE OF CONTROL OFFER -- WE MAY NOT HAVE THE ABILITY TO RAISE THE
FUNDS NECESSARY TO FINANCE THE REPURCHASE OPTION CONTAINED IN THE INDENTURE.
Upon the occurrence of specific kinds of change of control events described
in the Section entitled "Description of the Notes" under the heading "Purchase
Notes Upon a Change of Control," we will be required to offer to repurchase all
outstanding exchange notes. However, we may not have sufficient funds at the
time of the change of control to make the required repurchase of exchange notes
and restrictions in the new credit facility may not allow the repurchases. As of
June 30, 1999, our total debt was $121.4 million. In addition, corporate events,
such as a leveraged recapitalization that would increase the level of our debt,
would not constitute a change of control event under the indenture. The
following highly
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<PAGE> 20
leveraged transactions may not constitute a change of control but may adversely
affect holders of exchange notes:
(1) a reorganization,
(2) a restructuring, or
(3) a merger or similar transaction, including an acquisition of
Sleepmaster and Sleepmaster Finance Corporation by management or
affiliates, involving Sleepmaster and Sleepmaster Finance Corporation.
A transaction with management would not be a change of control so long as
no party other than management or Citicorp Venture Capital, Ltd. and its
affiliates acquired more than 50% of Sleepmaster's voting stock in the
transaction.
FRAUDULENT CONVEYANCE MATTERS -- FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER
SPECIFIC CIRCUMSTANCES, TO VOID GUARANTEES, SUBORDINATE CLAIMS IN RESPECT OF THE
EXCHANGE NOTES AND REQUIRE EXCHANGE NOTEHOLDERS TO RETURN PAYMENTS RECEIVED FROM
GUARANTORS.
Federal and state statutes allow courts, under specific circumstances, to
void guarantees, subordinate claims in respect of the exchange notes and require
noteholders to return payments received from guarantors. Under the federal
bankruptcy law and comparable provisions of state fraudulent transfer laws, the
guarantees of our subsidiary guarantors could be voided or claims in respect of
the exchange notes or the subsidiary guarantees could be junior to all of our
other debts or all other debts of our guarantor subsidiaries if, among other
things:
- we incurred the debt with the intent of hindering, delaying or defrauding
then-existing or future creditors,
- we received less than reasonably equivalent value or fair consideration
for incurring the debt and, at the time of the incurrence of the debt,
we:
- were insolvent or rendered insolvent by reason of the incurrence, or
- were engaged in a business or transaction for which the assets
remaining with Sleepmaster and its subsidiaries constituted
unreasonably small capital, or
- intended to incur, or believed that we would incur, debts beyond our
ability to pay as they would mature, or
- were a defendant in an action for money damages, or had a judgment for
money damages rendered against us, which after final judgment was
unsatisfied, or
- any subsidiary guarantor received less than reasonably equivalent value
or fair consideration for the incurrence of the subsidiary guarantee and,
at the time it incurred the debt evidenced by its subsidiary guarantee,
any subsidiary guarantor:
- was insolvent or rendered insolvent by reason of the incurrence, or
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital, or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay the debts as they mature.
In addition, any payment made by us or that subsidiary guarantor pursuant
to its subsidiary guarantee could be voided and required to be returned to us or
the subsidiary guarantor or to a fund for the benefit of our creditors or the
creditors of the subsidiary guarantor.
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The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a subsidiary guarantor
would be considered insolvent if:
- the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of its assets, or
- the present fair saleable value of its assets were less than the amount
that would be required in order to pay its probable liability on its
existing debts, including contingent liabilities, as they become absolute
and mature, or
- it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, we believe that we and each subsidiary guarantor, after
giving effect to its guarantee of these exchange notes, will not be insolvent,
will not have unreasonably small capital for the business in which it is engaged
and will not have incurred debts beyond its ability to pay the debts as they
mature. There can be no assurance, however, as to what standard a court would
apply in making those determinations or that a court would agree with our
conclusions in this regard.
NO PRIOR MARKET FOR EXCHANGE NOTES -- YOU CANNOT BE SURE THAT AN ACTIVE TRADING
MARKET WILL DEVELOP FOR THESE EXCHANGE NOTES WHICH COULD LIMIT THE LIQUIDITY OF
YOUR EXCHANGE NOTES.
Prior to this offering, there was no public market for these exchange
notes. We have been informed by the initial purchasers that they intend to make
a market in these exchange notes after this offering is completed. However, the
initial purchasers may cease their market-making at any time. In addition, the
liquidity of the trading market in these exchange notes, and the market price
quoted for these exchange notes, may be decreased by changes in the overall
market for high yield securities and by changes in our financial performance or
prospects or in the prospects for companies in our industry generally.
------------------------
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements, which are subject to risks,
uncertainties, and assumptions about Sleepmaster and its subsidiaries include,
among other things, statements regarding:
- our anticipated growth strategies and pursuit of potential acquisition
opportunities;
- our intention to introduce new products;
- anticipated trends in our businesses;
- our ability to integrate acquired businesses;
- future expenditures for capital projects, including our new management
information systems;
- our ability to continue to control costs and maintain quality; and
- our ability to implement our year 2000 compliance modifications.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
These forward-looking statements may be materially impacted by the factors
listed under "Risk Factors." In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this prospectus might not
occur.
USE OF PROCEEDS
Sleepmaster and Sleepmaster Finance Corporation will not receive any
proceeds from this exchange offer.
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<PAGE> 22
CAPITALIZATION
The following table sets forth the capitalization of Sleepmaster at June
30, 1999. This table should be read in conjunction with "Use of Proceeds,"
"Selected Historical Financial and Other Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and accompanying notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1999
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Total debt, including current portion:
Industrial revenue bonds(a)............................... $ 6,415
Notes offered hereby...................................... 115,000
--------
Total debt........................................ 121,415
--------
Redeemable cumulative preferred interests, 9,999.96 units
outstanding(b)............................................ 19,378
Members' deficit:
Common interests
Class A, 8,000 units outstanding....................... 1,640
Class B, no units outstanding.......................... --
Accumulated deficit....................................... (21,773)
--------
Total members' deficit............................ (20,133)
--------
Total capitalization......................... $120,660
========
</TABLE>
- ---------------
(a) We are financially obligated under Palm Beach's variable rate industrial
revenue bonds due 2016. The industrial revenue bonds are collateralized by
land and buildings of Palm Beach and an irrevocable letter of credit up to
$7.0 million.
(b) The redeemable cumulative preferred interests accrue dividends at a
compounded annual rate of 12.0%. In connection with the closing of the old
note offering, the parties to the Sleepmaster LLC operating agreement
amended the agreement to extend the redemption date of the redeemable
cumulative preferred interests to November 14, 2009. See "Certain
Relationships and Related Transactions -- Sleepmaster LLC Operating
Agreement."
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<PAGE> 23
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited consolidated pro forma financial information of
Sleepmaster has been prepared to give effect to the acquisitions of Palm Beach,
Herr and Star and the old note offering, including the application of the net
proceeds therefrom. The pro forma adjustments presented are based upon available
information and certain assumptions that Sleepmaster believes are reasonable.
The unaudited pro forma consolidated statements of income of Sleepmaster
for the year ended December 31, 1998 and the six months ended June 30, 1999 give
effect to the acquisitions of Palm Beach, Herr and Star and the old note
offering, including the application of the net proceeds therefrom, as if the
transactions had occurred as of January 1, 1998.
The pro forma financial data should be read in conjunction with the
historical consolidated financial statements of Sleepmaster, Palm Beach, Herr
and Star and accompanying notes thereto, "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial information included elsewhere in this prospectus. Sleepmaster
believes that the assumptions used in the following financial statements provide
a reasonable basis on which to present the unaudited pro forma data. The pro
forma financial data and related notes are provided for informational purposes
only and do not purport to be indicative of the financial position or results of
operations that would have actually been obtained had the acquisitions of Palm
Beach, Herr and Star and the old note offering been completed on the dates
indicated, or to project Sleepmaster's results of operations for any future date
or period.
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<PAGE> 24
SLEEPMASTER L.L.C.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS AS ADJUSTED
HISTORICAL FOR PALM BEACH, FOR PALM BEACH,
HISTORICAL PALM HISTORICAL HERR AND HERR AND HISTORICAL
SLEEPMASTER BEACH(B) HERR(D) OLD NOTE OFFERING OLD NOTE OFFERING STAR(M)
----------- ------------- ------------- ----------------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales...................... $110,251 $ 7,056 $19,385 $ (226)(e) $136,466 $15,236
Cost of sales.................. 68,988 4,338 11,587 (226)(e) 84,586 9,446
(101)(f)
-------- ------- ------- -------- -------
Gross profit................. 41,263 2,718 7,798 51,880 5,790
-------- ------- ------- -------- -------
Selling, general &
administrative expenses...... 25,794 1,739 6,545 76(g) 32,699 3,237
(1,455)(h)
Amortization of intangibles.... 1,223 -- 16 606(i) 1,845 --
-------- ------- ------- -------- -------
Operating income............. 14,246 979 1,237 17,336 2,553
Interest expense, net(a)....... 7,096 49 27 6,264(j) 13,436 17
Other (income) expense, net.... (18) (2,318) (150) 2,780(k) 294 --
-------- ------- ------- -------- -------
Income before income taxes
and extraordinary items.... 7,168 3,248 1,360 3,606 2,536
Provision for income taxes..... 3,020 1,366(c) 532 (3,431)(l) 1,487 935
-------- ------- ------- -------- -------
Income before extraordinary
items........................ $ 4,148 $ 1,882 $ 828 $ 2,119 $ 1,601
======== ======= ======= ======== =======
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS AS
FOR STAR ADJUSTED
----------- ---------
<S> <C> <C>
Net sales...................... $151,702
Cost of sales.................. 94,032
--------
Gross profit................. 57,670
--------
Selling, general &
administrative expenses...... 35,936
Amortization of intangibles.... 385(n) 2,230
--------
Operating income............. 19,504
Interest expense, net(a)....... (17)(o) 13,436
Other (income) expense, net.... 294
--------
Income before income taxes
and extraordinary items.... 5,774
Provision for income taxes..... (155)(p) 2,267
--------
Income before extraordinary
items........................ $ 3,507
========
</TABLE>
20
<PAGE> 25
SLEEPMASTER L.L.C.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS AS ADJUSTED PRO FORMA
HISTORICAL HISTORICAL FOR HERR AND FOR HERR AND HISTORICAL ADJUSTMENTS PRO FORMA
SLEEPMASTER HERR(B) OLD NOTE OFFERING OLD NOTE OFFERING STAR(M) FOR STAR AS ADJUSTED
----------- ---------- ----------------- ----------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $73,987 $2,748 $ (24)(e) $76,711 $5,753 $82,464
Cost of sales........ 46,070 1,697 (24)(e) 47,739 3,533 51,272
(4)(f)
------- ------ ------- ------ -------
Gross profit......... 27,917 1,051 28,972 2,220 31,192
------- ------ ------- ------ -------
Selling general &
administrative
expenses........... 18,208 739 18,947 1,188 20,135
Amortization of
intangibles........ 836 3 82(i) 921 -- 192(n) 1,113
------- ------ ------- ------ -------
Operating income..... 8,873 309 9,104 1,032 9,944
------- ------ ------- ------ -------
Interest expense,
net(a)............. 4,876 2 1,886(j) 6,764 9 (9)(o) 6,764
Other (income)
expense, net....... (36) (16) (52) (9) (61)
------- ------ ------- ------ -------
Income before income
taxes and
extraordinary
items.............. 4,033 323 2,392 1,032 3,241
------- ------ ------- ------ -------
Provision for income
taxes.............. 1,717 126 (825)(l) 1,018 351 (77)(p) 1,292
------- ------ ------- ------ -------
Income before
extraordinary
items.............. $ 2,316 $ 197 $ 1,374 $ 681 $ 1,949
======= ====== ======= ====== =======
</TABLE>
21
<PAGE> 26
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
The pro forma consolidated statements of income for the year ended December
31, 1998 and the six months ended June 30, 1999 give effect to the following pro
forma adjustments:
(a) Interest expense, net includes the amortization of deferred debt
issuance costs of $517 and $259 for the year ended December 31, 1998
and the six months ended June 30, 1999, respectively.
(b) For the year ended December 31, 1998 -- represents the results of
operations of Palm Beach prior to its acquisition for the period from
January 1, 1998 through March 2, 1998. For the six months ended June
30, 1999 -- represents the results of operations of Herr prior to its
acquisition for the period from January 1, 1999 to February 25, 1999.
(c) Represents an adjustment to income tax expense (42.0% effective rate)
as a result of including the results of operations of Palm Beach
indicated in adjustment (b). Prior to the acquisition, Palm Beach was
taxed as a small business corporation whereby profits and losses were
passed directly to the shareholders for inclusion in their personal
income tax returns.
(d) Derived from the audited financial statements of Herr for the year
ended December 31, 1998, included elsewhere in this prospectus.
(e)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
<S> <C> <C>
Elimination of intercompany sales transactions $226 $24
</TABLE>
(f)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- --------------
<S> <C> <C>
Decreased depreciation expense of Herr's factory $101 $4
machinery and equipment based upon the application
of the straight-line method of depreciation, in
conformity with Sleepmaster's accounting policy,
compared with an accelerated method used in the
historical financial statements of Herr
</TABLE>
(g) Represents legal expenses associated with the debt incurred in
connection with the acquisition of Herr.
(h) Represents the elimination of costs incurred by Herr that Sleepmaster
has not assumed:
<TABLE>
<S> <C>
Interest expense associated with deferred compensation
arrangements with certain officers and stockholders....... $ 125
Compensation for certain officers/stockholders of Herr to
reflect new contractual arrangements for officers'
compensation. This adjustment is solely as a result of
changed circumstances that will exist after the
acquisition. The duties and responsibilities of the
officers will not be diminished or cause other costs to be
incurred to offset the pro forma adjustment to
compensation expense...................................... 1,330
------
Total............................................. $1,455
------
</TABLE>
(i) Represents the amortization over 40 years of the excess of purchase
price over the estimated fair values of the net assets acquired of
Palm Beach and Herr as follows.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
Palm Beach for the period from January 1, 1998 through
March 2, 1998, and Herr for the year ended December 31,
1998................................................... $606
</TABLE>
22
<PAGE> 27
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1999
--------------
<S> <C>
Herr for the period from January 1, 1999 through February
25, 1999............................................... $82
</TABLE>
(j) Represents adjustments to interest expense:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
<S> <C> <C>
Interest expense on the notes....................... $12,650 $ 4,779
Amortization of issuance costs associated with the
old note offering over the life of the notes...... 517 214
Elimination of interest expense as a result of the
repayment of certain indebtedness with the
proceeds from the old note offering. Pro forma
interest expense associated with debt incurred in
connection with the acquisitions of Palm Beach and
Herr has not been included herein since the
acquisition debt is assumed to be repaid from the
proceeds from the old note offering............... (6,622) (2,860)
Elimination of amortization expense of debt issuance
costs as a result of the write-off thereby due to
early repayment of certain indebtedness. Pro forma
amortization of debt issuance costs associated
with incremental debt incurred in connection with
the acquisition of Herr, except for legal fees
associated with the incremental borrowing which
have been charged to selling, general and
administrative expenses for the year ended
December 31, 1998 (adjustment (g)), has not been
included herein since the debt issuance costs are
assumed to be written off when the associated debt
is repaid from the proceeds from the old note
offering.......................................... (281) (247)
------- -------
Total..................................... $ 6,264 $ 1,886
======= =======
</TABLE>
(k) Represents an adjustment to eliminate a gain recorded by Palm Beach
from the sale of a building prior to the acquisition. The building was
sold to an unrelated third party.
(l) Represents an adjustment to income tax expense for the effects of the
aforementioned adjustments (e) through (k) (42.0% effective rate for
the year ended December 31, 1998 and for the six months ended June
30, 1999).
(m) Derived from the audited financial statements of Star for the year
ended December 31, 1998 included elsewhere in this prospectus and from
the unaudited financial statements of Star for the period from January
1, 1999 through May 18, 1999.
(n)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
<S> <C> <C>
Amortization over 40 years of the excess of
purchase price over the estimated fair values of
the net assets acquired of Star................... $385 $192
</TABLE>
(o)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
<S> <C> <C>
Elimination of interest expense associated with
debt of Star not assumed by Sleepmaster........... $17 $9
</TABLE>
(p) Represents an adjustment to income tax expense for the effects of the
aforementioned adjustments (n) and (o) (42.0% effective rate for the
year ended December 31, 1998 and for the six months ended June 30,
1999).
23
<PAGE> 28
SELECTED HISTORICAL FINANCIAL AND OTHER DATA
The following table sets forth our historical selected consolidated
financial and other data. The historical consolidated financial information for
the fiscal years ended December 31, 1998, December 31, 1997 and December 31,
1996 has been derived from, and should be read in conjunction with, the audited
consolidated financial statements of Sleepmaster and its subsidiaries. The
financial information as of and for the fiscal years ended December 31, 1995 and
December 31, 1994 has been derived from our internal financial records and is
unaudited but, in the opinion of our management, includes all adjustments
considered necessary for the fair presentation of our financial condition and
results of operations for those periods and as of those dates. The condensed
financial data for the six months ended June 30, 1999 and 1998 is unaudited but,
in our opinion, includes all adjustments, consisting only of normal recurring
adjustments considered necessary for the fair presentation of the information.
The results of operations for interim periods are not necessarily indicative of
the results to be expected for the full year.
The selected consolidated financial data should be read in conjunction with
the historical consolidated financial statements of Sleepmaster and accompanying
notes thereto, "Unaudited Pro Forma Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------ --------------------
1994 1995 1996 1997 1998 1998 1999
------- -------- -------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales............................ $47,575 $ 55,044 $ 59,763 $67,472 $110,251 $ 47,503 $ 73,987
Gross profit......................... 16,565 20,347 22,265 25,024 41,263 17,495 27,917
Selling, general and administrative
expenses........................... 12,561 13,965 14,130 15,044 25,794 11,108 18,208
Amortization of intangibles.......... 423 676 644 644 1,223 559 836
Operating income..................... 3,582 5,707 7,491 9,336 14,246 5,828 8,873
Interest expense, net(a)............. 308 2,304 2,578 4,663 7,096 3,424 4,876
Other (income) expense, net.......... (114) 188 216 (97) (18) (8) (36)
Income before income taxes and
extraordinary items................ 3,389 3,214 4,697 4,770 7,168 2,412 4,033
Net income (loss).................... 3,389 3,214 4,606 2,757 4,148 1,390 (851)
BALANCE SHEET DATA (AT END OF
PERIOD):
Net working capital(b)............... $ 1,160 $ (553) $ 736 $ 309 $ 2,749 $ 3,079 $ 7,647
Total assets......................... 14,704 29,813 48,634 47,339 89,540 90,180 142,869
Total debt........................... 3,900 17,989 44,031 39,102 70,696 76,454 121,415
Redeemable cumulative preferred
interests.......................... -- -- 14,221 15,927 18,267 17,257 19,378
Members' equity (deficit)............ 4,240 2,717 (21,116) (20,092) (17,517) (19,268) (20,133)
OTHER DATA:
Gross margin......................... 34.8% 37.0% 37.3% 37.1% 37.4% 36.8% 37.7%
Adjusted EBITDA (c).................. $ 4,348 $ 6,793 $ 8,534 $10,429 $ 16,335 $ 6,774 $ 10,365
Adjusted EBITDA margin............... 9.1% 12.3% 14.3% 15.5% 14.8% 14.3% 14.0%
Depreciation and amortization........ $ 766 $ 1,086 $ 1,043 $ 1,093 $ 2,089 $ 946 $ 1,492
Capital expenditures................. $ 1,380 $ 292 $ 167 $ 572 $ 1,095 $ 559 $ 1,971
Cash flows from operating
activities......................... $ 2,860 $ 6,612 $ 5,583 $ 6,036 $ 8,874 $ 2,485 $ 4,159
Cash flows from investing
activities......................... $(1,293) $(25,235) $ (167) $ (505) $(33,851) $(33,361) $(43,430)
Cash flows from financing
activities......................... $(1,249) $ 18,880 $ (6,129) $(4,955) $ 24,548 $ 30,431 $ 40,540
Ratio of earnings to fixed
charges(d)......................... 7.20x 2.25x 2.64x 1.97x 1.96x 1.67x 1.79x
</TABLE>
- ---------------
(a) Interest expense, net includes the amortization of deferred debt issuance
costs of $15, $60, $391, $170 and $281 for the years ended December 31,
1994, 1995, 1996, 1997 and 1998, respectively, and $211 and $291 for the six
months ended June 30, 1998 and 1999, respectively.
(b) Represents total current assets, excluding cash and cash equivalents, less
total current liabilities, excluding current portion of long-term debt.
(c) Adjusted EBITDA represents, for any period, net income before interest
expense, income taxes, depreciation and amortization and other non-operating
income/expense. Adjusted EBITDA is presented because it is a
24
<PAGE> 29
widely accepted financial indicator of a company's ability to service and/or
incur indebtedness. We believe that presentation of Adjusted EBITDA may be
helpful to investors. However, Adjusted EBITDA should not be considered an
alternative to net income as a measure of Sleepmaster's operating results or
to cash flows as a measure of liquidity. In addition, although the Adjusted
EBITDA measure of performance is not recognized under generally accepted
accounting principles, it is widely used by industrial companies as a
general measure of a company's operating performance because it assists in
comparing performance on a relatively consistent basis across companies
without regard to depreciation and amortization, which can vary
significantly depending on accounting methods, particularly where
acquisitions are involved, or non-operating factors such as historical cost
bases. Because Adjusted EBITDA is not calculated identically by all
companies, the presentation in this prospectus may not be comparable to
other similarly titled measures of other companies.
The following is a reconciliation of net income to Adjusted EBITDA:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ -----------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income before extraordinary
items............................ $3,389 $3,214 $4,606 $ 2,757 $ 4,148 $1,390 $ 2,316
Interest expense................... 308 2,304 2,578 4,663 7,096 3,424 4,876
Provision for income taxes......... -- -- 91 2,013 3,020 1,022 1,717
Depreciation....................... 342 411 399 449 866 387 656
Amortization....................... 423 676 644 644 1,223 559 836
------ ------ ------ ------- ------- ------ -------
EBITDA............................. 4,462 6,605 8,318 10,526 16,353 6,782 10,401
------ ------ ------ ------- ------- ------ -------
Commissions earned on sales to
other Serta licensee customers... (56) (32) (33) (30) (33) (23) (71)
Distributions to former
shareholder...................... -- 285 189 -- -- -- --
Other, net......................... (58) (65) 60 (67) 15 15 35
------ ------ ------ ------- ------- ------ -------
Other (income) expense............. (114) 188 216 (97) (18) (8) (36)
------ ------ ------ ------- ------- ------ -------
Adjusted EBITDA.................... $4,348 $6,793 $8,534 $10,429 $16,335 $6,774 $10,365
====== ====== ====== ======= ======= ====== =======
</TABLE>
(d) In calculating the ratio of earnings to fixed charges, earnings consist of
income before taxes plus fixed charges. Fixed charges consist of interest
expense and amortization of issuance costs, whether capitalized or expensed,
plus one-third of rental expense under operating leases, the portion that
has been deemed by Sleepmaster and its Subsidiaries to be representative of
an interest factor.
25
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH
"FORWARD-LOOKING STATEMENTS" AND "RISK FACTORS," AS WELL AS THE MORE DETAILED
INFORMATION IN THE HISTORICAL FINANCIAL STATEMENTS AND UNAUDITED PRO FORMA
FINANCIAL DATA, INCLUDING THE RELATED NOTES, APPEARING ELSEWHERE IN THIS
PROSPECTUS. ALL REFERENCES TO YEARS RELATE TO THE FISCAL YEAR THAT ENDED ON
DECEMBER 31 OF THAT YEAR.
GENERAL
We are a leading manufacturer and distributor of a full line of
conventional bedding, mattresses and box springs marketed under the well-known
brand names of Serta, Serta Perfect Sleeper, Sertapedic and Masterpiece. Serta,
Inc., through its licensees, is the second largest manufacturer of conventional
bedding products in the United States, with a domestic market share of
approximately 17% in 1998. We are the second largest Serta licensee in North
America with approximately a 22% market share in our domestic licensed
territories in 1998. Sleepmaster was founded in Newark, New Jersey in 1910 and
became a Serta licensee for the metropolitan New York area, including Fairfield
County in Connecticut, and northern New Jersey in 1966.
Prior to November 14, 1996, Sleepmaster was a limited liability company
primarily owned by Sleepmaster Holdings L.L.C., a holding company then owned by
management of Sleepmaster and an investor group. On November 14, 1996,
Sleepmaster entered into a recapitalization agreement with a new group of
investors led by Citicorp Venture Capital and PMI Mezzanine Fund, LLP, pursuant
to which the new investor group, Sleep Investor L.L.C., paid cash and issued
promissory notes to effect a leveraged recapitalization of Sleepmaster. As a
result of the recapitalization, Sleep Investor acquired a 72.0% interest in
Sleepmaster Holdings L.L.C. Sleepmaster Holdings L.L.C., in turn, holds over
99.9% of Sleepmaster. In connection with the recapitalization, Sleepmaster
received funding in the form of equity invested by Sleep Investor and current
management, proceeds from the issuance of senior subordinated notes and
borrowings under a credit facility.
Since the recapitalization, we have acquired the stock of Palm Beach on
March 3, 1998, the stock of Herr on February 26, 1999 and substantially all of
the assets of Star on May 18, 1999. The aggregate consideration for these three
acquisitions totaled approximately $80 million. In connection with these
transactions, we entered into employment contracts with the executive management
of Palm Beach, Herr and Star so that the existing management would continue to
operate their respective facilities and licensed territories.
Star is a leading manufacturer and distributor of the full line of Serta
brand mattresses and box springs and owns the rights to manufacture and sell
Serta products in substantially all of Ontario, Canada. Similar to Palm Beach
and Herr, Star distributes its products primarily through leading retailers
including furniture stores, sleep specialists, local retail outlets, department
stores and other institutional customers. Star has captured approximately an 11%
market share of bedding products sold in the Ontario region, approximately a 28%
increase over its market share in 1997. For the fiscal year ended December 31,
1998, Star's net sales were $15.2 million and its EBITDA was $2.7 million. For
the first quarter of 1999, Star's net sales were $3.8 million and its EBITDA was
$0.7 million.
26
<PAGE> 31
RESULTS OF OPERATIONS
The following table sets forth certain operating data of Sleepmaster as a
percentage of net sales for the fiscal years ended December 31, 1996, 1997 and
1998 and for the six months ended June 30, 1998 and 1999.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
---------------------------------------------------------
FOR THE SIX
FOR THE FISCAL YEARS FOR THE QUARTER MONTHS ENDED
ENDED DECEMBER 31, ENDED JUNE 30, JUNE 30,
--------------------- --------------- -------------
1996 1997 1998 1998 1999 1998 1999
----- ----- ----- ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 62.7 62.9 62.6 62.7 62.4 63.2 62.3
----- ----- ----- ----- ----- ----- -----
Gross profit.............................. 37.3 37.1 37.4 37.3 37.6 36.8 37.7
Operating expenses:
Selling, general and administrative
expenses................................ 23.6 22.3 23.4 23.4 24.7 23.4 24.6
Amortization of intangibles............... 1.1 1.0 1.1 1.3 1.1 1.2 1.1
----- ----- ----- ----- ----- ----- -----
Total operating expenses.................. 24.7 23.3 24.5 24.7 25.8 24.6 25.7
----- ----- ----- ----- ----- ----- -----
Operating income.......................... 12.6 13.8 12.9 12.6 11.8 12.2 12.0
Interest expense, net..................... 4.3 6.9 6.4 7.2 7.2 7.2 6.6
Other (income) expense, net............... 0.4 (0.1) -- -- 0.1 -- --
----- ----- ----- ----- ----- ----- -----
Income before income taxes and
extraordinary items..................... 7.9 7.1 6.5 5.4 4.5 5.0 5.4
Provision for income taxes................ 0.2 3.0 2.7 2.3 2.1 2.0 2.3
----- ----- ----- ----- ----- ----- -----
Income before extraordinary items......... 7.7 4.1 3.8 3.1 2.4 3.0 3.1
Extraordinary items....................... -- -- -- -- (8.0) -- (4.3)
----- ----- ----- ----- ----- ----- -----
Net income (loss)......................... 7.7% 4.1% 3.8% 3.1% (5.6)% 3.0% (1.2)%
===== ===== ===== ===== ===== ===== =====
Depreciation expense...................... 0.7% 0.7% 0.8% 0.8% 0.9% 0.8% 0.9%
Adjusted EBITDA........................... 14.3% 15.5% 14.8% 14.7% 13.8% 14.3% 14.0%
</TABLE>
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AS COMPARED TO THREE AND SIX MONTHS
ENDED JUNE 30, 1998
NET SALES
Net sales increased by 46.9%, or $12.7 million, to $39.8 million in the
three months (second quarter) ended June 30, 1999 from $27.1 million in the
second quarter of 1998 and rose 55.8%, or $26.5 million, to $74.0 million in the
six months (first half) ended June 30, 1999 from $47.5 million in the first half
of 1998. A significant portion of the increase in both the second quarter and
first half of 1999 was due to the contributions of net sales from Herr, acquired
on February 26, 1999, and Star, acquired on May 18, 1999. Herr contributed $6.0
million and $7.9 million of net sales in the second quarter and first half of
1999, respectively, and Star contributed $2.3 million of net sales in the second
quarter and first half of 1999. Excluding the acquisitions of Herr and Star, net
sales increased by 16.3%, or $4.4 million, in the second quarter of 1999 and by
34.2%, or $16.3 million, in the first half of 1999. This increase was due to
higher unit sales volumes and higher average unit selling prices due to shifts
in product sales mix towards higher priced products and also the introduction of
the new Masterpiece line of bedding products in 1999. Strong competitive
pressures impacted sales growth in the Northeastern United States (which
increased 8.5% in the second quarter and 6.9% in the first half) but this was
more than offset by substantial sales gains in the Florida market.
COST OF SALES
Cost of sales increased by 46.1%, or $7.8 million, to $24.8 million in the
second quarter of 1999 from $17.0 million in the second quarter of 1998 and by
53.5%, or $16.1 million, to $46.1 million in the first
27
<PAGE> 32
half of 1999 from $30.0 million in the first half of 1998. Cost of sales as a
percentage of net sales decreased to 62.4% in the second quarter of 1999 from
62.7% in the second quarter of 1998 and decreased to 62.3% in the first half of
1999 from 63.2% in the first half of 1998. The reduction of cost of sales as a
percentage of net sales in both the second quarter and first half of 1999 was
primarily due to the impact of higher margin business generated by Palm Beach
and Herr. These higher margins were offset by an increase in Sleepmaster's
manufacturing costs associated with the development and introduction of the
Masterpiece line of bedding products in the first quarter of 1999 which
continued into the second quarter of 1999. Sleepmaster was successful in
obtaining volume-related cost savings from vendors as a result of the
acquisitions of Palm Beach, Herr and Star which serve to reduce purchase costs
and hence reduce the ratio of cost of sales to net sales. The Company's ongoing
gross profit and pricing strategy is to focus product sales mix towards higher
priced and higher margin units and to continue to leverage purchase volumes to
drive volume-related purchase discounts, thereby reducing cost of sales as a
percentage of net sales and increasing margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by 54.9%, or $3.5
million, to $9.8 million in the second quarter of 1999 from $6.3 million in the
second quarter of 1998 and by 63.9%, or $7.1 million, to $18.2 million in the
first half of 1999 from $11.1 million in the first half of 1998. Selling,
general and administrative expenses as a percentage of net sales increased to
24.7% in the second quarter of 1999 from 23.4% in the second quarter of 1998 and
to 24.6% in the first half of 1999 from 23.4% in the first half of 1998. Several
factors contributed to the increase in selling, general and administrative
expenses as a percentage of net sales: (1) Palm Beach and Herr have higher fixed
cost bases than Sleepmaster and the second quarter of 1999 includes the full
impact of Herr's fixed cost base on the consolidated results; (2) Herr, included
in the Company's consolidated results for the full second quarter, and Palm
Beach have higher delivery expenses as a percentage of net sale due to the large
geographical territories they service compared with that of Sleepmaster. These
costs were offset by Sleepmaster's ability to leverage its fixed delivery costs
per unit with higher average unit selling prices at its Linden facility; and (3)
Palm Beach has certain contractual employment arrangements scheduled to expire
in March 2000 that contributed to the increase in selling, general and
administrative expenses as a percentage of net sales. Management's ongoing
objective is to reduce this expense ratio by leveraging its fixed expense base.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased by $0.1 million to $0.4 million in
the second quarter of 1999 from $0.3 million in the second quarter of 1998 and
by $0.2 million to $0.8 million in the first half of 1999 from $0.6 million in
the first half of 1998. These increases were due to the acquisitions of Palm
Beach on March 3, 1998, Herr on February 26, 1999 and Star on May 18, 1999.
OPERATING INCOME
Operating income increased by 37.3%, or $1.3 million, to $4.7 million in
the second quarter of 1999 from $3.4 million in the second quarter of 1998 and
by 52.3%, or $3.1 million, to $8.9 million in the first half of 1999 from $5.8
million in the first half of 1998. As a result of the above factors, operating
income as a percentage of net sales decreased to 11.8% in the second quarter of
1999 from 12.6% in the second quarter of 1998 and to 12.0% in the first half of
1999 from 12.2% in the first half of 1998.
INTEREST EXPENSE, NET
Interest expense increased by 46.3%, or $0.9 million, to $2.8 million in
the second quarter of 1999 from $1.9 million in the second quarter of 1998 and
by 42.4%, or $1.5 million, to $4.9 million in the first half of 1999 from $3.4
million in the first half of 1998. This increase was due to the cost of
additional debt financing incurred for the acquisitions of Palm Beach and Herr
and the issuance of senior subordinated notes on May 18, 1999. See "-- Liquidity
and Capital Resources". On the basis of current plans, management expects
interest expense for the remaining quarters of 1999 to be higher than the prior
periods.
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<PAGE> 33
PROVISION FOR INCOME TAXES
The provision for income taxes increased by $0.2 million, to $0.8 million,
in the second quarter of 1999 from $0.6 million in the second quarter of 1998
and by $0.7 million, to $1.7 million, in the first half of 1999 from $1.0
million in the first half of 1998. The provision for income taxes resulted in an
effective tax rate of 47.0% and 42.6% in the second quarter and first half of
1999, respectively, compared with 42.0% and 42.4% for the corresponding periods
in the prior year. The increase in the effective tax rate in the second quarter
of 1999 is primarily due to the acquisition of Herr. The goodwill associated
with the acquisition of Herr is not deductible for tax purposes since the
Company acquired the capital stock of Herr, thereby increasing the effective tax
rate.
EXTRAORDINARY ITEMS
The extraordinary items recorded in the second quarter of 1999 consisted of
the payment of $3.6 million in premiums on the redemption of $20 million in
aggregate principal amount of Series A and Series B 12% Senior Subordinated
Notes and the repayment of $69.2 million of borrowings under the Company's
former credit facility, together with the write-off of $1.9 million of
unamortized debt issuance costs relating to such redemption and repayment on May
18, 1999. See "-- Liquidity and Capital Resources". There were no extraordinary
items incurred during 1998.
NET INCOME (LOSS)
As a result of the above factors, the Company recorded a net loss of $2.2
million for the second quarter of 1999 compared with net income of $0.9 million
for the second quarter of 1998 and a net loss of $0.9 million for the first half
of 1999 compared with net income of $1.4 million for the first half of 1998.
FISCAL 1998 AS COMPARED TO FISCAL 1997
NET SALES
Net sales increased by 63.4%, or $42.8 million, to $110.3 million in 1998
from $67.5 million in 1997. This increase was primarily due to the acquisition
of Palm Beach which contributed ten months of sales totaling $37.1 million.
Excluding the acquisition of Palm Beach, net sales increased by 8.4%, or $5.7
million, to $73.2 million in 1998 from $67.5 million in 1997. This increase was
primarily attributable to higher unit volumes in 1998. There was also an
increase in average unit selling prices due to a change in product sales mix to
higher priced products.
COST OF SALES
Cost of sales increased by 62.7%, or $26.6 million, to $69.0 million in
1998 from $42.4 million in 1997. Cost of sales as a percentage of net sales
decreased to 62.6% in 1998 from 62.9% in 1997. This improvement was primarily
due to higher margin business generated by Palm Beach. These higher margins,
which serve to reduce cost of sales as a percentage of net sales, were partially
offset by an increase in Sleepmaster's manufacturing costs in 1998. As a result
of the Palm Beach acquisition, Sleepmaster was also able to realize cost savings
on raw material purchases as a result of obtaining additional volume-related
purchase discounts from vendors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by 72.0%, or $10.8
million, to $25.8 million in 1998 from $15.0 million in 1997. Selling, general
and administrative expenses as a percentage of net sales increased to 23.4% in
1998 from 22.3% in 1997. Several factors contributed to this increase. First,
Palm Beach has a higher fixed cost base as a percentage of net sales than
Sleepmaster's base business and has a greater number of smaller customers than
Sleepmaster. Second, Palm Beach has higher delivery expenses as a percentage of
net sales due to its large geographical licensed territory. Such expenses were
offset by increases in average unit selling prices and generally fixed delivery
costs per unit at our Linden, New Jersey facility. Finally, certain of Palm
Beach's contractual employment arrangements, scheduled to expire in March 2000,
contributed to the increase in selling, general and administrative expenses as a
percentage of net sales. Management's ongoing objective is to reduce this
expense ratio by leveraging its fixed expense base.
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<PAGE> 34
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased by $0.6 million, to $1.2 million in
1998 from $0.6 million in 1997. This increase was due to the acquisition of Palm
Beach in March 1998.
OPERATING INCOME
Operating income increased by 52.6%, or $4.9 million, to $14.2 million in
1998 from $9.3 million in 1997. As a result of the above factors, operating
income as a percentage of net sales decreased to 12.9% in 1998 from 13.8% in
1997.
INTEREST EXPENSE, NET
Interest expense increased by 52.2%, or $2.4 million, to $7.1 million in
1998 from $4.7 million in 1997. This increase was due to the cost of additional
debt financing on debt incurred and assumed resulting from the acquisition of
Palm Beach. See "-- Liquidity and Capital Resources." Based on current plans and
as a result of this offering, management expects interest expense to increase in
1999.
PROVISION FOR INCOME TAXES
The provision for income taxes increased by 50%, or $1.0 million, to $3.0
million in 1998 from $2.0 million in 1997. The provision for income taxes
resulted in an effective rate of 42.1% in 1998 and 42.2% in 1997.
NET INCOME
As a result of the above factors net income for 1998 was $4.1 million
compared to $2.8 million in 1997.
FISCAL 1997 AS COMPARED TO FISCAL 1996
NET SALES
Net sales increased by 12.9%, or $7.7 million, to $67.5 million in 1997
from $59.8 million in 1996. This increase was primarily due to increases in unit
sales volume in 1997 of 9.5% and an increase in average unit selling prices of
3.0%.
COST OF SALES
Cost of sales increased by 13.2%, or $4.9 million, to $42.4 million in 1997
from $37.5 million in 1996. Cost of sales as a percentage of net sales increased
slightly to 62.9% in 1997 from 62.7% in 1996. This increase was attributable to
higher costs of raw materials and labor in 1997, partially offset by a reduction
in manufacturing costs in the same period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by 6.5%, or $0.9
million, to $15.0 million in 1997 from $14.1 million in 1996. Selling, general
and administrative expenses decreased as a percentage of net sales to 22.3% in
1997 from 23.6% in 1996. This decrease was primarily attributable to a reduction
in salaries and commissions as a percentage of net sales, a decrease in Serta
licensing fees as a percentage of net sales, and higher professional fees
incurred in 1996 in connection with Sleepmaster's leveraged recapitalization
which did not recur in 1997.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles remained constant at $0.6 million in 1997 and
1996.
OPERATING INCOME
Operating income increased by 24.6%, or $1.8 million, to $9.3 million in
1997 from $7.5 million in 1996. The above factors resulted in an increase in
operating income as a percentage of net sales to 13.8% in 1997 from 12.5% in
1996.
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<PAGE> 35
INTEREST EXPENSE, NET
Interest expense increased by 80.9%, or $2.1 million, to $4.7 million in
1997 from $2.6 million in 1996. This was due to the cost of increased debt
financing incurred as a result of Sleepmaster's leveraged recapitalization in
November 1996. See "-- Liquidity and Capital Resources."
PROVISION FOR INCOME TAXES
The provision for income taxes in 1997 was $2.0 million compared to $0.1
million in 1996. The provision for income taxes resulted in an effective rate of
42.2% in 1997 and 1.9% in 1996. Until Sleepmaster's leveraged recapitalization,
which was effected on November 14, 1996, Sleepmaster was taxed as a partnership.
No provision was made for income taxes during the period from January 1, 1996
through November 13, 1996 since income or loss arising during this period was
included in the income tax returns of the members of Sleepmaster.
NET INCOME
As a result of the above factors net income for 1997 was $2.8 million
compared to $4.6 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of cash to fund liquidity needs is net cash provided
by operating activities and availability under our existing credit facility. Our
principal use of funds consists of
(1) payments of principal and interest on our indebtedness and
(2) capital expenditures.
OPERATING ACTIVITIES
Sleepmaster's operating activities generated cash of $8.9 million in 1998
compared to $6.0 million in 1997 and $5.6 million in 1996. The increase in cash
flows in 1998 was primarily due to the acquisition of Palm Beach. Sleepmaster's
operating activities generated cash of $4.2 million in the first half of 1999
compared to $2.5 million in the first half of 1998. This increase in cash flows
in the first half of 1999 was primarily due to increased net income from
operations and the acquisitions of Herr and Star.
CAPITAL EXPENDITURES
Sleepmaster's capital expenditures were $1.1 million in 1998, $0.6 million
in 1997 and $0.2 million in 1996. Capital expenditures were $2.0 million in the
first half of 1999, as compared to $0.6 million in the first half of 1998. These
capital expenditures consisted primarily of normal recurring expenditures for
machinery and equipment, leasehold and office furniture and fixtures.
Sleepmaster has historically funded its capital expenditures with cash generated
from operations.
Based on current plans, management expects that capital expenditures at all
of our facilities will be approximately $3.9 million in 1999. The increase in
capital expenditures is primarily attributable to a $2.0 million investment to
replace and upgrade our domestic computer system software and hardware and the
full year effect of planned capital expenditures for Palm Beach, Herr and Star.
The balance of the increase in capital expenditures is for machinery and
equipment. We anticipate future capital expenditures to be $1.9 million per year
for the existing factories. Management believes that annual capital expenditure
limitations under the new credit facility will not significantly inhibit
Sleepmaster from meeting its capital needs.
FINANCING ACTIVITIES
Sleepmaster generated $24.5 million of cash inflows from financing
activities in 1998, principally arising from borrowings under an increased
credit facility to acquire Palm Beach, compared with cash outflows of $5.0
million in 1997 and $6.1 million in 1996. Financing cash outflows arose
primarily from repayments of borrowings under our revolving credit facility in
1997 and arose principally from distributions to members in 1996. Sleepmaster
generated $40.5 million of cash inflows from financing
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<PAGE> 36
activities in the first half of 1999, principally arising from net proceeds from
the issuance on May 18, 1999 of $115.0 million of 11% senior subordinated notes
due 2009, as compared to $30.4 million of cash inflows from financing activities
in the first half of 1998. Cash inflows in the first half of 1998 arose
principally from borrowings under an increased credit facility to acquire Palm
Beach.
In connection with the acquisition of Palm Beach on March 3, 1998,
Sleepmaster amended and restated its credit facility to provide for an aggregate
amount of borrowings of up to $66.3 million, a portion of which was used to
finance the acquisition of Palm Beach. See note 10 to the 1998 consolidated
financial statements of Sleepmaster included elsewhere in this prospectus.
On February 26, 1999, Sleepmaster purchased all of the capital stock of
Herr. In connection with the acquisition, Sleepmaster amended and restated its
credit facility to provide for an aggregate amount of borrowings of up to $86.0
million, a portion of which was used to finance the acquisition of Herr.
On May 18, 1999, Sleepmaster purchased substantially all the assets of
Star, the Serta licensee located in Concord, Ontario, Canada. Star is a leading
producer and distributor of the full line of Serta brand mattresses and box
springs and owns the rights to manufacture and sell Serta products in
substantially all of Ontario, Canada. The acquisition was primarily funded with
the net proceeds of the old note offering.
DEBT
On May 18, 1999, we and Sleepmaster Finance Corporation issued $115.0
million of 11% senior subordinated notes due 2009. Sleepmaster used a portion of
the proceeds of the old note offering to prepay the existing credit facility,
redeem the series A and series B senior subordinated notes due 2007, and acquire
substantially all of the assets of Star. Also on May 18, 1999, Sleepmaster
entered into a new credit facility with First Union National Bank. The new
credit facility provides revolving credit facilities with aggregate availability
of $25.0 million. The revolving credit facility matures six years after closing
and includes a sublimit of $8.0 million for letters of credit currently
consisting of:
(a) a letter of credit to back the industrial revenue bonds currently
outstanding of $6.4 million and
(b) a $720,000 letter of credit for deposit on the Linden, New Jersey
facility. In addition, our lender has agreed to use its best efforts to
arrange a $50.0 million acquisition facility.
Borrowings under the new credit facility bear interest at floating rates
that are based on LIBOR or on the applicable alternate base rate, and
accordingly Sleepmaster's financial condition and performance will be affected
by changes in interest rates. The new credit facility also imposes certain
restrictions on Sleepmaster and requires Sleepmaster to comply with financial
ratios and tests described in the section entitled, "Description of Certain
Indebtedness" under the heading "The New Credit Facility."
Sleepmaster, through its subsidiary Palm Beach, is obligated to the County
of Palm Beach, Florida pursuant to revenue bonds issued on behalf of Palm Beach.
On April 1, 1996, the County of Palm Beach Florida issued Variable Rate Demand
Industrial Development Revenue Bonds, Palm Beach Bedding Company Project, Series
1996 in the aggregate principal amount of $7.7 million to finance the
construction of a 235,000 square foot manufacturing facility for Palm Beach. As
of June 30, 1999, $6.4 million of the bonds were outstanding. The bonds mature
in April 2016 and bear interest at a variable rate that was 3.9% at June 30,
1999.
In connection with the recapitalization of Sleepmaster Holdings L.L.C. on
November 14, 1996, Sleepmaster issued $15.0 million of series A 12% senior
subordinated notes due 2006 to PMI. In connection with the acquisition of Palm
Beach on March 3, 1998, Sleepmaster issued $5.0 million of series B 12% senior
subordinated notes due 2007 to PMI and amended the terms of the series A senior
subordinated notes to extend the maturity date to 2007. On May 18, 1999, we used
a portion of the net proceeds from the old note offering to prepay the senior
subordinated notes.
In connection with the recapitalization of Sleepmaster Holdings L.L.C. on
November 14, 1996, Sleep Investor issued $7.0 million of junior subordinated
promissory notes and paid cash to the then existing members of Sleepmaster
Holdings L.L.C., including current members of our management. In exchange for
the notes, the then-existing members of Sleepmaster Holdings L.L.C. delivered
common and preferred
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<PAGE> 37
interests of Sleepmaster Holdings L.L.C., as well as notes issued by Sleepmaster
Holdings L.L.C., to Sleep Investor. Interest payments received by Sleep Investor
on the notes issued by Sleepmaster Holdings L.L.C. correspond to Sleep
Investor's obligation to make interest payments on the promissory notes. The
promissory notes bear interest at a fixed rate of 7.02% per annum and mature on
November 14, 2008. The interest on the promissory notes is pay-in-kind except
that an amount equal to the current tax liability for interest payments received
on the promissory notes is paid in cash. The maturity date of the promissory
notes was extended in connection with the acquisition of Palm Beach from
November 14, 2007 to November 14, 2008. In connection with the completion of the
offering of the old notes, and the prepayment of the senior subordinated notes,
the promissory notes were amended to retroactively bear interest at a fixed rate
of 12.0% per annum and to mature on November 14, 2007. See "Description of
Certain Indebtedness -- The Sleep Investor Promissory Notes."
In conjunction with the purchase of substantially all the assets of Star on
May 18, 1999, Sleepmaster Holdings L.L.C. issued a junior subordinated note to
the seller in the initial aggregate principal amount of $0.68 million as a
portion of the purchase price. The junior subordinated note bears interest at a
fixed rate of 6.0% per annum, which interest shall be paid in kind, and will
mature on the third anniversary of the closing. See "Description of Certain
Indebtedness -- The Sleepmaster Holdings L.L.C. Junior Subordinated Note."
Sleepmaster has no obligations or commitments to Sleepmaster Holdings
L.L.C. or Sleep Investor either under the promissory notes or the junior
subordinated note. The new credit facility will allow Sleepmaster to fund
interest payments on the promissory notes and the junior subordinated note.
Distributions, dividends and loans of Sleepmaster Holdings L.L.C. for that
purpose are restricted by the terms of the indenture governing the notes. See
"Description of the Notes -- Certain Covenants -- Limitation on Restricted
Payments."
We believe that the cash flows from operations, together with available
borrowings under the new senior credit facility, will be adequate to fund
Sleepmaster's currently anticipated working capital, capital spending and debt
service requirements for at least the next several years. However, we are highly
leveraged and may be able to incur additional debt following this offering. We
cannot assure you that our business will generate sufficient cash flow from
operations, that anticipated revenue growth and operating improvements will be
realized or that future borrowings will be available under the new credit
facility in an amount sufficient to enable us to service our indebtedness,
including the notes, or to fund our other liquidity needs. If our business does
not generate sufficient cash flow, we may not be able to effect any refinancing
of our existing indebtedness on commercially reasonable terms or at all. See
"Risk Factors."
SEASONALITY OF BUSINESS
Sleepmaster's net sales and net income are generally consistent throughout
the fiscal year, except for slight increases in the third quarter. However,
seasonal variations in net sales and net income affect each of Sleepmaster's
four facilities. Palm Beach's net sales and net income increase during the first
and fourth quarters of the fiscal year. In contrast, net sales and net income
increase during the third quarter of the fiscal year at our Linden, New Jersey,
Lancaster, Pennsylvania, and Concord, Ontario, Canada facilities. Since Palm
Beach's sales cycle does not coincide with the sales cycles at the other
facilities, seasonal variations of Sleepmaster are reduced.
NEW ACCOUNTING STANDARDS
In February 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee ("AcSEC") issued statement of position
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." SOP 98-1 requires costs incurred in connection with
developing or obtaining internal-use software to be capitalized and other costs
to be expensed.
In March 1998, AcSEC issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs and requires
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<PAGE> 38
that costs be expensed as incurred. The effect of adopting SOP 98-5 will be
reported as a change in accounting principle.
We adopted these standards effective January 1, 1999. The impact of
adopting SOP 98-1 was to increase pre-tax income for the first six months of
1999 by $1.0 million. The adoption of SOP 98-5 had an immaterial impact on our
consolidated financial position and results of operations for the first half of
1999.
IMPACT OF THE YEAR 2000 ISSUE
As of June 14, 1999, we completed a formal review of the computer hardware
systems and software programs located at all of our facilities. This review
included analysis of potentially affected business and process systems and
replacement or correction of all non-compliant critical business and process
systems we will need in the new millennium. Currently, we believe that our
systems are year 2000 compliant in all material respects.
We utilize non-information technology systems including telephones,
voicemail, heating/air conditioning, electricity and security systems supplied
by third-parties. We completed formal communications, through questionnaires,
with critical suppliers of the non-information technology systems and have been
assured that the products and services they provide are year 2000 compliant. If
any of the non-information technology systems provided by these suppliers are
not in fact year 2000 compliant, our business or operations could be materially
adversely affected.
We also utilize manufacturing processes that involve computer controlled
equipment using embedded micro-processor technology. As of May 30, 1999, we
completed a formal review of this equipment located at all of our facilities.
Currently, we believe that our systems are year 2000 compliant.
We estimate that the cost of achieving year 2000 compliance with our
information technology and non-information technology systems is approximately
$600,000. These costs have all been incurred during the first quarter of 1999.
As of August 20, 1999, we believe we have substantially addressed our year 2000
compliance issues. While failure of any critical technology components to
operate properly in the year 2000 could affect our operations, we believe that
resolution of the year 2000 issue will not require significant additional costs
and will not have a material adverse effect on our results of operations.
We rely on transmissions from Serta's computer system for orders from
national accounts to our factories. We have been informed by Serta that this
computer system is currently year 2000 compliant.
In addition to reviewing our internal systems and contacting Serta, we have
polled our significant suppliers and customers to determine whether they are
year 2000 compliant and, if not, the extent to which our operations may be
adversely affected as a result of their failure to be year 2000 compliant. All
of our significant suppliers and customers have responded to our queries, either
that they are currently, or that they are in the process of becoming, year 2000
compliant.
We have not developed contingency plans for manual or delayed information
processing since we believe that our efforts to address the year 2000 issue have
been substantially completed consistent with our timetable. We will periodically
reassess our progress and efforts and may develop such contingency plans in the
future. While we currently expect no material adverse effect on our business,
financial condition, results of operations or cash flows due to year 2000
issues, our beliefs and expectations are based on certain assumptions that
ultimately may prove to be inaccurate.
We believe that the most reasonable worst case scenario in the event of a
year 2000-related failure would be delays in the receipt of payments from our
customers and delays in receiving shipments of raw materials from our suppliers.
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<PAGE> 39
BUSINESS
We are a leading manufacturer and distributor of a full line of
conventional bedding, mattresses and box springs marketed under the well-known
brand names of Serta, Serta Perfect Sleeper, Sertapedic and Masterpiece. Serta,
Inc., through its licensees, is the second largest manufacturer of conventional
bedding products in the United States, with a domestic market share of
approximately 17% in 1998. We are the second largest Serta licensee in North
America with approximately a 22% market share in our domestic licensed
territories on a pro forma basis in 1998. The license and geographic structure
of Serta has enabled us to capitalize on the combination of a strong nationally
advertised brand with high consumer awareness, along with the ability to provide
localized marketing and customer support in our licensed territories.
Serta is a national organization that is owned by and operated for the
benefit of its licensees. The organization consists of 12 domestic licensed
mattress manufacturers, covering 34 licensing territories and operating out of
27 domestic manufacturing facilities. Serta also has 30 international licensees
in Canada, Europe, Asia, the Middle East, South America and the Caribbean. Since
1993, the domestic market share of Serta brand products has increased by 32.3%,
compared to a 7.7% increase for its next closest competitor. In 1998, domestic
net shipments of Serta brand products by Serta licensees were approximately $640
million, of which our share on a pro forma basis was approximately 21.3%.
We are one of Serta's 12 domestic licensed mattress producers, covering
licensing territories consisting of:
- the metropolitan New York area, including Fairfield County in
Connecticut, and southern New York State,
- the State of New Jersey,
- eastern Pennsylvania, including the metropolitan Philadelphia area,
- the metropolitan Wilmington, Delaware area, including Cecil County in
Maryland,
- the State of Florida, except for seven counties in the Florida panhandle,
and
- substantially all of Ontario, Canada.
We distribute our products through a variety of channels, including bedding
chains, furniture retailers, department stores, wholesale buying clubs and
contract customers. We operate from manufacturing facilities located in Linden,
New Jersey, Lancaster, Pennsylvania, Riviera Beach, Florida and Concord,
Ontario, Canada. For the six months ended June 30, 1999, on a pro forma basis,
we generated net sales of $82.5 million and EBITDA of $11.9 million.
INDUSTRY OVERVIEW
The United States conventional bedding industry is mature and stable. Over
the past 20 years, the industry has enjoyed an increase in revenues at a
compounded annual growth rate of 6.7%. Sales in the bedding industry declined
only once during the period, 1.9% in 1982. For the year ended December 31, 1998,
wholesale shipments were $3.9 billion. Since 1993, the combined market share of
the top three bedding manufacturers has increased from 49% to 54%.
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<PAGE> 40
The following chart illustrates the growth in the domestic bedding
industry:
[Domestic Wholesale Mattress & Foundation Shipment Bar Graph]
<TABLE>
<CAPTION>
DOMESTIC WHOLESALE MATRESS AND FOUNDATION
SHIPMENTS
-----------------------------------------
<S> <C>
'1978' 1062
1213
'1980' 1326
1395
'1982' 1369
1593
'1984' 1700
1796
'1986' 1929
2095
'1988' 2261
2309
'1990' 2319
2382
'1992' 2564
2762
'1994' 3018
3181
'1996' 3347
3621
'1998' 3900
</TABLE>
- ---------------
Source: International Sleep Products Association
INDUSTRY GROWTH
The steady growth in shipments in the domestic bedding industry is
attributable to several factors. These factors include:
- increases in housing starts and replacement sales,
- population growth,
- increases in new family formations,
- increased individual and family mobility,
- increased divorce rates,
- growth in gross domestic product, and
- more disposable personal income.
Unit sales have also increased due to trends towards more beds per home and
more frequent replacement of bedding products. In addition, the average unit
selling price has increased as a result of the increase in sales of larger size
beds, greater emphasis on marketing to older consumers who spend more per unit
on average than younger consumers spend, a focus on retailers' efforts to sell
better quality bedding and the industry's continued public relations efforts
related to health benefits of more supportive bedding.
Growth in the bedding industry is also attributable to the high profit
margins available to bedding retailers. Studies conducted by the National Home
Furnishings Association have consistently shown that bedding is one of the most
profitable items on their retailers' floor. In particular, the studies indicate
that bedding sales:
- provide the most profit in terms of gross margin return on investment,
- result in the highest inventory turnover,
- constitute one of the highest sales per square foot of selling area, and
- exhibit growth at a compounded annual rate 50% greater than that of
domestic furniture.
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The profitability of bedding sales has prompted stores without bedding
departments to begin selling bedding products and influenced stores that
currently sell bedding products to expand their existing bedding departments.
INDUSTRY STABILITY
The bedding industry has been consistently stable and somewhat shielded
from economic downturns. The bedding industry's relative insulation from
cyclical swings has enabled the industry to suffer only a single year of
decreasing sales in the past 20 years. The industry has remained stable largely
as a result of the following characteristics:
- replacement sales, which account for approximately 70% of conventional
bedding sales, contribute to the market's relative stability, as
management believes that the average household purchases a new mattress
set every seven to eight years,
- bedding manufacturers fund a substantial portion of cooperative
advertising which enables retailers to continue to advertise bedding
products even in a weak economic environment,
- a significant portion of costs in manufacturing mattresses, especially
cost of goods sold expenses, are variable, which limits the impact of
economic downturn on margins and allows industry participants to continue
to invest in necessary sales promotion and research and development, and
- because mattresses are generally manufactured to order, manufacturers and
retailers maintain low inventory levels which mitigate variations in
working capital requirements experienced by the furniture and appliance
industries.
In addition, the domestic bedding industry is relatively insulated from
foreign competition due to
- the size and bulk of bedding products,
- retailers' desire for just-in-time delivery of bedding products,
- labor costs' small percentage of manufacturing expense, and
- the lack of a foreign brand name.
While a few foreign competitors have entered the bedding industry, they have
done so by acquiring or building United States-based companies and/or
manufacturing facilities.
DEMAND FOR A FULLY MERCHANDISED BRANDED PROGRAM
Retailers have recognized that a broad product line with identifiable value
gradations is an effective way to market bedding to consumers. We believe that a
strong brand name and a favorable opinion of the product's quality by the retail
floor sales staff are crucial to the sales process. As a result, manufacturers
and retailers typically emphasize brand names and focus on popular price points.
To this end, most major manufacturers produce a mattress which will sell at a
retail price of $399 per queen-size set, which includes both the mattress and
the box spring, in an effort to generate store traffic. However, once consumers
are in the store, retailers are often able to motivate consumers to make
purchases at higher retail price points of $599, $699, $799 and above per
queen-size set. This strategy requires a manufacturer to supply retailers with a
broad product line which in turn results in increased sales of incrementally
higher margin products for retailers and increased market share for the
manufacturer.
COMPETITIVE STRENGTHS
We attribute our leadership position to the following competitive
strengths:
STRONG MARKET POSITION AND HIGH BRAND AWARENESS
Serta, through its licensees, is the second largest manufacturer of
conventional bedding products in the United States. Our market share on a pro
forma basis in 1998 was approximately 22% in our domestic
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<PAGE> 42
licensed territories compared to Serta's 17% overall domestic market share. Our
well-known brand names such as Serta, Serta Perfect Sleeper and Sertapedic have
contributed to our consistently strong market share. In addition, the Serta
brand is recognized as one of the leading brands in the home furnishing
industry. In 1998, Serta's national advertising investment was $17.5 million
compared with $14.4 million and $4.4 million by its two largest competitors. We
believe Serta's investment in national advertising coupled with advertising by
Serta licensees which is matched by local dealers totaled approximately $130.0
million in 1998 and has created strong brand recognition in the bedding
industry. We also believe our strong brand names create consumer preference,
which leads to higher average unit selling prices, higher retailer profitability
and additional retail floor space allocations.
NATIONAL BRAND WITH LOCAL MARKETING EFFORTS
We combine a strong nationally advertised brand that has wide consumer
awareness with localized marketing efforts tailored to meet the specific needs
of our customers. Our sales and marketing efforts are decentralized so that we
can more readily identify local market opportunities and quickly take advantage
of them. The Serta license structure allows us to determine the product,
display, advertising and service needs of our customers, while giving localized
sales persons the flexibility to work with our customers to fulfill their
specific needs.
EXTENSIVE PRODUCT OFFERINGS
We offer an extensive selection of well-known conventional bedding products
designed to appeal to multiple segments of the consumer base and retail market.
Our broad product offerings at various price points enable retailers to
merchandise their programs to maximize step-up sales and profitability. Our
product line ranges from higher-margin, higher-priced bedding, sold under the
Perfect Night by Serta, Serta Perfect Sleeper Nightstar, Serta Perfect Sleeper
Showcase, Serta Perfect Sleeper and Masterpiece names, to lower-priced
promotional products as Sertapedic, private label and contract bedding products.
PROPRIETARY PRODUCTS
Serta has been a leader in developing proprietary features designed to
distinguish our mattresses from competitive products. Serta has built a
"mini-factory" at its corporate headquarters to test and develop new and better
components and to provide Serta licensees with proprietary features. These
features include a continuous wire innerspring unit, patented ModuCoil steel
elements, patented Triple Beam box springs and patented Contour Comfort Quilt.
In addition, Serta has developed and designed the new Masterpiece Collection
which contains features such as Double Micro-Offset Coils, Master Weld Torsion
System and Ultimate Edge Support.
EFFICIENT MANUFACTURING AND DISTRIBUTION CAPABILITIES
Our current manufacturing space spans 629,000 square feet in our four
factories. All of our facilities were opened within the last five years and
contain advanced technology and production equipment. As a result, we have
enhanced production, improved operating efficiencies and increased production
capacities. Our efficiency in production and our dedication to customer service
have enabled us to respond to our retailers' needs for just-in-time deliveries
of quality products.
COMMITMENT TO RETAILERS
We understand that the critical link in selling our products to the
consumer is our customer, the retailer. We provide our retailers with the
necessary products, services and information to assist them in achieving their
sales and profit objectives. These include proper sales training support,
advertising ideas to attract consumers to the stores, just-in-time deliveries,
quality products and extensive product assortments that allow effective retail
merchandising to achieve more profitable step-up sales.
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<PAGE> 43
BUSINESS STRATEGY
Our objectives are to continue to grow sales, increase profitability and
gain market share by pursuing the following strategies:
SELECTIVELY PURSUE CONSOLIDATION OPPORTUNITIES
Since 1993, we have purchased and integrated four Serta licensees. We are
continuously involved in discussions relating to potential acquisitions of Serta
licensees in North America. In addition, we will explore the possibility of
acquiring independent/regional bedding manufacturing operations that would allow
us to capitalize on existing joint marketing, manufacturing and distribution
capabilities. Through our acquisitions, we have been able to realize cash flow
benefits and cost savings associated with materials purchasing, working capital
improvements, productivity improvements and the adoption of "best practices"
methodologies among all of our facilities. Our strategy is to leverage our
superior manufacturing, distribution and marketing capabilities in order to
generate incremental revenue and EBITDA.
BUILD INVESTMENT IN THE SERTA BRAND
Since consumers cannot closely examine the inner construction of a
mattress, perceptions of quality and value are strongly influenced by the brand
name and sales efforts by local retailers. We believe Serta's investment in
national advertising coupled with advertising by Serta licensees which is
matched by local dealers totaled approximately $130.0 million in 1998. These
expenditures further increase awareness of our brands and strengthen our
relationships with customers.
EXPAND OUR PRODUCT OFFERINGS
We constantly seek ways to expand our product offerings. Within the past
year, we introduced a new, high-end addition to the Perfect Sleeper line, the
Nightstar. In addition, we have recently begun to manufacture and distribute a
new upscale product called Masterpiece with minimum advertised prices ranging
from $700 to $5,000. The Masterpiece collection was designed to meet customer
demands for upscale bedding. This collection provides us and retailers with a
top-of-the-line product to maximize step-up sales, which results in higher
average unit selling prices and gross margins. Leading retailers as Macy's,
Bloomingdale's and Burdine's are currently selling this collection.
CAPITALIZE ON EXPERIENCED AND COMMITTED MANAGEMENT TEAM
We have assembled one of the industry's strongest management teams with a
demonstrated track record of increasing sales and profitability. This senior
management team has an average tenure of 20 years in the bedding industry and
has a 26% equity interest on a fully diluted basis in our parent company. The
management team has been involved in:
- the acquisition of other Serta licensees and the integration of these
acquisitions into Sleepmaster,
- strategic planning to develop programs and products that have
significantly increased sales and profitability,
- the development of close retailer relationships, and
- providing Serta with direction and guidance through the participation of
one of our officers as a member of Serta's board of directors and by
other key executives' participation as members of Serta's manufacturing,
sales and finance committees.
In addition, upon completion of our acquisitions, we have sought to retain
successful management teams in order to capitalize on their experience and local
market expertise.
THE SERTA NATIONAL ORGANIZATION
Serta is a national organization that is owned by and operated for the
benefit of the Serta licensees. The Serta organization consists of 12 domestic
licensed mattress producers which cover 34 licensing
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<PAGE> 44
territories and operate out of 27 domestic manufacturing facilities. Serta also
has 30 international licensees in Canada, Europe, Asia, the Middle East, South
America and the Caribbean. Serta owns the rights to the Serta trademark and
licenses companies to manufacture and sell mattresses under the Serta brand
name. The licensing agreements prohibit each licensee from manufacturing outside
of its licensing territories. The Serta organization generated total domestic
revenues of $640 million in the year ending December 31, 1998.
The Serta organization is headed by Serta's president, who reports to a
board of directors which consists of representatives of six licensees, two
outside directors and the president of Serta, Inc. Charles Schweitzer, Chief
Executive Officer of Sleepmaster, has been a member of the board of directors
since 1995. Serta cannot own its licenses and does not have a
"right-of-first-refusal" if any are to be sold. Strategic decisions for Serta
are made by the board of directors and passed through to the Serta licensees.
Although all Serta national advertising budgets are voted on and approved by the
Serta board of directors, Serta licensees control their own marketing,
merchandising, manufacturing and administrative functions and thus have the
ability to tailor their businesses to the needs of local customers. Serta
focuses on the following programs and services for the licensing group:
conducting national advertising campaigns; issuing guidelines for Serta
products; supervising quality control programs; handling sales programs for
national accounts; protecting Serta trademarks; and conducting product research
and development. We paid approximately 3.0% of our 1998 gross sales on a pro
forma basis as a royalty to the Serta organization.
PRODUCTS
OVERVIEW
Our product line consists of conventional bedding and box springs sold
primarily under the Serta brand which varies in price, design, material and
size. Retail prices for our Serta brand products range from under $200 for a
twin size promotional set to approximately $2,400 for a king size luxury set.
Retail prices of the newly introduced Masterpiece line range from approximately
$700 for twin size to $5,000 for king size. We offer retailers a full line of
products, allowing retailers to develop their own product assortment to
facilitate step-up sales and to meet various consumer comfort and support
preferences.
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<PAGE> 45
SERTA PERFECT SLEEPER
The Serta Perfect Sleeper line up consists of five levels of quality,
Perfect Night, Night Star, Showcase, Ultra Premium and Super Premium, and
retails in a range from approximately $399 to $2,199 per queen-sized set. The
following chart illustrates the differences between each of the levels:
[RETAIL PRICE STEP-UP FEATURES GRAPHIC]
In addition, each of the Serta Perfect Sleeper's five levels of quality has
step-up features as follows:
- PERFECT NIGHT
The highest end product within the Serta Perfect Sleeper line, the Perfect
Night retails from approximately $1,599 to $2,199 in queen size. The
innerspring unit contains 752 Posture Spirals, with Dual Posture Edge,
Triple Beam 108 ModuCoil support elements, Contour Comfort Quilt with Body
Loft, Perimeter Edge Foam and temperature sensitive Body Pillow foam.
- NIGHTSTAR
The newest introduction in the Perfect Sleeper line, the Nightstar, retails
from approximately $1,099 to $1,499 in queen size. The innerspring contains
720 Posture Spirals with Dual Posture Edge, Triple Beam 108 ModuCoil
support elements, Contour Comfort Quilt with Body Loft and Posture Edge
Foam.
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- SHOWCASE
Providing the step-up bridge from Ultra Premium to Nightstar, the Showcase
retails from approximately $899 to $1,099 in queen size. The innerspring
contains 704 posture spirals over the patented Triple Beam 96 ModuCoil
foundation system plus resilient down-like Pillo-Fill quilted to
high-density zoned convoluted foam.
- ULTRA PREMIUM
The Ultra Premium provides superior value at popular upper retail price
points ranging from approximately $699 to $999 in queen size and utilizes
a 704 Posture Spiral continuous wire innerspring unit over a Triple Beam
box spring with additional support from specially zoned convoluted foam
and ultra firm Perimeter Edge foam.
- SUPER PREMIUM
Our best selling category, the Super Premium provides support and comfort
at popular retail price points ranging from $399 to $799 in queen size,
while containing all of the components of a Perfect Sleeper so that the
consumer benefits from comfort and firmness at lower prices.
All Perfect Sleepers include the Perfect Sleeper Spiral Support System and
the Perfect Sleeper Triple Beam Foundation System described as follows:
- The Perfect Sleeper Posture Spiral Support System contains continuous
steel spirals to provide a superior level of surface support and comfort,
a unique lacing configuration of head-to-toe helical wire to provide
stability, additional posture spirals in the center third of the mattress
to deliver additional support, and a clipped border rod to provide extra
edge support.
- The Perfect Sleeper Triple Beam Foundation System has ModuCoil steel
elements to uniquely combine the resilience of a coil with the strength
of a module, a self-locking grid system to provide surface consistency
and long-lasting firmness, and an exclusive triple beam frame that
provides additional strength, uniform support and maximum stability.
MASTERPIECE
Introduced in 1999, Masterpiece was developed with a blend of old world
craftsmanship and modern technology, and represents an upscale collection of
mattresses and box springs. The Masterpiece line targets the growing upscale
market and reflects a distinct marketing philosophy that is structured to
protect and enhance its upscale brand image. A driving force behind the growth
of the upscale market has been an increase in the disposable income of the baby
boom generation, the population's dominant buying segment, as well as the
demographic changes which have evolved, including the graduation and self
support of that generation's children. Masterpiece has many exclusive features
as Double Micro-Offset Coils, Ultimate Edge, Master Weld Torsion System, Contour
Comfort Quilt and Posture Pad. We expect this product line to complement and
strengthen our assortment offered to retailers without decreasing sales of Serta
products. This collection provides us and retailers with a top-of-the-line
product to maximize step-up sales, which results in higher average unit selling
prices and gross margins.
SERTAPEDIC PROMOTIONAL AND OTHER
Our Sertapedic branded promotional lines are value-oriented products sold
at retail prices from approximately $200 in twin size to $600 in queen size.
These lower priced beds help attract consumers into stores and provide the
retailer with a program necessary to create merchandising steps to achieve
step-up sales.
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CONTRACT
We sell a wide range of quality bedding products to institutions in the
hospitality, healthcare, military and dormitory markets. These products are sold
both under the Serta and Serta Perfect Sleeper labels, as well as non-Serta
brand private labels.
PRIVATE LABEL
We offer a collection of private label products at lower price points to
compete with non-branded products supplied by smaller non-branded competitors.
Our private label products help our retailers consolidate vendor structures by
enabling them to purchase through one source.
CUSTOMERS
We manufacture and supply products to a broad and stable customer base
consisting of over 1,730 retail outlets representing more than 710 customers
from channels of distribution such as:
- major bedding chains including Sleepy's, Rockaway, Mattress Giant,
Bedding Barn and Sleep Country,
- major furniture retailers including Rooms To Go, Seaman's, Baer, Kanes
and The Brick,
- major department stores including Macy's, Bloomingdale's, Burdine's,
Stern's, Boscov's, Sears and Eaton's,
- wholesale buying clubs such as Sam's,
- direct marketing firms such as Dial-A-Mattress, and
- contract customers such as Prime Hospitality.
Our ten largest accounts accounted for approximately 46% of net shipments
in 1998 on a pro forma basis. Sleepy's accounted for approximately 10% of sales
on a pro forma basis in 1998.
We have recently experienced a substantial decline in sales to one of our
customers, Dial-a-Mattress. Dial-a-Mattress has informed us that it has reduced
purchases of our mattresses because of our unwillingness to sell them
Masterpiece mattresses. While we believe that Dial-a-Mattress will reconsider
its decision, we cannot assure you that this will be the case.
SALES, MARKETING AND ADVERTISING
Our marketing and advertising focus on local markets as well as the
national market. We exclusively employ a sales organization of approximately 44
people to target local retailers and to sell our products to authorized
retailers in local markets. We provide our sales force with ongoing, extensive
training in advertising, merchandising and salesmanship so that our sales force
can successfully target retailers and work closely with retailers to assist them
in implementing and improving their sales techniques. In addition, Serta has
formed an organization to sell Serta products on a national level and to
administer programs for national accounts such as Sears and Sam's Club. The
combination of our local sales efforts and Serta's national marketing efforts
allows us to better analyze the needs of our retailers and to customize our
sales and marketing efforts to specific competitive environments.
Our marketing strategy focuses on two areas: (1) total retailer support
programs -- including cooperative advertising programs designed to meet
individual retailer needs and to complement individual retailers' marketing
programs and (2) a continuation of the substantial investment in national
advertising that has established and will continue to build brand awareness.
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Our retailer support program assists retailers in increasing sales by
providing them with the following:
- advertising and retail incentive packages tailored to the needs of our
retailers,
- point of sale materials that enable retail sales people to demonstrate
the unique features of our product and explain step-up features to
increase average unit selling prices,
- retail sales education programs conducted at retail sites and at our
factory showrooms, and
- merchandised product assortments to meet the needs of retailers and help
achieve step-up sales.
We believe this program differentiates us from most of our competitors.
Serta invests in building the Serta brand name through national
advertising, and has been recognized as one of the leading brands in the home
furnishing industry. Serta advertises throughout the year on prime network and
cable programs, as well as on selected daytime and syndicated programs. Serta
advertising is featured on shows such as ER, Touched by an Angel, Law & Order,
Oprah Winfrey and the Annual Academy Awards. Serta's year-long magazine schedule
includes such publications as House Beautiful, Architectural Digest, House and
Garden and Travel and Leisure. In addition, Serta sponsors highly successful
radio programs on the acclaimed National Public Radio Network.
COMPETITION
Serta is the second largest conventional bedding manufacturer in the United
States and primarily competes with two national companies: Sealy and Simmons. Of
the top three bedding manufacturers, Serta is the only one comprised solely of
licensees. The license structure gives Serta and its licensees the advantage of
having a strong national organization combined with localized marketing and
sales efforts to maximize opportunities in local markets.
Serta, Simmons and Sealy together accounted for approximately 54% of
domestic wholesale mattress and box spring shipments in 1998. In 1998, the
market shares of the top three manufacturers were as follows:
<TABLE>
<CAPTION>
MARKET
SHARE
------
<S> <C>
Serta 16.7%
Sealy (Includes the Stearns and Foster brand) 21.7%
Simmons 15.7%
Other 45.9%
</TABLE>
- ---------------
Source: Company estimates derived from data from the International Sleep
Products Association, Furniture/Today and public filings.
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Since 1993, market shares of the top three mattress manufacturers have
changed as follows:
[MARKET SHARE COMPARISON BAR CHART]
<TABLE>
<CAPTION>
SEALY (INCLUDES THE STEARNS
& FOSTER BRAND) SIMMONS SERTA
--------------------------- ------- -----
<S> <C> <C> <C>
'1993-98' -4 9.80 34.70
</TABLE>
- ---------------
Source: Company estimates derived from data from the International Sleep
Products Association, Furniture/Today and public filings.
The remaining 46% of the domestic bedding market is highly fragmented and
consists of
(1) six second tier companies: Spring Air, Restonic, Springwall,
Thera-Pedic, Basset and Englander and
(2) approximately 800 independent and local regional manufacturers which
mainly manufacture lower quality products for sale at lower price
points.
While we primarily manufacture higher margin, differentiated bedding products,
we also manufacture lower priced, lower margin promotional and private label
bedding to compete with smaller manufacturers and to enable retailers to provide
a full breadth of products to consumers.
MANUFACTURING FACILITIES AND DISTRIBUTION
We operate three bedding manufacturing facilities in the United States and
one manufacturing facility in Concord, Ontario, Canada. Of our three current
facilities, one operates a single shift and the others operate two shifts daily.
We anticipate that all four facilities will operate two shifts daily by December
31, 2000. We have found that the movement to two shifts has dramatically
increased unit production levels. We believe that through the utilization of
extra shifts, we will be able to meet the growing demand for our products
without incurring significant capital expenditures.
Our facilities are strategically located to service one or more major
metropolitan areas. We have approximately 629,000 square feet of space, most of
which is devoted to production. We have instituted just-in-time delivery from
our major suppliers. We do not maintain a supply of finished inventory. Instead
we produce all products on a made-to-order basis, enabling us to supply our
broad selection of products in an efficient manner to our retailers and
minimizing our inventory carrying costs. As a result, our average inventory turn
is 13 times per year. We adjust production levels to meet demand and as a result
we have no material backlog of orders.
Our Linden, New Jersey facility is held pursuant to a lease which
terminates on February 1, 2004 but provides us with two five-year options to
extend the lease. The Star facility in Concord, Ontario, Canada is held pursuant
to a lease which terminates on December 31, 2000 but provides us with a five
year option to
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<PAGE> 50
renew. We own our other facilities. The following table sets forth certain
information regarding our manufacturing and distribution facilities at December
31, 1998:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE
LOCATION FOOTAGE OWNED/LEASED
- -------- ----------- ------------
<S> <C> <C>
Linden, New Jersey................................. 240,000 Leased
Riviera Beach, Florida............................. 235,000 Owned
Lancaster, Pennsylvania............................ 100,000 Owned
Concord, Ontario................................... 54,000 Leased
</TABLE>
We consider our present facilities to be well maintained, in sound
operating condition and adequate for our needs. We have the necessary, as well
as some excess, capacity available in our facilities, and we have the necessary
equipment, as owner or lessee, to carry on and grow our business.
We have entered into various distribution arrangements at each facility
based upon our needs and the circumstances at each location. In some locations,
we have contracted with independent third parties to distribute all or a portion
of our products and in other locations we own trailers and distribute the
products ourselves. The flexibility of our distribution program allows us to
distribute products using the most cost effective method.
On August 24, 1999 we provided notice to terminate our agreement with our
exclusive distributor for our Linden facility due to the distributor's failure
to provide an adequate number of trucks for our shipments, among other reasons.
During the ninety-day notice period, we are obligated to use the distributor's
trucks to the extent of their capacity. We will be using a new distributor with
a national presence for additional shipments and have entered into a letter of
intent with the new distributor to enter into a five-year exclusive agreement by
October 15, 1999. We anticipate that distribution costs at our Linden facility
will increase by approximately 8% as a result of the new proposed arrangement.
SUPPLIERS
We have cultivated numerous long-standing relationships with a broad range
of raw material suppliers. Major raw material categories include innersprings,
box spring modules, lumber, foam and ticking. Our largest suppliers include
Leggett & Platt, Burlington Industries, Blumenthal Print Works, Foamex, Flexible
Foam and General Foam. Approximately 43% of our raw materials were purchased
from Leggett & Platt in 1998. We take advantage of all trade discounts and do
not enter into written supply contracts with any of our suppliers. We maintain
several alternative-source suppliers for most of our raw materials. However,
inner spring units can only be purchased from Leggett & Platt. We have never
suffered a significant production loss from insufficient raw material supplies.
Raw materials are periodically inspected to confirm specifications from
suppliers. At the finished goods stage, two inspectors review each mattress
and/or box spring before they are packed and sent to shipping. If a quality
problem exists, the unit is removed from the line and sent for repair.
Management estimates that only a small amount of total production is removed for
reasons of deficient production quality.
Management also employs a quality control supervisor who works full-time
reviewing processes and finished goods in order to maintain a high-quality,
Serta-specified construction standard. The supervisor is responsible for
training workers on Sleepmaster and its subsidiaries quality inspection methods.
WARRANTIES; PRODUCT RETURNS
Our conventional bedding products generally offer limited warranties of ten
years against manufacturing defects, with promotional products carrying
warranties of one year. Our management believes that our warranty terms are
generally consistent with those of our primary national competitors. Our
historical costs of honoring warranty claims have been immaterial.
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ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
We are subject to federal, state, and local laws and regulations relating
to pollution, environmental protection and occupational health and safety. In
addition, our conventional bedding and other product lines are subject to
various federal and state laws and regulations relating to flammability,
sanitation and consumer protection standards. We believe that we are in material
compliance with these requirements.
We are not aware of any pending federal environmental legislation that we
expect to have a material impact on our company. We do not expect to make any
material capital expenditures for environmental controls during the next two
fiscal years.
Our principal wastes are nonhazardous materials such as wood, cardboard,
scrap foam and packaging materials. As is the case with manufacturers in
general, if a release of hazardous substances occurs on or from our properties
or any associated off-site disposal location, or if contamination from prior
activities is discovered at any of our properties, we may be held liable and the
amount of the liability could be material. We also dispose, primarily by
recycling, of small amounts of used oil.
EMPLOYEES
As of June 30, 1999, we employed 795 full-time employees, of whom
approximately 365 were represented by the United Steel Worker's Union. The
collective bargaining agreement covering the employees at the Linden, New Jersey
facility terminates on April 30, 2000 and the collective bargaining agreement
covering employees at the Concord, Ontario, Canada facility expires on December
31, 1999. We are not a party to any master labor agreement covering production
employees at more than a single manufacturing facility. We believe that our
employee relations are generally satisfactory. We have not experienced any work
stoppages or slowdowns as a result of labor difficulties during the last ten
years.
LEGAL PROCEEDINGS
From time to time, we are involved in various legal proceedings arising in
the ordinary course of business. We do not expect that these matters,
individually or in the aggregate, will have a material adverse effect on
Sleepmaster's or its subsidiaries' business, financial condition or results of
operations. We are not currently involved in any material legal proceedings.
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MANAGEMENT
ADVISORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and a brief account of the
business experience of each person who is an advisor or executive officer of
Sleepmaster L.L.C. and Sleepmaster Holdings L.L.C.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Charles Schweitzer................... 55 President and Chief Executive Officer, Advisor,
and Managing Member
James Koscica........................ 39 Executive Vice President and Chief Financial
Officer and Advisor
Michael Reilly....................... 50 Senior Vice President of Sales and Marketing
Timothy Dupont....................... 50 Vice President of Manufacturing
Michael Bubis........................ 44 President of Palm Beach and Advisor
David Thomas......................... 49 Advisor
John Weber........................... 34 Advisor
Michael Bradley...................... 33 Advisor
Robert Bartholomew................... 52 Advisor
</TABLE>
Charles Schweitzer has served as President and Chief Executive Officer of
Sleepmaster since April 1993, after joining Sleepmaster as Senior Vice President
in April 1986. Prior to joining Sleepmaster, he served as Senior Vice President,
Sales and Marketing for Classic Corporation, one of the world's largest waterbed
manufacturers. Before his tenure at Classic Corporation, Mr. Schweitzer served
as Vice President, Marketing for Sealy Mattress Company of Connecticut/New York.
Mr. Schweitzer has a B.A. in Economics and an MBA in Marketing from City College
of New York.
James Koscica has served as Executive Vice President and Chief Financial
Officer of Sleepmaster since January 1995 and served as Vice President of
Finance and Administration since April 1993, after joining Sleepmaster as
controller in November 1989. Before he joined Sleepmaster, he served as
controller for a Budget Rent-A-Car Corporation franchise. Prior to his work at
Budget, Mr. Koscica served in management in systems development at AT&T. Mr.
Koscica has a B.A. in Accounting from Rutgers University and is a licensed CPA
in New Jersey.
Michael Reilly has served as Senior Vice President of Sales and Marketing
since January 1995 and Vice President of Sales from April 1993, after joining
Sleepmaster as Key Account Executive in February 1978. Before joining
Sleepmaster, Mr. Reilly served as Marketing Representative for Simmons Company.
Mr. Reilly has a B.A. in Business Administration from Catholic University.
Timothy Dupont has served as Vice President of Manufacturing since April
1993, after joining Sleepmaster as Manufacturing Manager in January 1985. Before
joining Sleepmaster, he served as General Manager for Guilden Development
Company. Mr. Dupont has a B.A. in Business Administration from Chapman College.
Michael Bubis is an advisor of Sleepmaster. Mr. Bubis has worked at Palm
Beach since 1969 and has been President of Palm Beach since 1991. Mr. Bubis
served as a member of the board of directors of Serta from 1995 through 1998.
David Thomas is an advisor of Sleepmaster. Mr. Thomas has been a Managing
Director of Citicorp Venture Capital, Ltd. for over five years. Mr. Thomas is a
director of Lifestyle Furnishings International Ltd., Galey & Lord, Inc., Anvil
Knitwear, Inc., Plainwell, Inc., Stage Stores, Inc. and American Commercial
Lines LLC.
John Weber is an advisor of Sleepmaster. Mr. Weber has been a Vice
President at Citicorp Venture Capital, Ltd. since 1994. Previously, Mr. Weber
worked at Putnam Investments from 1992 through 1994.
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Mr. Weber is a director of Anvil Knitwear, Inc., Electrocal Designs, Inc., FFC
Holding, Inc., Graphic Design Technologies, Marine Optical, Inc., Gerber
Childrenswear, Inc., Plainwell, Inc. and Smith Alarm.
Michael Bradley is an advisor of Sleepmaster. Mr. Bradley joined Citicorp
Venture Capital, Ltd. in 1996. Prior to joining Citicorp Venture Capital, Ltd.,
Mr. Bradley worked at Merrill Lynch and Selected Equity Research. Mr. Bradley
received his B.A. from the University of Virginia, his J.D. from the University
of Virginia and his MBA from Columbia Business School. Mr. Bradley serves on the
board of directors of Hayden Corporation, MinCorp, Galey & Lord, Inc. and HL
Holdings.
Robert Bartholomew is an advisor of Sleepmaster. Mr. Bartholomew co-founded
Pacific Mezzanine Investors in 1990. Previously, Mr. Bartholomew worked at
Pacific Mutual from 1986 through 1989. Mr. Bartholomew received his B.A. in
Economics and an MBA in Finance from Rutgers University.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to our company for the
fiscal year ended December 31, 1998, of those persons who served as
(1) the chief executive officer during fiscal year 1998 and
(2) the other four most highly compensated executive officers of our
company for fiscal year 1998 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(A)
- --------------------------- ---- --------- -------- ---------------
<S> <C> <C> <C> <C>
Charles Schweitzer.................................... 1998 $320,250 $73,658 $56,006
President and Chief Executive Officer
James Koscica......................................... 1998 233,221 48,510 47,924
Executive Vice President and Chief Financial Officer
Michael Bubis......................................... 1998 241,660 59,257 23,010
President of Palm Beach
Michael Reilly........................................ 1998 179,550 39,501 40,942
Senior Vice President of Sales and Marketing
Timothy Dupont........................................ 1998 116,550 47,786 34,273
Vice President of Manufacturing
</TABLE>
- ---------------
(a) Represents amounts paid on behalf of each of the Named Executive Officers
for
(1) premiums for health, life and accidental death and dismemberment
insurance and for long-term disability benefits;
(2) contributions to Sleepmaster's defined contribution plans; and
(3) automobile allowances.
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<PAGE> 54
No stock options were exercised by any of the Named Executive Officers
during 1998. The following table sets forth the number of securities underlying
unexercised options held by each of the Named Executive Officers and the value
of the options at the end of 1998:
<TABLE>
<CAPTION>
FISCAL YEAR END OPTION VALUES
----------------------------------------------------------
NUMBERS OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END At Fiscal Year-End (a)
NAME (#) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------------------------- -------------------------
<S> <C> <C>
Charles Schweitzer............ 0/212 $0/$515,584
James Koscica................. 0/106 0/$257,792
Michael Reilly................ 0/106 0/$257,792
Timothy Dupont................ 0/106 0/$257,792
</TABLE>
- ---------------
(a) Value of unexercised options at fiscal year-end represents the difference
between the exercise price of any outstanding-in-the-money options and the
fair market value of Sleepmaster Holdings L.L.C.'s class A common membership
interests on December 31, 1998.
EXECUTIVE EMPLOYMENT AGREEMENTS
In 1996, Sleepmaster Holdings L.L.C., Sleepmaster and Sleep Investor
entered into employment and option agreements with Charles Schweitzer, James
Koscica, Michael Reilly and Timothy Dupont dated as of November 14, 1996. These
agreements provide for, among other things:
- terms of employment until November 1, 2001,
- base salaries of $305,000 (Mr. Schweitzer), $210,000 (Mr. Koscica),
$171,000 (Mr. Reilly) and $111,000 (Mr. Dupont),
- early termination by reason of the officer's death or disability, by
resolution of Sleepmaster's board of advisors, or upon the officer's
voluntary resignation with or without a good reason event,
- a severance payment in the case of early termination by Sleepmaster for
other than cause or a voluntary resignation for good reason, payable in
regular installments of the base salary through the period ending on the
earlier of
(1) November 1, 2001 and
(2) the later of
(a) January 2, 2000 and
(b) the second anniversary of the date of termination plus a bonus
payment pro rated based on the number of days worked during the
year of termination,
- a base salary plus a bonus to be calculated based upon EBITDA
performance,
- benefits, including medical, life and disability insurance,
- confidentiality of information obtained during employment,
non-competition and non-solicitation, and
- an option vesting schedule for employees to acquire membership interests
in Sleepmaster Holdings L.L.C., which Sleepmaster Holdings L.L.C. or
Sleepmaster, if Sleepmaster Holdings L.L.C. does not elect to purchase
all such interests, may repurchase if the employee is terminated for any
reason.
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<PAGE> 55
On March 3, 1998, Palm Beach (joined by Sleepmaster Holdings L.L.C. and
Sleepmaster) entered into an employment agreement with Michael Bubis. The terms
of this agreement are substantially similar to the terms described above with
the following differences:
- a base salary of $267,904,
- term of employment until March 3, 2001,
- election to the Board of Advisors of Sleepmaster and Sleepmaster Holdings
L.L.C. during the employment term,
- a severance payment in the case of early termination by Palm Beach
without cause or a voluntary resignation for good reason, payable in a
lump sum, of the base salary from the date of termination through March
3, 2001 plus a specified sum in satisfaction on any bonus payment due or
to become due under the employment agreement.
STOCK OPTION PLANS
On November 14, 1996 we entered into stock option agreements with Charles
Schweitzer, James Koscica, Michael Reilly and Timothy Dupont. These nonqualified
options entitle the executives to purchase an aggregate amount of 530 units of
class A common interests of Sleepmaster Holdings L.L.C. at an exercise price of
$100 per unit.
Options granted under the agreements vest in whole or in part on December
31, 1999 and December 31, 2001 based on Sleepmaster's achievement of EBITDA
targets as long as the executive remains employed by Sleepmaster.
Additionally, applicable portions of the options shall vest upon a sale of
Sleepmaster if:
- the sale occurs prior to December 31, 1999 and
- the aggregate cash consideration received by the holders of Sleepmaster's
common interests equals or exceeds either the target for December 31,
1999 or for December 31, 2001.
Fifty percent of the options shall vest upon a sale of Sleepmaster if:
- the sale occurs after December 31, 1999 but before December 31, 2001 and
- the aggregate cash consideration received by holders of Sleepmaster's
common interests equals or exceeds the target for December 31, 2001.
If as of December 31, 2001 any portion of the options have not vested,
Sleepmaster may automatically transfer any portion of the unvested options and
re-grant the unvested options without payment of any consideration to the
executives. The option agreements may be amended by Sleepmaster Holdings
L.L.C.'s board of advisors.
COMPENSATION OF ADVISORS
Our advisors are not compensated for the services they render on the board
of advisors, and they are not reimbursed for expenses incurred as a result of
board membership.
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<PAGE> 56
SECURITY OWNERSHIP
The following table sets forth certain information with respect to the
common equity interests of Sleepmaster Holdings L.L.C. Sleepmaster Holdings
L.L.C. owns over 99.9% of the common equity interests of Sleepmaster.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
COMMON COMMON
MEMBERSHIP MEMBERSHIP
NAME AND ADDRESS INTERESTS INTERESTS
- ---------------- ---------- -------------
<S> <C> <C>
Citicorp Venture Capital, Ltd. ............................. 3,852.3 38.6%
399 Park Avenue
New York, NY 10043
CCT Partners IV, L.P. ...................................... 677.5 6.8
399 Park Avenue
New York, NY 10043
PMI Mezzanine Fund L.P.(a) ................................. 3,403.0 34.1
610 Newport Center Drive
Suite 1100
Newport Beach, CA 92660
Charles Schweitzer.......................................... 677.7 6.8
2001 Lower Road
Linden, NJ 07036-6520
James Koscica............................................... 360.0 3.6
2001 Lower Road
Linden, NJ 07036-6520
Michael Reilly.............................................. 360.0 3.6
2001 Lower Road
Linden, NJ 07036-6520
Timothy Dupont.............................................. 360.0 3.6
2001 Lower Road
Linden, NJ 07036-6520
Michael Bubis............................................... 466.0 4.7
3774 Interstate Park Road North
Riviera Beach, FL 33404
David Thomas(b)............................................. 4,716.3 47.3
399 Park Avenue
New York, NY 10043
John Weber(b)............................................... 4,578.3 45.9
399 Park Avenue
New York, NY 10043
Michael Bradley(c).......................................... 4,529.9 45.4
399 Park Avenue
New York, NY 10043
Robert Bartholomew(d)....................................... 3,403.0 34.1
610 Newport Center Drive
Suite 1100
Newport Beach, CA 92660
All directors and executive officers as a group (9
persons).................................................. 10,354.7 94.3
</TABLE>
- ---------------
(a) Consists of 1,000 class A common membership interests and warrants currently
exercisable for 2,403 common membership interests.
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<PAGE> 57
(b) Includes 4,529.76 common membership interests held by Citicorp Venture
Capital and CCT Partners IV. Messrs. Thomas and Weber each disclaim
beneficial ownership of these common membership interests.
(c) Includes 3,852.3 common membership interests held by Citicorp Venture
Capital. Mr. Bradley disclaims beneficial ownership of these common
membership interests.
(d) Includes 1,000 common membership interests held by PMI and warrants held by
PMI currently exercisable for 2,403 common membership interests. Mr.
Bartholomew disclaims beneficial ownership of these common membership
interests and warrants.
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<PAGE> 58
RELATIONSHIPS AND RELATED TRANSACTIONS
Each of the following descriptions is a summary of the documents listed
below. Therefore, each summary does not restate the document described in its
entirety. We urge you to read each document because it will provide more
information concerning the points highlighted below. A copy of any document
described below can be obtained by writing to Sleepmaster at the address located
in the section entitled "Prospectus Summary."
SLEEPMASTER HOLDINGS L.L.C. LIMITED LIABILITY COMPANY OPERATING AGREEMENT
In 1996, Sleep Investor, Charles Schweitzer, James Koscica, Timothy Dupont
and Michael Reilly entered into the Sleepmaster Holdings L.L.C. second amended
and restated limited liability company operating agreement. Sleepmaster Holdings
L.L.C. was formed under the New Jersey Limited Liability Company Act. The
business and affairs of Sleepmaster Holdings L.L.C. are managed by the managing
member, Charles Schweitzer, subject to the direction of a board of advisors
having duties comparable to a corporate board of directors. Currently, the board
of advisors is composed of seven advisors. The number of advisors can be
increased by a vote of at least 80% of the advisors. The Sleepmaster Holdings
L.L.C. limited liability company agreement calls for the existence of four
senior officers as follows:
(1) Chief Executive Officer and President,
(2) Executive Vice President and Chief Financial Officer,
(3) Vice President of Sales and
(4) Vice President of Production.
MEMBERSHIP INTERESTS
The board of advisors is authorized to issue or sell any of the following:
(1) additional membership interests or other interests in Sleepmaster
Holdings L.L.C.,
(2) obligations, evidences of indebtedness or other securities or interests
convertible into or exchangeable for membership interests or other
interests in Sleepmaster Holdings L.L.C. and
(3) warrants, options, or other rights to purchase or otherwise acquire
membership interests or other interests in Sleepmaster Holdings L.L.C.
The class A members are entitled to one vote per class A common unit.
Except as specifically required by law, the class B members and the preferred
members have no right to vote on any matters to be voted on by the members of
Sleepmaster Holdings L.L.C., except in the case of mergers, consolidations,
recapitalizations, or reorganizations. Each class B member is entitled at any
time to convert any or all of the class B common units held by the class B
member into the same number of class A common units and members holding a
majority of the class B common units can cause a conversion of 100% of the class
B common units into the same number of class A common units.
DISTRIBUTIONS
The board of advisors has sole discretion regarding the amounts and timing
of distributions to members of Sleepmaster Holdings L.L.C., subject to the
retention and establishment of reserves of, or payments to third parties of, the
funds as it deems necessary with respect to the reasonable business needs of
Sleepmaster Holdings L.L.C. Distributions are to be made in the following order
and priority:
(1) first, to the members in proportion to and to the extent of their
unpaid preferred return (as defined in the Sleepmaster Holdings L.L.C.
limited liability company agreement),
(2) second, to the members in proportion to and to the extent of their
unreturned preferred capital (as defined in the Sleepmaster Holdings
L.L.C. limited liability company agreement), and
(3) third, to the members in proportion to their common units.
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<PAGE> 59
REDEMPTION
Except as extensions are provided for, Sleepmaster Holdings L.L.C. shall
make a distribution to each preferred member on November 14, 2008 in an amount
equal to the full amount of the preferred member's unpaid preferred return and
unreturned preferred capital as of the scheduled redemption date. In connection
with the closing of the old note offering on May 18, 1999, the parties to the
Sleepmaster Holdings L.L.C. limited liability company agreement amended the
agreement to extend the redemption date of the preferred membership interests to
November 14, 2009.
SLEEPMASTER LIMITED LIABILITY COMPANY OPERATING AGREEMENT
Sleep Investor and Sleepmaster Holdings L.L.C. entered into the Sleepmaster
amended and restated limited liability company operating agreement. Sleepmaster
was formed under the New Jersey Limited Liability Company Act. The business and
affairs of Sleepmaster are managed by the managing member, Charles Schweitzer,
subject to the direction of a board of advisors having duties comparable to a
corporate board of directors. Currently, the Sleepmaster board of advisors is
composed of seven advisors. The number of advisors can be increased by a vote of
at least 80% of the advisors. The Sleepmaster limited liability company
agreement calls for the existence of four senior officers as follows:
(1) Chief Executive Officer and President,
(2) Executive Vice President and Chief Financial Officer,
(3) Vice President of Sales and
(4) Vice President of Production.
MEMBERSHIP INTERESTS
Sleepmaster's board of advisors is authorized to issue or sell any of the
following:
(1) additional membership interests or other interests in Sleepmaster,
(2) obligations, evidences of indebtedness or other securities or interests
convertible into or exchangeable for membership interests or other
interests in Sleepmaster, and
(3) warrants, options, or other rights to purchase or otherwise acquire
membership interests or other interests in Sleepmaster.
The class A members are entitled to one vote per class A common unit.
Except as specifically provided or required by law, the class B members and the
preferred members have no right to vote on any matters to be voted on by the
members of Sleepmaster, except in the case of mergers, consolidations,
recapitalizations, or reorganizations. Each class B member is entitled at any
time to convert any or all of the class B common units held by the class B
member into the same number of class A common units and members holding a
majority of the class B common units can cause a conversion of 100% of the class
B common units into the same number of class A common units. Currently, 7,999
class A membership interests are held by Sleepmaster Holdings L.L.C. and one is
held by Sleep Investor. Sleepmaster Holdings L.L.C. also holds 9,999.96
preferred membership interests.
DISTRIBUTIONS
Sleepmaster's board of advisors has sole discretion regarding the amounts
and timing of distributions to members of Sleepmaster, subject to the retention
and establishment of reserves of, or payments to third parties of, the funds as
it deems necessary with respect to the reasonable business needs of Sleepmaster.
Distributions are to be made in the following order and priority:
(1) first, to the members in proportion to and to the extent of their
Unpaid Preferred Return, as defined in the Sleepmaster limited
liability company agreement,
(2) second, to the members in proportion to and to the extent of their
Unreturned Preferred Capital, as defined in the Sleepmaster limited
liability company agreement, and
(3) third, to the members in proportion to their common units.
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<PAGE> 60
REDEMPTION
Except as extensions are provided for, Sleepmaster shall make a
distribution to each preferred member on November 14, 2008 in an amount equal to
the full amount of such preferred member's unpaid preferred return and
unreturned preferred capital as of the scheduled redemption date. In connection
with the closing of the old note offering, the parties to the Sleepmaster LLC
agreement amended the agreement to extend the redemption date of the preferred
membership interests to November 14, 2009.
SLEEPMASTER HOLDINGS L.L.C. SECURITYHOLDERS AGREEMENT
In 1998, Sleepmaster Holdings L.L.C., Sleep Investor, PMI, key executives
of Holdings and two other investors entered into an amended and restated
securityholders agreement dated as of March 3, 1998. The amended and restated
securityholders agreement requires that Sleepmaster Holdings L.L.C., Sleep
Investor, PMI and those executives of Sleepmaster Holdings L.L.C. vote their
membership interests and take all other actions within their control so that the
board of advisors of Sleepmaster Holdings L.L.C. will be comprised of four
advisors designated by Sleep Investor and three advisors representative of
management, Schweitzer, Koscica and Bubis. The board of advisors, or similar
governing bodies of Sleepmaster Holdings L.L.C.'s subsidiaries must have the
same composition.
In addition, the securityholders agreement:
(1) restricts the transfer of membership interests of Sleepmaster Holdings
L.L.C.;
(2) grants tag-along rights on transfers of membership interests of
Sleepmaster Holdings L.L.C.;
(3) grants first offer rights on transfers of membership interests of
Sleepmaster Holdings L.L.C.;
(4) requires each securityholder to consent to a sale of Sleepmaster
Holdings L.L.C. if the sale is approved by the board of advisors of
Sleepmaster Holdings L.L.C. and the holders of a majority of the
membership interests issued to Sleep Investor and its affiliates; and
(5) grants limited preemptive rights on issuances of membership interests
of Holdings.
The tag-along and first offer rights with respect to each securityholder's
interests will terminate upon the consummation of a sale of the interests to the
public pursuant to an offering registered under the Securities Act of 1933 or to
the public effected through a broker-dealer or market-maker pursuant to Rule
144.
SLEEPMASTER HOLDINGS L.L.C. REGISTRATION RIGHTS AGREEMENT
In 1998, Sleepmaster Holdings L.L.C., Sleep Investor, PMI, certain
executives of Sleepmaster Holdings L.L.C. and two other investors entered into
an amended and restated registration rights agreement dated as of March 3, 1998.
Under the amended and restated registration rights agreement, the holders of a
majority of the membership interests issued to Sleep Investor or its affiliates
have the right, subject to certain conditions, to require Sleepmaster Holdings
L.L.C. to consummate a registered offering of equity securities of Sleepmaster
Holdings L.L.C. or a successor corporate entity.
In addition, all holders of registrable securities are entitled to request
the inclusion, subject to the terms and conditions of the registration rights
agreement, of any of their common interests in any registration statement, other
than registration statements on forms S-8 or S-4 or any similar form in
connection with a registration to primarily register debt securities, at
Sleepmaster Holdings L.L.C.'s expense whenever Sleepmaster Holdings L.L.C.
proposes to register any of its common interests under the Securities Act of
1933. In connection with all the registrations, Sleepmaster Holdings L.L.C. has
agreed to indemnify all holders of registrable securities against liabilities,
including liabilities under the Securities Act of 1933.
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<PAGE> 61
THE RECAPITALIZATION AND OTHER TRANSACTIONS
RECAPITALIZATION AGREEMENT
In November 1996, Sleepmaster Holdings L.L.C., Sleepmaster, Sleep Investor,
Brown/Schweitzer Holdings Inc. and each of the then existing members of
Sleepmaster Holdings L.L.C. entered into a recapitalization agreement. Pursuant
to the recapitalization agreement, Sleepmaster Holdings L.L.C. redeemed all of
the membership interests of its members, except for four members who are current
members of management, and then sold the membership interests to Sleep Investor.
In addition, Sleep Investor purchased 8,714 units of redeemable preferred
interests and 6,099 units of common interests of Sleepmaster Holdings L.L.C. for
approximately $12.9 million plus issuance of notes to the then existing members
of Sleepmaster Holdings L.L.C. totaling $7.0 million. The remaining preferred
and common interests of Sleepmaster Holdings L.L.C. were allocated to the four
members of Sleepmaster Holdings L.L.C. who are currently members of our
management. As a result of the recapitalization, Sleep Investor acquired 72% of
the outstanding interests of Sleepmaster Holdings L.L.C. and Sleepmaster
Holdings L.L.C. management retained 28%.
SLEEP INVESTOR PROMISSORY NOTES
In conjunction with the recapitalization of Sleepmaster Holdings L.L.C. in
1996, Sleep Investor issued $7.0 million of junior subordinated notes and paid
cash to the then-existing members of Sleepmaster Holdings L.L.C., including
current members of our management. In exchange for the notes, the then-existing
members of Sleepmaster Holdings L.L.C. delivered common and preferred interests
of Sleepmaster Holdings L.L.C., as well as notes issued by Sleepmaster Holdings
L.L.C., to Sleep Investor. As of March 31, 1999, $8.0 million of the promissory
notes were outstanding. In connection with the old note offering and the
redemption of the senior subordinated notes, the promissory notes were amended
to provide for a 12.0% interest rate and a maturity date of November 14, 2007.
SENIOR SUBORDINATED NOTES
In November 1996 Sleepmaster, Sleepmaster Holdings L.L.C. and PMI entered
into a securities purchase agreement. Pursuant to this agreement, Sleepmaster
sold $15.0 million series A senior subordinated notes due 2007 to PMI. These
senior subordinated notes held by PMI were redeemed with a portion of the net
proceeds of the old note offering.
In addition, in March 1998 Sleepmaster, Sleepmaster Holdings L.L.C. and PMI
entered into a securities purchase agreement. Pursuant to this agreement,
Sleepmaster sold $5.0 million series B senior subordinated notes due 2007 to
PMI. These senior subordinated notes held by PMI were redeemed with a portion of
the proceeds of the old note offering.
WARRANTS
In connection with the sale of senior subordinated notes by Sleepmaster to
PMI in 1996 and 1998, Sleepmaster Holdings L.L.C. issued to PMI 2000 warrants
and 403 warrants, respectively, to purchase class A common units of Sleepmaster
Holdings L.L.C. The warrants are currently exercisable at any time until March
3, 2010 at exercise price of $0.01 per unit, subject to adjustment. The holders
of a majority of the outstanding warrants, during a specified window period each
year from November 14, 2003 to November 14, 2009, have the right to require
Sleepmaster Holdings L.L.C. to purchase all of the warrants or common units into
which the warrants are exercisable. If this right is exercised, the purchase
price on a per unit basis would be an amount equal to the value of Sleepmaster
Holdings L.L.C. divided by the number of outstanding units of common interests.
The value of Sleepmaster Holdings L.L.C. would be the greater of a multiple of
EBITDA and the aggregate current market price of the units of common interests
on a fully diluted basis. The put option is subject to the availability of
financing. The put option shall terminate upon:
(1) an approved sale or
(2) the consummation of an underwritten public offering of units of common
interests.
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<PAGE> 62
DESCRIPTION OF INDEBTEDNESS
THE NEW CREDIT FACILITY
The following is a summary of the material terms of the new credit facility
that Sleepmaster, Sleepmaster Holdings L.L.C., Palm Beach, Herr, Lower Road
Associates, LLC, and Sleepmaster Finance Corporation, the lenders parties
thereto and First Union National Bank, as a lender and as an administrative
agent entered into on May 18, 1999. The following summary is qualified in its
entirety by reference to the new credit facility, copies of which will be made
available to holders of the exchange notes upon request.
STRUCTURE
The new credit facility provides revolving credit facilities with aggregate
availability of $25.0 million. The revolving credit facility will mature on May
18, 2005 and includes a sublimit of $8.0 million which covers letters of credit
currently consisting of (a) a letter of credit to back the industrial revenue
bonds currently outstanding of $6.6 million and (b) a $720,000 letter of credit
issued to the landlord for deposit on the Linden, New Jersey facility. In
addition, First Union National Bank has also agreed to use its best efforts to
arrange an acquisition facility with an aggregate availability of $50.0 million.
AVAILABILITY
Availability under the new credit facility is subject to various conditions
precedent typical of bank loans. Amounts under the revolving credit facility are
available on a revolving basis. Amounts under the acquisition facility are
available until November 18, 2001.
INTEREST
Borrowings under the revolving credit facility and the acquisition facility
bear interest at a rate equal to LIBOR plus
- the applicable margin to be determined on the basis of Sleepmaster's
ratio of total funded debt, including any earnout payments capitalized on
Sleepmaster's balance sheet in accordance with GAAP, to EBITDA or
- the alternate base rate, which is equal to the higher of (1) the First
Union prime rate and (2) the Federal Funds rate plus 0.50%, plus the
applicable margin.
FEES
Sleepmaster has agreed to pay certain fees with respect to the new credit
facility, including:
- a revolving credit facility commitment fee on a per annum basis at a rate
of 0.50% on the average daily commitment;
- an acquisition facility commitment fee on a per annum basis during the
draw down period on the average unused portion of the acquiring facility;
- letter of credit fees calculated on the aggregate face amount for each
letter of credit equal to
(1) the applicable margin for LIBOR loans on a per annum basis plus
(2) a fronting fee of 0.125% per annum and customary amendment, drawing
and transfer fees to be paid to the issuing bank.
SECURITY
The obligations of Sleepmaster under the new credit facility are secured,
jointly and severally, by
- a first priority lien on 100% of the membership interests in Sleepmaster,
- a first priority lien on 100%, 65% for foreign subsidiaries of the equity
or other ownership interests of Sleepmaster's currently owned or
hereafter acquired direct and indirect subsidiaries, and
- a first priority lien on and security interest in all assets of
Sleepmaster and its direct and indirect United States subsidiaries.
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<PAGE> 63
GUARANTEES
The obligations of Sleepmaster are guaranteed, jointly and severally, by
each of our domestic subsidiaries.
COMMITMENT REDUCTIONS AND REPAYMENTS
Sleepmaster will be required to make mandatory prepayments upon receipt of
proceeds of insurance awards, asset sales or equity sale proceeds, debt issuance
proceeds, and 50% of annual excess cash flow. These proceeds will first reduce
any remaining amortization payments on the acquisition facility and then be
applied to reduce the revolving credit facility.
AFFIRMATIVE, NEGATIVE AND FINANCIAL COVENANTS
The new credit facility contains a number of covenants that, among other
things, restrict the ability of Sleepmaster and its subsidiaries to:
- incur additional indebtedness,
- pay dividends and make distributions,
- issue common and preferred stock of subsidiaries,
- make certain investments,
- repurchase stock,
- create liens,
- enter into transactions with affiliates.
- enter into sale and leaseback transactions,
- merge or consolidate with third parties, and
- transfer and sell assets.
In addition, the new credit facility requires Sleepmaster to comply with
specified financial ratios, including a maximum leverage ratio, a minimum
interest coverage ratio and a fixed charge coverage ratio.
The maximum leverage ratio requires that Sleepmaster Holdings, L.L.C.,
together with its subsidiaries, have a ratio of total debt to EBITDA of no more
than 5.75 to 1.0 until September 30, 1999. Thereafter, the required ratio will
decline by .25 each year until January 1, 2004 and thereafter, where the
required ratio will be no greater than 3.75 to 1.0.
The minimum interest coverage ratio requires that Sleepmaster Holdings,
L.L.C., together with its subsidiaries, have a ratio of EBITDA to interest
expense of no less than 1.5 to 1.0 until December 31, 1999. Thereafter, the
required ratio will increase by .25 each year until January 1, 2004 and
thereafter, where the required ratio will be no less than 2.75 to 1.0.
The fixed charge coverage ratio requires that Sleepmaster Holdings, L.L.C.,
together with its subsidiaries, have a ratio of EBITDA minus capital
expenditures to interest expense plus taxes, dividend payments and scheduled
payments on funded debt of no less than 1.0 to 1.0 until September 30, 1999.
Thereafter, the required ratio will increase to 1.15 to 1.10 for the period from
October 1, 1999 to December 31, 1999 and will increase to 1.25 to 1.0
thereafter.
EVENTS OF DEFAULT
Affirmative, Negative and Financial Covenants. The new credit facility
contains customary events of default, including:
- non-payment of principal, interest or fees,
- violation of covenants after customary cure periods,
- inaccuracy of representations and warranties,
- cross-default to other material agreements and indebtedness,
- bankruptcy,
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<PAGE> 64
- material judgments,
- ERISA matters,
- invalidity of loan documentation or security interest, and
- change of control.
INDUSTRIAL REVENUE BONDS
Sleepmaster, through its subsidiary Palm Beach, is financially obligated to
the County of Palm Beach, Florida pursuant to revenue bonds issued on behalf of
Palm Beach. On April 1, 1996, the County of Palm Beach Florida issued the
Variable Rate Demand Industrial Development Revenue Bonds, Palm Beach Bedding
Company Project, Series 1996 in the aggregate principal amount of $7.7 million
to finance the construction of a 235,000 square foot manufacturing facility for
Palm Beach. The bonds mature in April 2016. As of June 30, 1999, $6.4 million
principal amount of the bonds were outstanding.
INTEREST RATES
The bonds bear interest at a variable rate determined weekly by the First
Union National Bank of North Carolina. The variable rate will be based upon
prevailing market conditions and will be the minimum rate necessary, in the
judgement of the First Union National Bank of North Carolina, to enable it to
arrange the sale of the bonds at a price equal to the principal amount thereof
plus accrued interest. The variable rate is capped at
(1) the maximum rate permitted by applicable law or
(2) 12.0% per annum determined weekly.
On a one-time basis, Palm Beach has the option to convert the interest rate
payable on the bonds from a variable rate to a fixed rate. The interest fixed
rate will be determined by First Union National Bank of North Carolina, as
placement agent, in its sole judgment based upon prevailing market conditions on
the date of the conversion. Palm Beach has not exercised its right to convert
the interest rate payable to a fixed rate. At June 30, 1999, the interest rate
on the bonds was 3.9%.
REDEMPTION AND REPURCHASE
While the bonds bear interest at the variable rate, the County of Palm
Beach, Florida may redeem the bonds in whole or in part on:
(1) interest payment dates and
(2) on the date the interest rate is converted to a fixed rate, upon the
written request from Palm Beach with the consent of First Union
National Bank of Florida. The owners of the bonds also have the right
to demand the purchase of the bonds at a purchase price equal to the
principal amount of the bond, plus accrued interest to the date of
purchase if notice provisions are met. Once the interest rate on the
bonds is converted to a fixed interest rate, they are subject to
mandatory tender and purchase by Palm Beach on the date of the
conversion unless the owners have irrevocably elected to hold the bonds
bearing a fixed rate.
SECURITY
The bonds are collateralized by a letter of credit issued by First Union
National Bank of Florida and backed up by La Salle National Bank for the benefit
of the trustee under the indenture relating to the bonds on the Palm Beach
manufacturing facilities and a pledge of Palm Beach's interest in the bonds.
THE SLEEP INVESTOR PROMISSORY NOTES
In conjunction with the recapitalization of Sleepmaster Holdings L.L.C. in
1996, Sleep Investor issued $7.0 million of junior subordinated notes and paid
cash to the then-existing members of Sleepmaster Holdings L.L.C., including
current members of our management. In exchange for the notes, the then-existing
members of Sleepmaster Holdings L.L.C. delivered common and preferred interests
of Sleepmaster Holdings L.L.C., as well as notes issued by Sleepmaster Holdings
L.L.C., to Sleep Investor. Interest payments received by Sleep Investor on the
notes issued by Sleepmaster Holdings L.L.C.
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correspond to Sleep Investor's obligation to make interest payments on the
promissory notes. The promissory notes may be prepaid at Sleep Investor's option
and any prepayments must be made pro rata among all holders of the promissory
notes.
The promissory notes initially matured on November 14, 2007 and bore
interest at a fixed rate of 7.02% per annum, which interest was paid in kind
except that an amount equal to the current tax liability for the interest
received on the promissory notes was paid in cash. The maturity date was
extended to November 14, 2008 from November 14, 2007 in connection with the
acquisition of Palm Beach as required by the terms of the senior subordinated
notes.
AMENDMENT
In connection with the old note offering and the prepayment of the senior
subordinated notes, the promissory notes were amended to retroactively bear
interest at a fixed rate of 12.0% per annum and to mature on November 14, 2007.
The holders of the promissory notes received the retroactive interest payment in
the form of a cash payment which was meant to satisfy the tax obligations of the
holders with respect to the retroactive interest payment and a pay-in-kind note
for the balance. Future interest will be paid semi-annually. An amount of
interest shall be paid in cash that allows the holders to satisfy their income
tax obligations with respect to the interest accrual on the promissory notes.
The cash interest payment portion will rise or fall as income tax rates rise or
fall. The balance of the interest will be paid in the form of a promissory note;
provided that if Sleepmaster's ratio of EBITDA to interest expense is greater
than or equal to 2:1, the entire 12.0% interest shall be paid in cash. As of
June 30, 1999, $8.5 million principal amount of promissory notes were
outstanding.
PREPAYMENT
A mandatory prepayment of the promissory notes will be triggered upon a
change of control which is defined as:
(1) prior to an initial public offering, the failure of Citicorp Venture
Capital, Ltd. and its affiliates and employees to own 40% of the common
interests of Sleepmaster Holdings L.L.C.; and
(2) after an initial public offering, the failure of Citicorp Venture
Capital, Ltd. and its affiliates and employees to own 25% of the common
interests of Sleepmaster Holdings L.L.C.
Sleepmaster has no obligations or commitments to Sleep Investor under the
promissory notes. The new credit facility allows Sleepmaster to fund interest
payments on the promissory notes.
THE SLEEPMASTER HOLDINGS L.L.C. JUNIOR SUBORDINATED NOTE
In conjunction with the purchase of substantially all the assets of Star on
May 18, 1999, Sleepmaster Holdings L.L.C. issued a junior subordinated note to
the seller in the initial aggregate principal amount of $0.68 million as a
portion of the purchase price.
The junior subordinated note bears interest at a fixed rate of 6.0% per
annum, which is pay-in-kind, unless and until the occurrence of:
- a mandatory prepayment of the entire outstanding principal amount of the
junior subordinated note, plus all accrued and unpaid interest, within 15
days after the consummation of a sale of Sleepmaster Holdings L.L.C. or
Star or
- an optional prepayment of all or a portion of the unpaid principal amount
of the junior subordinated note, together with accrued and unpaid
interest on the portion of the principal amount which it is prepaying,
provided that such prepayment is not forbidden by the terms of the senior
debt.
The junior subordinated note matures on May 18, 2002.
Sleepmaster has no obligations or commitments to Sleepmaster Holdings
L.L.C. under the junior subordinated note. The new credit facility allows
Sleepmaster to fund interest payments on the junior subordinated note.
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DESCRIPTION OF THE NOTES
GENERAL
You can find the definitions of some of the terms used in this description
under the subheading "Definitions." For purposes of this section, reference to
Sleepmaster L.L.C. does not include its subsidiaries.
We will issue the exchange notes under the terms of the indenture dated as
of May 18, 1999 between Sleepmaster L.L.C., as the issuer, Sleepmaster Finance
Corporation, as a co-obligor, the guarantor subsidiaries and United States Trust
Company of New York, as trustee. The terms of the exchange notes include those
stated in the indenture and those made part of the indenture by reference to the
Trust Indenture Act of 1939.
The form and terms of the series B senior subordinated notes due 2009 are
the same as the form and terms of the old notes except that
(1) the exchange notes will have been registered under the Securities Act
of 1933 and thus will not bear restrictive legends restricting their
transfer under the Securities Act of 1933 and
(2) holders of exchange notes will not be entitled to rights of holders of
the old notes under the registration rights agreement which terminate
upon the consummation of the exchange offer.
The following description is a summary of the material provisions of the
indenture. It does not restate that agreement in its entirety. We urge you to
read the indenture and the registration rights agreement because they, and not
this description, define your rights as holders of these exchange notes. Copies
of the of the indenture and the registration rights agreement may be obtained by
contacting us at the address and telephone number at the end of the section
entitled "Prospectus Summary."
BRIEF DESCRIPTION OF THE EXCHANGE NOTES
THE NOTES
These exchange notes:
- are general unsecured obligations of Sleepmaster and Sleepmaster Finance
Corporation;
- are subordinated in right of payment to all of our and our guarantor
subsidiaries' current and future senior debt;
- are equal in right of payment to all of our and our guarantor
subsidiaries' existing and future senior subordinated debt; and
- are ahead of all our and our guarantor subsidiaries' other current and
future debt that expressly provides that it is subordinated to these
exchange notes and the subsidiary guarantees.
PRINCIPAL, MATURITY AND INTEREST
The exchange notes will be unsecured senior subordinated obligations of the
Sleepmaster and Sleepmaster Finance Corporation and will mature on May 15, 2009.
Each exchange note will bear interest at the rate of 11% from May 18, 1999 or
from the most recent interest payment date on which interest has been paid,
payable semiannually in arrears on May 15 and November 15 in each year,
commencing November 15, 1999.
The exchange notes which may be issued under the indenture will be limited
to $165.0 million aggregate principal amount, of which $115.0 million will be
issued in this offering. Up to $50 million of additional notes having identical
terms and conditions to the notes offered in this offering may be issued from
time to time after the date of this prospectus under the indenture, subject to
the provisions of the indenture, including those described under the caption
"-- Covenants -- Limitation on Indebtedness." The exchange notes issued in this
offering and any additional notes subsequently issued under the indenture will
be treated as a single class for all purposes under the indenture, including,
without limitation, waivers, amendments, redemptions and offers to purchase.
The issuers will pay interest to the Person in whose name the exchange
note, or any predecessor exchange note, is registered at the close of business
on the May 1 or November 1 immediately preceding
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the relevant interest payment date. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months. (Sections 202, 301 and 309)
METHODS OF RECEIVING PAYMENTS ON THE EXCHANGE NOTES
Principal of, premium, if any, and interest on the exchange notes will be
payable, and the exchange notes will be exchangeable and transferable, at the
office or agency of the issuers in The City of New York maintained for such
purposes, which initially will be the corporate trust office of the trustee.
Payment of interest also may be made at the option of the issuers by check
mailed to the Person entitled thereto as shown on the security register.
(Sections 301, 305 and 1002)
The exchange notes will be issued only in fully registered form without
coupons, in denominations of $1,000 and any integral multiple thereof. No
service charge will be made for any registration of transfer, exchange or
redemption of exchange notes, except in circumstances for any tax or other
governmental charge that may be imposed in connection with the exchange notes.
(Sections 302 and 305)
Settlement for the exchange notes will be made in same day funds. All
payments of principal and interest will be made by Sleepmaster in same day
funds. The exchange notes will trade in the Same-Day Funds Settlement System of
The Depository Trust Company until maturity, and secondary market trading
activity for the exchange notes will therefore settle in same day funds.
GUARANTEES
Payment of the exchange notes is guaranteed by the guarantors jointly and
severally, fully and unconditionally, on a senior subordinated basis.
- The guarantors are comprised of all of the domestic Wholly Owned
Restricted Subsidiaries of Sleepmaster.
- In addition, if any domestic Restricted Subsidiary of Sleepmaster becomes
a guarantor or obligor in respect of any other Indebtedness of
Sleepmaster or any of the Restricted Subsidiaries, Sleepmaster shall
cause such Restricted Subsidiary to enter into a supplemental indenture.
Under the supplemental indenture, the Restricted Subsidiary shall agree
to guarantee Sleepmaster's obligations under the exchange notes.
If the issuers default in payment of the principal of, premium, if any, or
interest on the exchange notes, each of the guarantors will be unconditionally,
jointly and severally obligated to duly and punctually pay the principal of,
premium, if any, and interest on the exchange notes.
The obligations of each guarantor under its guarantee are limited to the
maximum amount which:
(1) after giving effect to all other contingent and fixed liabilities of
such guarantor, and
(2) after giving effect to any collections from or payments made by or on
behalf of any other guarantor in respect of the obligations of such
other guarantor under its guarantee or pursuant to its contribution
obligations under the indenture,
will result in the obligations of such guarantor under its guarantee not
constituting a fraudulent conveyance or fraudulent transfer under Federal or
state law. Each guarantor that makes a payment or distribution under its
guarantee shall be entitled to a contribution from any other guarantor in a pro
rata amount based on the net assets of each guarantor determined in accordance
with GAAP.
Notwithstanding the foregoing, in circumstances such as those described in
the Section "Covenants" under the heading "Limitation on Issuance of Guarantees
and Pledges for Indebtedness" in subsection (c), a guarantee of a guarantor may
be released from their obligation. Sleepmaster also may, at any time, cause a
Restricted Subsidiary to become a guarantor by executing and delivering a
supplemental indenture providing for the guarantee of payment of the exchange
notes by such Restricted Subsidiary on the basis provided in the indenture.
OPTIONAL REDEMPTION
After May 15, 2004, we may redeem all or a portion of the exchange notes,
on not less than 30 nor more than 60 days' prior notice, in amounts of $1,000 or
an integral multiple of $1,000. The exchange
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notes will be redeemed during the twelve-month period beginning on May 15 of the
years indicated below at the redemption prices expressed as percentages of
principal amount plus accrued and unpaid interest described below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2004.............................................. 105.500%
2005.............................................. 103.667%
2006.............................................. 101.833%
2007 and thereafter............................... 100.000%
</TABLE>
In each case, we will also pay accrued and unpaid interest, if any, to the
redemption date, subject to the rights of holders of record on relevant record
dates to receive interest due on an interest payment date.
PUBLIC EQUITY OFFERING REDEMPTION
At any time prior to May 15, 2002, we may on one or more occasions redeem
up to 35% of the aggregate principal amount of the exchange notes originally
issued under the indenture with the proceeds of one or more public equity
offerings. This 35% includes the principal amount of any additional notes which
may be issued under the indenture. The redemption price will be 111% of the
principal amount of the exchange notes, plus accrued and unpaid interest to the
redemption date, provided that:
(1) at least 65% of the aggregate principal amount of exchange notes,
including any additional notes which may be issued under the indenture,
remains outstanding immediately after the occurrence of each such
redemption;
(2) we mail notice of the redemption no later than 20 days after the
closing of the related public equity offering; and
(3) the redemption occurs within 45 days of the date of the closing of such
public equity offering.
CHANGE OF CONTROL CALL
The exchange notes may be redeemed at any time prior to May 15, 2004, at
the option of the issuers, in whole and not in part, within 60 days after a
change in control event. The issuers must give notice to each holder of exchange
notes not less than 30 nor more than 60 days' prior to the scheduled redemption.
Exchange notes may be redeemed in amounts of $1,000 or an integral multiple of
$1,000. The redemption price will be equal to the sum of
(1) 100% of the principal amount thereof plus
(2) accrued and unpaid interest, if any, to the redemption date, subject to
the right of holders of record on relevant record dates to receive
interest due on an interest payment date, plus
(3) the Applicable Premium, if any.
In no event will the redemption price of the exchange notes be less than 105.5%,
the redemption price for the exchange notes on May 15, 2004, of the principal
amount of the exchange notes, plus accrued interest to the applicable redemption
date.
Applicable Premium means, with respect to an exchange note to be redeemed
at any redemption date, the excess of
(A) the present value at such time of
(1) the redemption price of such exchange note at May 15, 2004, plus
(2) all required interest payments, excluding accrued but unpaid
interest to the date of redemption, due on such exchange note
through May 15, 2004, computed using a discount rate equal to the
Treasury Rate plus 50 basis points, over
(B) the then outstanding principal amount of such exchange note.
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PROCEDURES
If less than all of the exchange notes are to be redeemed, the trustee
shall select the exchange notes to be redeemed in compliance with the
requirements of the principal national security exchange, if any, on which the
exchange notes are listed. If the exchange notes are not listed on a national
security exchange, the trustee shall redeem the exchange notes on a pro rata
basis, by lot or by any other method the trustee shall deem fair and reasonable.
Exchange notes redeemed in part must be redeemed only in integral multiples of
$1,000. Redemption pursuant to the provisions relating to a public equity
offering must be made on a pro rata basis or on as nearly a pro rata basis as
practicable, subject to the procedures of The Depositary Trust Company or any
other depositary. (Sections 203, 1101, 1105 and 1107)
SINKING FUND
The exchange notes will not be entitled to the benefit of any sinking fund.
PURCHASE OF NOTES UPON A CHANGE OF CONTROL
If a change of control event occurs, each holder of exchange notes will
have the right to require that the issuers purchase all or any part, in integral
multiples of $1,000, of such holder's exchange notes under a change of control
offer. Neither the board of directors of Sleepmaster or Sleepmaster Finance
Corporation nor the trustee may waive a holder's right to redeem its exchange
notes upon a change of control. In the change of control offer, the issuers will
offer to purchase all of the exchange notes at a purchase price in cash in an
amount equal to 101% of the principal amount of such exchange notes, plus
accrued and unpaid interest, if any, to the date of purchase. The repurchase is
subject to the rights of holders of record on relevant record dates to receive
interest due on an interest payment date.
Within 30 days of any change of control, the issuers must notify the
trustee and give written notice of the change of control to each holder of
exchange notes, by first-class mail, postage prepaid, at its address appearing
in the security register. The notice must state, among other things,
- that a change of control has occurred and the date of such event;
- the circumstances and relevant facts regarding such change of control,
including information with respect to pro forma historical income, cash
flow and capitalization after giving effect to such change of control;
- the purchase price and the purchase date which shall be fixed by the
issuers on a business day no earlier than 30 days nor later than 60 days
from the date the notice is mailed, or such later date as is necessary to
comply with requirements under the Securities Exchange Act of 1934;
- that any exchange note not tendered will continue to accrue interest;
- that, unless the issuers default in the payment of the change of control
purchase price, any exchange notes accepted for payment pursuant to the
change of control offer shall cease to accrue interest after the change
of control purchase date; and
- other procedures that a holder of exchange notes must follow to accept a
change of control offer or to withdraw acceptance of the change of
control offer. (Section 1015)
In addition, prior to any change of control, but after it is publicly
announced, the issuers, at their option, may notify the trustee and give written
notice of the proposed change of control to each holder of the exchange notes,
offering to purchase all of the exchange notes at the change of control purchase
price, which notice and offer shall be sufficient to constitute a change of
control offer.
If a change of control offer is made, the issuers may not have available
funds sufficient to pay the change of control purchase price for all of the
exchange notes that might be delivered by holders of the exchange notes seeking
to accept the change of control offer. As of June 30, 1999, Sleepmaster had $6.4
million of senior debt outstanding. The failure of Sleepmaster to make or
consummate the change of control offer or pay the change of control purchase
price when due will give the trustee and the holders of the exchange notes the
rights described under "-- Events of Default."
Under the credit facility, a change of control, as defined in the credit
facility, constitutes an event of default. Upon acceleration, all Indebtedness
thereunder would become due and payable.
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The definition of change of control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the issuers. The term "all or substantially all" as used in the
definition of "change of control" has not been interpreted under New York law,
which is the governing law of the indenture, to represent a specific
quantitative test. Therefore, if holders of the exchange notes elected to
exercise their rights under the indenture and Sleepmaster and Sleepmaster
Finance Corporation elected to contest such election, it is not clear how a
court interpreting New York law would interpret the phrase. A disposition of all
of the assets of Sleepmaster and Sleepmaster Finance Corporation, however, may
still not constitute a change of control.
The existence of a holder's right to require the issuers to repurchase the
holder's exchange notes upon a change of control may deter a third party from
acquiring Sleepmaster and Sleepmaster Finance Corporation in a transaction which
constitutes a change of control.
The provisions of the indenture will not afford holders of the exchange
notes the right to require the issuers to repurchase the exchange notes in the
event of a highly leveraged transaction or certain transactions with Sleepmaster
and Sleepmaster Finance Corporation management or Affiliates if the transaction
is not defined as a change of control. The following highly leveraged
transactions may not constitute a change of control but may adversely affect
holders of exchange notes:
(1) a reorganization,
(2) a restructuring, or
(3) a merger or similar transaction, including an acquisition of
Sleepmaster and Sleepmaster Finance Corporation by management or
affiliates, involving Sleepmaster and Sleepmaster Finance Corporation.
A transaction with management would not be a change of control so long as no
party other than management or Citicorp Venture Capital, Ltd. and its affiliates
acquired more than 50% of Sleepmaster's voting stock in the transaction.
Sleepmaster and Sleepmaster Finance Corporation will comply with the
applicable tender offer rules, including Rule 14e-1 under the Securities
Exchange Act, and any other applicable securities laws or regulations in
connection with a change of control offer.
Sleepmaster and Sleepmaster Finance Corporation will not be required to
make a change of control offer upon a change of control if
(1) a third party makes the change of control offer
(2) the change of control offer is made in the manner and at the times and
otherwise in compliance with the requirements described in the
indenture applicable to a change of control offer made by Sleepmaster
and Sleepmaster Finance Corporation and
(3) the third party purchases all exchange notes validly tendered and not
withdrawn under the change of control offer.
RANKING
The Indebtedness evidenced by the exchange notes will be unsecured senior
subordinated indebtedness of Sleepmaster and Sleepmaster Finance Corporation.
The payment of the principal of any premiums and interest on the exchange notes
(1) is subordinate in right of payment, as described in the indenture, to
all existing and future Senior Indebtedness of Sleepmaster and
Sleepmaster Finance Corporation,
(2) will rank equal in right of payment with all existing and future senior
subordinated indebtedness of Sleepmaster and Sleepmaster Finance
Corporation, and
(3) will be senior in right of payment to all existing and future
subordinated obligations of Sleepmaster and Sleepmaster Finance
Corporation.
The exchange notes will also be effectively subordinated to any Secured
Indebtedness of Sleepmaster and Sleepmaster Finance Corporation to the extent of
the value of the assets securing such indebtedness. However, payment from the
money or the proceeds of U.S. Government Obligations held in any
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defeasance trust described under "Defeasance" below is not subordinated to any
Senior Indebtedness or subject to the restrictions in the indenture.
GUARANTOR SUBSIDIARIES
The indebtedness evidenced by a subsidiary guaranty will be unsecured
senior subordinated indebtedness of the guarantor subsidiary issuing such
subsidiary guaranty. The payment of a subsidiary guaranty
(1) is subordinate in right of payment, as described in the indenture, to
all existing and future senior indebtedness of such guarantor
subsidiary,
(2) will rank equal in right of payment with the existing and future senior
subordinated indebtedness of such guarantor subsidiary and
(3) will be senior in right of payment to all existing and future
subordinated obligations of such guarantor subsidiary.
Each subsidiary guaranty will also be effectively subordinated to any Secured
Indebtedness of the guarantor subsidiary to the extent of the value of the
assets securing such indebtedness.
EVENT OF DEFAULT
Upon the occurrence of any default in the payment of any Designated Senior
Indebtedness beyond any applicable grace period and after the receipt by the
trustee from a representative of holders of any Designated Senior Indebtedness,
collectively, a "Senior Representative", of written notice of such default,
payments on the exchange notes will be restricted. Specifically, no payment
(other than payments previously made pursuant to the provisions described under
"-- Defeasance or Covenant Defeasance of Indenture") or distribution of any
assets of Sleepmaster of any kind or character (excluding permitted equity
interests or subordinated securities) may be made on account of the principal
of, premium, if any, or interest on, the exchange notes or on account of the
purchase, redemption, defeasance or other acquisition of or in respect of, the
exchange notes unless and until such default shall have been cured or waived or
shall have ceased to exist or such Designated Senior Indebtedness shall have
been discharged or paid in full. After the default is cured or waived,
Sleepmaster shall resume making any and all required payments in respect of the
exchange notes, including any missed payments.
BLOCKAGE PERIOD
Upon the occurrence and during the continuance of any non-payment default
Sleepmaster may not pay the exchange notes for a period. This restriction
applies to any Designated Senior Indebtedness with maturity that may be
accelerated immediately. This period will commence upon the receipt by the
trustee and Sleepmaster from a Senior Representative of written notice of such
non-payment default. After the trustee and Sleepmaster receive notice, no
payment (other than payments previously made pursuant to the provisions
described under "-- Defeasance or Covenant Defeasance of Indenture") or
distribution of any assets of Sleepmaster of any kind or character (excluding
permitted equity interests or subordinated securities) may be made by
Sleepmaster on account of the principal of, premium, if any, or interest on, the
exchange notes. In addition, no payments may be made on account of the purchase,
redemption, defeasance or other acquisition of, or in respect of, the exchange
notes for the period specified below.
The payment blockage period shall commence upon the receipt of notice of
the non-payment default by the trustee and Sleepmaster from a Senior
Representative and shall end on the earliest of
(1) the 179th day after such commencement,
(2) the date on which such non-payment default, and all other non-payment
defaults as to which notice is given after such payment blockage period
is initiated, is cured, waived or ceases to exist or on which such
Designated Senior Indebtedness is discharged or paid in full or
(3) the date on which such payment blockage period, and all non-payment
defaults as to which notice is given after such payment blockage period
is initiated, shall have been terminated by
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written notice to Sleepmaster or the trustee from the Senior
Representative initiating such payment blockage period.
When the payment blockage period ends, Sleepmaster will promptly resume
making any and all required payments in respect of the exchange notes, including
any missed payments. In no event will a payment blockage period extend beyond
179 days from the date of the receipt by Sleepmaster or the trustee of the
notice initiating such payment blockage period.
Any number of notices of non-payment defaults may be given during this
first 179 day period. However, during any period of 365 consecutive days only
one payment blockage period, during which payment of principal of, or interest
on, the exchange notes may not be made, may commence. The duration of such
payment blockage period may not exceed 179 days and there must be a 186
consecutive day period in any 365 day period during which no payment blockage
period is in effect.
No non-payment default with respect to Designated Senior Indebtedness that
existed or was continuing on the date of the commencement of any payment
blockage period will be, or can be, made the basis for the commencement of a
second payment blockage period, whether or not within a period of 365
consecutive days, unless such default has been cured or waived for a period of
not less than 90 consecutive days subsequent to the commencement of such initial
Payment Blockage Period. (Section 1203)
DEFAULT
If Sleepmaster fails to make any payment on the exchange notes when due or
within any applicable grace period, whether or not on account of the payment
blockage provisions referred to above, such failure would constitute an event of
default under the indenture and would enable the holders of the exchange notes
to accelerate the maturity thereof. See "-- Events of Default."
The indenture will provide that in the event of
(1) any insolvency or bankruptcy case or proceeding, or any receivership,
liquidation, reorganization or other similar case or proceeding,
relative to Sleepmaster or its assets,
(2) or any liquidation, dissolution or other winding up of Sleepmaster,
whether voluntary or involuntary, or
(3) any assignment for the benefit of creditors or other marshalling of
assets or liabilities of Sleepmaster (except in connection with the
consolidation or merger of Sleepmaster or its liquidation or
dissolution following the conveyance, transfer or lease of its
properties and assets substantially as an entirety upon the terms and
conditions described under "-- Consolidation, Merger, Sale of Assets"),
all Senior Indebtedness must be paid in full before any payment or
distribution (excluding distributions of permitted equity interests or
subordinated securities) is made on account of the principal of,
premium, if any, or interest on the exchange notes or on account of the
purchase, redemption, defeasance or other acquisition of or in respect
of the exchange notes (other than payments previously made pursuant to
the provisions described under "-- Defeasance or Covenant Defeasance of
Indenture").
By reason of such subordination, in the event of liquidation or insolvency,
creditors of Sleepmaster who are holders of Senior Indebtedness may recover
more, ratably, than the holders of the exchange notes. Funds which would be
otherwise payable to the holders of the exchange notes will be paid to the
holders of the Senior Indebtedness to the extent necessary to pay the Senior
Indebtedness in full and Sleepmaster may be unable to meet its obligations fully
with respect to the exchange notes.
FUTURE DEBT
The indenture will limit, but not prohibit, the incurrence by Sleepmaster
and its Subsidiaries of additional Indebtedness. Additionally, the indenture
will prohibit the incurrence by Sleepmaster of Indebtedness that is subordinated
in right of payment to any Senior Indebtedness of Sleepmaster and senior in
right of payment to the exchange notes. As of June 30, 1999, the amount of
indebtedness that Sleepmaster can incur which out ranks the exchange notes was
$30.9 million.
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Each guarantee of a guarantor will be an unsecured senior subordinated
obligation of such guarantor, ranking senior in right of payment to all other
existing and future Indebtedness of such guarantor that is expressly
subordinated to Senior Guarantor Indebtedness. The Indebtedness evidenced by the
guarantees will be subordinated to Senior Guarantor Indebtedness to
substantially the same extent as the exchange notes are subordinated to Senior
Indebtedness. During any period when payment on the exchange notes is blocked by
Designated Senior Indebtedness, payment on the guarantees will be similarly
blocked.
CURRENT OUTSTANDING DEBT
As of June 30, 1999,
(1) the aggregate amount of Senior Indebtedness outstanding was
approximately $6.4 million, consisting of our guarantee of Senior
Guarantor Indebtedness,
(2) the aggregate amount of Senior Guarantor Indebtedness was $6.4 million,
(3) our non-guarantor Restricted Subsidiary had no Indebtedness outstanding
and
(4) no Subordinated Indebtedness or Pari Passu Indebtedness was
outstanding.
See "Risk Factors -- We will have substantial debt following this offering and
will need to generate significant cash flow in order to pay interest on our
debt" and "Capitalization."
SLEEPMASTER FINANCE CORPORATION
Sleepmaster Finance Corporation is a joint and several co-obligor of the
exchange notes. Sleepmaster Finance Corporation is a Wholly Owned Restricted
Subsidiary of Sleepmaster and has no material assets. The indenture provides
that the exchange notes are senior subordinated obligations of Sleepmaster
Finance Corporation to the same extent as the obligations are senior
subordinated obligations of Sleepmaster. As of June 30, 1999, Sleepmaster
Finance Corporation had no Indebtedness outstanding, other than the exchange
notes. Sleepmaster Finance Corporation is prohibited from incurring any
indebtedness other than the notes and the exchange notes.
"SENIOR INDEBTEDNESS" means the principal of, premium, if any, and interest
on any Indebtedness of Sleepmaster (other than as otherwise provided in this
definition), whether outstanding on the date of the indenture or thereafter
created, incurred or assumed, and whether at any time owing, actually or
contingent, unless, in the case of any particular Indebtedness, the instrument
creating or evidencing the same or pursuant to which the same is outstanding
expressly provides that such Indebtedness shall not be senior in right of
payment to the exchange notes.
Notwithstanding the foregoing, "Senior Indebtedness" shall not include
(1) Indebtedness evidenced by the exchange notes or any additional notes,
(2) Indebtedness that is subordinate or junior in right of payment to any
Indebtedness of Sleepmaster,
(3) Indebtedness which when incurred and without respect to any election
under Section 1111(b) of Title 11 United States Code, is without
recourse to Sleepmaster,
(4) Indebtedness which is represented by Redeemable Capital Stock,
(5) any liability for foreign, federal, state, local or other taxes owed or
owing by Sleepmaster to the extent such liability constitutes
Indebtedness,
(6) Indebtedness of Sleepmaster to a Subsidiary or any other Affiliate of
Sleepmaster or any of such Affiliate's Subsidiaries,
(7) to the extent it might constitute Indebtedness, amounts owing for
goods, materials or services purchased in the ordinary course of
business or consisting of trade accounts payable owed or owing by
Sleepmaster, and amounts owed by Sleepmaster for compensation to
employees or services rendered to Sleepmaster,
(8) that portion of any Indebtedness which at the time of issuance is
issued in violation of the indenture and
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(9) Indebtedness evidenced by any guarantee of any Subordinated
Indebtedness or Pari Passu Indebtedness.
"DESIGNATED SENIOR INDEBTEDNESS" means
(1) all Senior Indebtedness under the credit facility and
(2) any other Senior Indebtedness which at the time of determination has an
aggregate principal amount outstanding of at least $20 million and
which is specifically designated in the instrument evidencing such
Senior Indebtedness or the agreement under which such Senior
Indebtedness arises as "Designated Senior Indebtedness" by Sleepmaster.
"SENIOR GUARANTOR INDEBTEDNESS" means the principal of, premium, if any,
and interest on any Indebtedness of any guarantor, other than as otherwise
provided in this definition. This includes indebtedness outstanding on the date
of the indenture or thereafter created, incurred or assumed, and whether at any
time owing, actually or contingent. Senior Guarantor Indebtedness will not
include Indebtedness if the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to any guarantee.
Notwithstanding the foregoing, "Senior Guarantor Indebtedness" shall not
include
(1) Indebtedness evidenced by the guarantees or any guarantee by a
guarantor of additional notes,
(2) Indebtedness that is subordinated or junior in right of payment to any
Indebtedness of any guarantor,
(3) Indebtedness which when incurred and without respect to any election
under Section 1111(b) of Title 11 United States Code, is without
recourse to any guarantor,
(4) Indebtedness which is represented by Redeemable Capital Stock,
(5) any liability for foreign, federal, state, local or other taxes owed or
owing by any guarantor to the extent such liability constitutes
Indebtedness,
(6) Indebtedness of any guarantor to a Subsidiary or any other Affiliate of
Sleepmaster or any of such Affiliate's Subsidiaries,
(7) to the extent it might constitute Indebtedness, amounts owing for
goods, materials or services purchased in the ordinary course of
business or consisting of trade accounts payable owed or owing by such
guarantor, and amounts owed by such guarantor for compensation to
employees or services rendered to such guarantor,
(8) that portion of any Indebtedness which at the time of issuance is
issued in violation of the indenture and
(9) Indebtedness evidenced by any guarantee of any Subordinated
Indebtedness or Pari Passu Indebtedness.
COVENANTS
The indenture contains, among others, the following covenants:
LIMITATION ON INDEBTEDNESS. Sleepmaster will not, and will not cause or
permit any of its Restricted Subsidiaries to incur Indebtedness. Incurring
Indebtedness includes creating, issuing, incurring, assuming, guaranteeing or
otherwise in any manner becoming directly or indirectly liable for the payment
of or otherwise incurring, contingently or otherwise, any Indebtedness,
including any Acquired Indebtedness, unless
(1) such Indebtedness is incurred by Sleepmaster or a guarantor or
constitutes Acquired Indebtedness of a Restricted Subsidiary and,
(2) in each case, Sleepmaster's Consolidated Fixed Charge Coverage Ratio
for the most recent four full fiscal quarters for which financial
statements are available immediately preceding the incurrence of such
Indebtedness taken as one period is at least equal to or greater than
2:1. (Section 1008)
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Notwithstanding the foregoing, Sleepmaster and, to the extent specifically
detailed below, the Restricted Subsidiaries may incur each and all of the
following which constitute Permitted Indebtedness:
(1) Indebtedness of Sleepmaster, and guarantees thereof by the guarantors,
under the credit facility in an aggregate principal amount then
classified as having been incurred in reliance on this clause (1) at
any one time outstanding not to exceed the greater of
(a) $25 million under the revolving credit facility thereof and in
respect of letters of credit thereunder minus the amount by which
any commitments thereunder are permanently reduced and minus the
aggregate amount of Net Cash Proceeds of Asset Sales applied to
permanently reduce the commitments with respect to such
Indebtedness pursuant to the "Restriction on Asset Sales"
covenant; and
(b) the sum of
(1) 80% of the consolidated net book value of the accounts
receivable and
(2) 60% of the net book value of the inventory, in each case of
Sleepmaster and its Restricted Subsidiaries as described on the
latest available consolidated balance sheet of Sleepmaster
determined in accordance with GAAP;
(2) Indebtedness of Sleepmaster and Sleepmaster Finance Corporation
pursuant to the exchange notes, other than any additional notes, and
Indebtedness of any guarantor pursuant to a guarantee of the exchange
notes, other than any additional notes;
(3) Indebtedness of Sleepmaster or any Restricted Subsidiary outstanding on
the date of the indenture,
(4) Indebtedness of Sleepmaster owing to a Restricted Subsidiary;
- provided that any Indebtedness of Sleepmaster owing to a Restricted
Subsidiary that is not a guarantor is made pursuant to an
intercompany note in the form attached to the indenture and is
unsecured and is subordinated in right of payment from and after
such time as the exchange notes shall become due and payable,
whether at Stated Maturity, acceleration or otherwise, to the
payment and performance of Sleepmaster's obligations under the
exchange notes;
- provided, further, that any disposition, pledge or transfer of any
such Indebtedness to a Person (other than a disposition, pledge or
transfer to a Restricted Subsidiary) shall be deemed to be an
incurrence of such Indebtedness by Sleepmaster or other obligor not
permitted by this clause (4);
(5) Indebtedness of a Majority Owned Restricted Subsidiary owing to
Sleepmaster or another Majority Owned Restricted Subsidiary;
- provided that any Indebtedness is made pursuant to an intercompany
note in the form attached to the indenture;
- provided, further, that
(a) any disposition, pledge or transfer of any such Indebtedness to a
Person, other than a disposition, pledge or transfer to
Sleepmaster or a Majority Owned Restricted Subsidiary, shall be
deemed to be an incurrence of such Indebtedness by the obligor
not permitted by this clause (5), and
(b) any transaction pursuant to which any Majority Owned Restricted
Subsidiary, which has Indebtedness owing to Sleepmaster or any
other Wholly Owned Restricted Subsidiary, ceases to be a Majority
Owned Restricted Subsidiary shall be deemed to be the incurrence
of Indebtedness by such Majority Owned Restricted Subsidiary that
is not permitted by this clause (5);
(6) guarantees of any Restricted Subsidiary made in accordance with the
provisions of "-- Limitation on Issuances of Guarantees of and Pledges
for Indebtedness;"
(7) obligations of Sleepmaster or any Restricted Subsidiary entered into in
the ordinary course of business
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(a) pursuant to Interest Rate Agreements designed to protect
Sleepmaster or any Restricted Subsidiary against fluctuations in
interest rates in respect of Indebtedness of Sleepmaster or any
Restricted Subsidiary as long as such obligations do not exceed
the aggregate principal amount of such Indebtedness then
outstanding or
(b) under any Currency Hedging Agreements, relating to
(1) Indebtedness of Sleepmaster or any Restricted Subsidiary and/or
(2) obligations to purchase or sell assets or properties, in each
case, incurred in the ordinary course of business of Sleepmaster
or any Restricted Subsidiary;
provided, however, that such Currency Hedging Agreements do not increase
the Indebtedness or other obligations of Sleepmaster or any Restricted
Subsidiary outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;
(8) Indebtedness of Sleepmaster or any Restricted Subsidiary represented
by Capital Lease Obligations or Purchase Money Obligations or other
Indebtedness incurred or assumed in connection with the acquisition or
development of real or personal, movable or immovable, property in
each case incurred for the purpose of financing or refinancing all or
any part of the purchase price or cost of construction or improvement
of property, including common stock, used in the business of
Sleepmaster, in an aggregate principal amount outstanding at any time
pursuant to this clause (8) not to exceed the greater of $7.5 million
or 10% of Sleepmaster's Consolidated Net Tangible Assets; provided
that the principal amount of any Indebtedness permitted under this
clause (8) did not in each case at the time of incurrence exceed the
Fair Market Value, as determined by Sleepmaster in good faith, of the
acquired or constructed asset or improvement so financed;
(9) Acquired Indebtedness, Indebtedness incurred to finance acquisitions,
or Indebtedness incurred to refinance Acquired Indebtedness or
Indebtedness incurred to finance acquisitions, in any such case of
Sleepmaster or any guarantor, provided that after giving pro forma
effect thereto
(a) Sleepmaster's Consolidated Fixed Charge Coverage Ratio is less
than 2.0:1 but greater than or equal to 1.75:1 and
(b) Sleepmaster's Consolidated Fixed Charge Coverage Ratio increases
as a consequence of such incurrence and related acquisition;
(10) any renewals, extensions, substitutions, refundings, refinancings or
replacements (collectively, a "refinancing") of any Indebtedness
described in clauses (2), (3) or (9) of this definition of "Permitted
Indebtedness," including any successive refinancings so long as the
borrower under such refinancing is Sleepmaster. If not, the same as
the borrower of the Indebtedness being refinanced and the aggregate
principal amount of Indebtedness represented thereby, or if such
Indebtedness provides for an amount less than the principal amount
thereof to be due and payable upon a declaration of acceleration of
the maturity thereof, the original issue price of such Indebtedness
plus any accreted value attributable thereto since the original
issuance of such Indebtedness, is not increased by such refinancing
plus the lesser of
(a)the stated amount of any premium or other payment required to be paid
in connection with such a refinancing pursuant to the terms of the
Indebtedness being refinanced or
(b)the amount of premium or other payment actually paid at such time to
refinance the Indebtedness, plus, in either case, the amount of
expenses of Sleepmaster incurred in connection with such refinancing
and
(1) in the case of any refinancing of Indebtedness that is
Subordinated Indebtedness, such new Indebtedness is made
subordinated to the exchange notes at least to the same
extent as the Indebtedness being refinanced and
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(2) in the case of Pari Passu Indebtedness or Subordinated
Indebtedness, as the case may be, such refinancing does not
reduce the Average Life to Stated Maturity or the Stated
Maturity of such Indebtedness;
(11) any guarantee by Sleepmaster or any of its Restricted Subsidiaries of
Indebtedness of Sleepmaster or a Restricted Subsidiary of Sleepmaster
that was not prohibited from being incurred pursuant to any of the
terms of the indenture;
(12) Indebtedness incurred by Sleepmaster or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to
letters of credit issued in the ordinary course of business, including
without limitation to letters of credit in respect to workers'
compensation claims or self-insurance, or other Indebtedness with
respect to reimbursement type obligations regarding workers'
compensation claims; provided, however, that upon the drawing of such
letters of credit or the incurrence of such Indebtedness, such
obligations are reimbursed within 30 days following such drawing or
incurrence;
(13) Indebtedness arising from agreements of Sleepmaster or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price
or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, asset or Restricted
Subsidiary, other than guarantees of Indebtedness incurred by any
Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition;
provided that
(x) such Indebtedness is not reflected on the balance sheet of
Sleepmaster or any Restricted Subsidiary, contingent obligations
referred to in a footnote or footnotes to financial statements and
not otherwise reflected on the balance sheet will not be deemed to
be reflected on such balance sheet for purposes of this clause (x),
and
(y) the maximum assumable liability in respect of such Indebtedness
shall at no time exceed the gross cash proceeds actually received by
Sleepmaster and/or such Restricted Subsidiary in connection with
such disposition;
(14) obligations in respect of performance and surety bonds and completion
guarantees provided by Sleepmaster or any Restricted Subsidiary in the
ordinary course of business; and
(15) Indebtedness of Sleepmaster in addition to that described in clauses
(1) through (14) above, and any renewals, extensions, substitutions,
refinancings or replacements of such Indebtedness, so long as the
aggregate principal amount of all such Indebtedness shall not exceed
$10 million outstanding at any one time in the aggregate.
For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness permitted by this
covenant, Sleepmaster in its sole discretion shall classify such item of
Indebtedness and only be required to include the amount of such Indebtedness as
one of such types. In addition, Sleepmaster may, at any time, change the
classification of an item of Indebtedness, or any portion thereof, to any other
clause or to the first paragraph hereof provided that Sleepmaster would be
permitted to incur such item of Indebtedness, or portion thereof, pursuant to
such other clause or the first paragraph hereof, as the case may be, at such
time of reclassification, except for Redeemable Capital Stock outstanding on the
date of the indenture.
LIMITATION ON RESTRICTED PAYMENTS.
(a) Sleepmaster will not, and will not cause or permit any Restricted
Subsidiary to, directly or indirectly:
(1) declare or pay any dividend on, or make any distribution on account
of, any shares of Sleepmaster's Capital Stock, other than dividends
or distributions payable solely in shares of
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its Qualified Capital Stock or in options, warrants or other rights
to acquire shares of such Qualified Capital Stock;
(2) purchase, redeem, defease or otherwise acquire or retire for value,
directly or indirectly, Sleepmaster's Capital Stock, any Capital
Stock of any Subsidiary of Sleepmaster (other than Capital Stock of
any Wholly Owned Restricted Subsidiary of Sleepmaster or any
Restricted Subsidiary if as a result of such purchase, redemption,
defeasance, acquisition or retirement, such Restricted Subsidiary
becomes a Majority Owned Restricted Subsidiary), any Capital Stock
of any entity that owns, directly or indirectly, a majority of the
Capital Stock of Sleepmaster, or options, warrants or other rights
to acquire any of the aforementioned Capital Stock;
(3) make any principal payment on, or repurchase, redeem, defease,
retire or otherwise acquire for value, prior to any required or
mandatory principal payment, sinking fund payment or maturity, any
Subordinated Indebtedness;
(4) declare or pay any dividend or distribution on any Capital Stock of
any Restricted Subsidiary to any Person other than
(a) to Sleepmaster or any of its Wholly Owned Restricted Subsidiaries
or
(b) dividends or distributions made by a Restricted Subsidiary on a
pro rata basis to all stockholders of such Restricted Subsidiary;
or
(5) make any Investment in any Person other than any Permitted
Investments
(any of the foregoing actions described in clauses (1) through (5)
above, other than any such action that is a Permitted Payment, as
defined below, collectively, "Restricted Payments") (the amount of any
such Restricted Payment, if other than cash, shall be the Fair Market
Value of the assets proposed to be transferred, as determined by the
board of directors of Sleepmaster, whose determination shall be
conclusive and evidenced by a board resolution), unless
(1) immediately before and immediately after giving effect to such
proposed Restricted Payment on a pro forma basis, no Default or
Event of Default shall have occurred and be continuing and such
Restricted Payment shall not be an event which is, or after notice
or lapse of time or both, would be, an "event of default" under the
terms of any Indebtedness of Sleepmaster or its Restricted
Subsidiaries;
(2) immediately before and immediately after giving effect to such
Restricted Payment on a pro forma basis, Sleepmaster could incur $1.00
of additional Indebtedness, other than Permitted Indebtedness, under
the provisions described under "-- Limitation on Indebtedness;" and
(3) after giving effect to the proposed Restricted Payment, the aggregate
amount of all such Restricted Payments declared or made after the date
of the indenture and all Designation Amounts does not exceed the sum
of:
(A) 50% of the aggregate Consolidated Net Income of Sleepmaster accrued
on a cumulative basis during the period beginning on the first day
of Sleepmaster's fiscal quarter beginning after the date of the
indenture and ending on the last day of Sleepmaster's last fiscal
quarter ending prior to the date of the Restricted Payment, or, if
such aggregate cumulative Consolidated Net Income shall be a loss,
minus 100% of such loss;
(B) the aggregate net cash proceeds received after the date of the
indenture by Sleepmaster either
(1) as capital contributions in the form of common equity to
Sleepmaster or
(2) from the issuance or sale, other than to any of its Subsidiaries,
of Qualified Capital Stock of Sleepmaster or any options,
warrants or rights to purchase such Qualified Capital Stock of
Sleepmaster to the extent, however, that the proceeds are used to
purchase, redeem or otherwise retire Capital Stock or
Subordinated Indebtedness as
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described below in clause (2) or (3) of paragraph (b) below. The
proceeds will not be included in aggregate net cash proceeds. The
Net Cash Proceeds from the issuance of Qualified Capital Stock
financed, directly or indirectly, using funds borrowed from
Sleepmaster or any Subsidiary until and to the extent such
borrowing is repaid will also be excluded. Finally, in
determining aggregate net cash proceeds, the fair market value of
property other than cash will be included. The fair market value
of property will be determined by the board of directors of
Sleepmaster in good faith and evidenced by a board resolution in
an officer's certificate delivered to the trustee. If the fair
market value is in excess of $5 million, an opinion as to the
value thereof issued by an investment banking firm of national
standing, which opinion shall provide a specific value which, or
a range of values the lowest point of which, is not lower than
the value in the board resolution, will be provided. The property
must also be related, ancillary or complementary to any business
of Sleepmaster and its Restricted Subsidiaries.
(C) the aggregate net cash proceeds received after the date of the
indenture by Sleepmaster, other than from any of its Subsidiaries,
upon the exercise of any options, warrants or rights to purchase
Qualified Capital Stock of Sleepmaster. In determining aggregate net
cash proceeds, the fair market value of property other than cash
will be included. The fair market value of the property will be
determined by the board of directors of Sleepmaster in good faith
and evidenced by a board resolution in an officer's certificate
delivered to the trustee. If the fair market value is in excess of
$5 million, an opinion as to the value thereof issued by an
investment banking firm of national standing, a copy of which shall
be delivered to the trustee, which opinion shall provide a specific
value which, or a range of values the lowest point of which, is not
lower than the value set forth in the board resolution will be
provided. The property must also be related, ancillary or
complementary to any business of Sleepmaster and its Restricted
Subsidiaries to be included in the calculation. Also, the net cash
proceeds from the exercise of any options, warrants or rights to
purchase Qualified Capital Stock financed, directly or indirectly,
using funds borrowed from Sleepmaster or any Subsidiary will be
excluded from the calculation until and to the extent such borrowing
is repaid;
(D) the aggregate net cash proceeds received after the date of the
indenture by Sleepmaster from the conversion or exchange, if any, of
debt securities or Redeemable Capital Stock of Sleepmaster or its
Restricted Subsidiaries into or for Qualified Capital Stock of
Sleepmaster plus, to the extent the debt securities or Redeemable
Capital Stock were issued after the date of the indenture, the
aggregate of net cash proceeds from their original issuance. The net
cash proceeds from the conversion or exchange of debt securities or
Redeemable Capital Stock financed, directly or indirectly, using
funds borrowed from Sleepmaster or any Subsidiary will be excluded
from the determination of aggregate net cash proceeds until and to
the extent such borrowing is repaid); and
(E) (a) in the case of the disposition or repayment of any investment
constituting a Restricted Payment made after the date of the
indenture, an amount, to the extent not included in
Consolidated Net Income, equal to the lesser of the return of
capital with respect to such Investment and the initial amount
of such Investment, in either case, less the cost of the
disposition of such Investment and net of taxes, and
(b) in the case of the designation of an Unrestricted Subsidiary
as a Restricted Subsidiary, as long as the designation of
such Subsidiary as an Unrestricted Subsidiary was deemed a
Restricted Payment, the Fair Market Value of Sleepmaster's
interest in such Subsidiary provided that such amount shall
not in any case exceed the amount of the Restricted Payment
deemed made at the time the Subsidiary was designated as an
Unrestricted Subsidiary.
(b) Notwithstanding the foregoing, and in the case of clauses (2) through
(11) below, so long as no Default or Event of Default is continuing or
would arise therefrom, the foregoing provisions shall
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not prohibit the following actions (each of clauses (1) through (4)
being referred to as a "Permitted Payment"):
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment
was permitted by the provisions of paragraph (a) of this section
and such payment shall have been deemed to have been paid on such
date of declaration and shall not have been deemed a "Permitted
Payment" for purposes of the calculation required by paragraph (a)
of this section;
(2) the repurchase, redemption, or other acquisition or retirement for
value of any shares of any class of Capital Stock of Sleepmaster in
exchange for, including any such exchange pursuant to the exercise
of a conversion right or privilege in connection with which cash is
paid in lieu of the issuance of fractional shares or scrip, or out
of the net cash proceeds of a substantially concurrent issuance and
sale for cash, other than to a Subsidiary, of, other shares of
Qualified Capital Stock of Sleepmaster; provided that the net cash
proceeds from the issuance of such shares of Qualified Capital
Stock are excluded from clause (3)(B) of paragraph (a) of this
section;
(3) the repurchase, redemption, defeasance, retirement or acquisition
for value or payment of principal of any Subordinated Indebtedness
in exchange for, or in an amount not in excess of the Net Cash
Proceeds of, a substantially concurrent issuance and sale for cash,
other than to any Subsidiary of Sleepmaster, of any Qualified
Capital Stock of Sleepmaster, provided that the Net Cash Proceeds
from the issuance of such shares of Qualified Capital Stock are
excluded from clause (3)(B) of paragraph (a) of this section; and
(4) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Subordinated
Indebtedness (other than Redeemable Capital Stock) (a
"refinancing") through the substantially concurrent issuance of new
Subordinated Indebtedness of Sleepmaster, provided that any such
new Subordinated Indebtedness
(a) shall be in a principal amount that does not exceed the
principal amount so refinanced, or, if such Subordinated
Indebtedness provides for an amount less than the principal
amount thereof to be due and payable upon a declaration of
acceleration thereof, then such lesser amount as of the date
of determination, plus the lesser of
(1) the stated amount of any premium or other payment
required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being
refinanced or
(2) the amount of premium or other payment actually paid at
such time to refinance the Indebtedness, plus, in either
case, the amount of expenses of Sleepmaster incurred in
connection with such refinancing;
(b) has an Average Life to Stated Maturity greater than the
remaining Average Life to Stated Maturity of the Subordinated
Indebtedness being refinanced; and
(c) is expressly subordinated in right of payment to the exchange
notes at least to the same extent as the Subordinated
Indebtedness to be refinanced;
(5) the purchase or redemption of shares of Special Preferred Stock
issued subsequent to the Issue Date, provided that immediately
following such purchase or redemption the Consolidated Fixed
Charge Coverage Ratio of Sleepmaster is not less than 2.0:1;
(6) the declaration or payment of dividends or other distributions, or
the making of loans, to Sleepmaster Holdings L.L.C. for
(a) reasonable and customary salary, bonus and other benefits
payable to officers, employees and consultants of Sleepmaster
Holdings L.L.C. consistent with past practice,
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(b) reasonable fees and expenses paid to members of the Board of
Directors of Sleepmaster Holdings L.L.C. consistent with past
practice,
(c) general corporate overhead expenses of Sleepmaster Holdings
L.L.C. in the ordinary course of business consistent with past
practice,
(d) management, consulting or advisory fees paid to Sleepmaster
Holdings L.L.C. to permit Sleepmaster Holdings L.L.C. to pay
management, consulting or advisory fees, in each case, not to
exceed $500,000 in any fiscal year, and
(e) the repurchase, redemption or other acquisition or retirement
for value of any Capital Stock of Sleepmaster Holdings L.L.C.
or Sleepmaster held by any member or former member of
Sleepmaster Holdings L.L.C.'s or Sleepmaster's, or any of
Sleepmaster's Restricted Subsidiaries', management pursuant to
any management equity subscription agreement, stockholders
agreement or stock option agreement, in each case as in effect
as of the date of the indenture;
provided, however,
(A) with respect to clauses (a) through (c) above in the
aggregate, the aggregate amount paid does not exceed $500,000
in any fiscal year and
(B) with respect to clause (e) above, the aggregate price paid
shall not exceed
(x) $2 million in any calendar year (with unused amounts in
any one calendar year being carried over to the
immediately succeeding calendar year subject to a maximum
(without giving effect to clause (y)) of $5 million in any
calendar year), plus
(y) the net cash proceeds contributed to Sleepmaster by
Sleepmaster Holdings L.L.C. from any issuance or
reissuance of Capital Stock by Sleepmaster Holdings
L.L.C. to members of management of Sleepmaster and its
Restricted Subsidiaries (provided that the net cash
proceeds contributed to Sleepmaster from the issuance of
such shares of Capital Stock are excluded from clause
(3)(B) of paragraph (a) of this section to the extent
used pursuant to this clause (6)(e) of paragraph (b) of
this section) and the proceeds to Sleepmaster of any
"key-man" life insurance policies; provided that the
cancellation of Indebtedness owing to Sleepmaster from
members of management of Sleepmaster or any Restricted
Subsidiary in connection with such repurchase of Capital
Stock will not be deemed to be a Restricted Payment;
(7) distributions to Sleepmaster Holdings L.L.C. of Tax Amounts with
respect to a calendar year, which distributions or payments may be
made from time to time with respect to such calendar year, based on
reasonable estimates of such Tax Amounts, as are necessary in order
for Sleepmaster Holdings L.L.C. to make estimated and final payments
of income tax with respect to the Taxable Income of Sleepmaster with
respect to such calendar year; provided that in the event that the
amounts which were actually distributed under this clause (7) with
respect to the calendar year exceed the required Tax Amounts with
respect to the calendar year as determined by Sleepmaster's
accountants, Sleepmaster Holdings L.L.C. shall promptly pay to
Sleepmaster the excess; and provided further that all the
distributions or payments in respect of a calendar year are made no
later than 120 days after the end of the calendar year;
(8) the declaration and payment of dividends on Redeemable Capital Stock
issued after the date of the indenture, the incurrence of which
satisfied the covenant in the first paragraph of "-- Limitation on
Indebtedness" above;
(9) repurchases of Capital Stock deemed to occur upon the exercise of
stock options if such Capital Stock represents a portion of the
exercise price thereof;
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(10) loans, advances, dividends or distributions from Sleepmaster to
Sleepmaster Holdings L.L.C. in an amount equal to the current cash
interest payments then due on the Sleep Investor Promissory Notes as
in effect on the Issue Date; provided that with respect to any such
loans, advances, dividends or distributions and after giving effect
thereto, the Consolidated Fixed Charge Coverage Ratio of Sleepmaster
is not less than 2.0:1; and
(11) additional Restricted Payments, other than those listed above, not to
exceed $5 million in the aggregate while the exchange notes are
outstanding. (Section 1009)
LIMITATION ON TRANSACTIONS WITH AFFILIATES. Sleepmaster will not, and will
not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly, enter into any transaction or series of related transactions
(including, without limitation, the sale, purchase, exchange or lease of assets,
property or services) with or for the benefit of any Affiliate of Sleepmaster
(other than Sleepmaster or a Majority Owned Restricted Subsidiary) unless such
transaction or series of related transactions is entered into in good faith and
in writing and
(1) (a) such transaction or series of related transactions is on terms that
are no less favorable to Sleepmaster or such Restricted Subsidiary, as
the case may be, than those that would be available in a comparable
transaction in arm's-length dealings with an unrelated third party, and
(b) Sleepmaster delivers an officers' certificate to the trustee
certifying that such transaction or series of related transactions
complies with clause (1)(a) of this Section,
(2) with respect to any transaction or series of related transactions
involving aggregate value in excess of $5 million, such transaction or
series of related transactions has been approved by a majority of the
Disinterested Directors of the board of directors of Sleepmaster, or in
the event there is only one Disinterested Director, by such
Disinterested Director, and
(3) with respect to any transaction or series of related transactions
involving aggregate value in excess of $10 million, Sleepmaster
delivers to the trustee a written opinion of an investment banking firm
of national standing or other recognized independent expert with
experience appraising the terms and conditions of the type of
transaction or series of related transactions for which an opinion is
required stating that the transaction or series of related transactions
is fair to Sleepmaster or such Restricted Subsidiary from a financial
point of view;
However, this provision shall not apply to
(1) employment agreements and employee benefit arrangements with any
officer or director of Sleepmaster, including under any stock option or
stock incentive plans, entered into in the ordinary course of business
and consistent with the past practices of Sleepmaster or such
Restricted Subsidiary,
(2) transactions pursuant to agreements in effect on the date of the
indenture, including amendments thereto entered into after that date,
provided that the terms of any such amendment are not less favorable to
Sleepmaster or such Restricted Subsidiary than the terms of such
agreement prior to such amendment or
(3) any Permitted Payment or Restricted Payment which is permitted to be
made under "-- Limitation on Restricted Payments." (Section 1010)
LIMITATION ON LIENS. Sleepmaster will not, and will not cause or permit
any Restricted Subsidiary to, directly or indirectly, create, incur or affirm
any Lien of any kind securing any Pari Passu Indebtedness or Subordinated
Indebtedness, including any assumption, guarantee or other liability with
respect thereto by any Restricted Subsidiary, upon any property or assets,
including any intercompany notes, of Sleepmaster or any Restricted Subsidiary
owned on the date of the indenture or acquired after the date of the indenture,
or assign or convey any right to receive any income or profits therefrom, unless
the exchange notes, or a guarantee in the case of Liens of a guarantor, are
directly secured equally and ratably with, or, in the case of Subordinated
Indebtedness, prior or senior thereto, with the same relative priority as the
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exchange notes shall have with respect to such Subordinated Indebtedness, the
obligation or liability secured by such Lien except for Liens
(A) securing Acquired Indebtedness which was created prior to, and not
created in connection with, or in contemplation of, the incurrence of
such Pari Passu Indebtedness or Subordinated Indebtedness, including
any assumption, guarantee or other liability with respect thereto by
any Restricted Subsidiary, and which Indebtedness is permitted under
the provisions of "-- Limitation on Indebtedness," provided, however,
that in the case of this clause (A), any such Lien only extends to the
assets that were subject to such Lien securing such Indebtedness prior
to the related acquisition by Sleepmaster or its Restricted
Subsidiaries,
(B) securing any Indebtedness incurred in connection with any refinancing,
renewal, substitutions or replacements of any such Indebtedness
described in clause (A), so long as the aggregate principal amount of
Indebtedness represented thereby, or if such Indebtedness provides for
an amount less than the principal amount thereof to be due and payable
upon a declaration of acceleration of the maturity thereof, the
original issue price of such Indebtedness plus any accreted value
attributable thereto since the original issuance of such Indebtedness,
is not increased by such refinancing by an amount greater than the
lesser of
(1) the stated amount of any premium or other payment required to be
paid in connection with such a refinancing pursuant to the terms of
the Indebtedness being refinanced or
(2) the amount of premium or other payment actually paid at such time to
refinance the Indebtedness, plus, in either case, the amount of
expenses of Sleepmaster incurred in connection with such
refinancing, provided, however, that in the case of this clause (B),
any such Lien only extends to the assets that were subject to such
Lien securing such Indebtedness prior to the related acquisition by
Sleepmaster or its Restricted Subsidiaries,
(C) Liens in favor of Sleepmaster or any Restricted Subsidiary,
(D) Liens on property existing at the time of acquisition thereof by
Sleepmaster or any Restricted Subsidiary of Sleepmaster, provided such
Liens were not incurred in contemplation of such acquisition,
(E) Liens existing on the date of the indenture, and
(F) Liens securing Indebtedness incurred pursuant to clause (10) of the
second paragraph of "-- Limitation on Indebtedness" where the Liens
securing the Indebtedness being refinanced were permitted under the
indenture.
Notwithstanding the foregoing, any Lien securing the exchange notes granted
pursuant to this covenant shall be automatically and unconditionally released
and discharged upon the release by the holders of the Pari Passu Indebtedness or
Subordinated Indebtedness described above of their Lien on the property or
assets of Sleepmaster or any Restricted Subsidiary, including any deemed release
upon payment in full of all obligations under such Indebtedness, at such time as
the holders of all such Pari Passu Indebtedness or Subordinated Indebtedness
also release their Lien on the property or assets of Sleepmaster or such
Restricted Subsidiary, or upon any sale, exchange or transfer to any Person not
an Affiliate of Sleepmaster of the property or assets secured by such Lien, or
of all of the Capital Stock held by Sleepmaster or any Restricted Subsidiary in,
or all or substantially all the assets of, any Restricted Subsidiary creating
such Lien. (Section 1011)
LIMITATION ON SALE OF ASSETS.
(a) Sleepmaster will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, consummate an Asset
Sale unless
(1) at least 75% of the consideration from such Asset Sale is received
in cash or Temporary Cash Investments and
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(2) Sleepmaster or the Restricted Subsidiary receives consideration at
the time of the Asset Sale at least equal to the Fair Market Value
of the shares or assets subject to the Asset Sale, as determined by
the board of directors of Sleepmaster and evidenced in a board
resolution; provided that the amount of
(x) any liabilities, as shown on Sleepmaster's or such Restricted
Subsidiary's most recent balance sheet, of Sleepmaster or any
Restricted Subsidiary (other than contingent liabilities,
liabilities that are subordinated to or rank equally with the
exchange notes or any guarantee thereof and liabilities that are
incurred in connection with or in contemplation of the related
Asset Sale) that are assumed by the transferee of any such
assets pursuant to a customary novation agreement that fully and
unconditionally releases Sleepmaster or such Restricted
Subsidiary from further liability and
(y) any securities, notes or other obligations received by
Sleepmaster or any such Restricted Subsidiary from such
transferee that are promptly converted by Sleepmaster or such
Restricted Subsidiary into cash or Temporary Cash Investments, to
the extent of the cash received, shall be deemed to be cash for
purposes of this provision; and provided, further, that the 75%
limitation referred to in clause (2) above will not apply to any
Asset Sale in which the cash or Temporary Cash Investments
portion of the consideration received therefrom, determined in
accordance with the foregoing proviso, is equal to or greater
than what the after-tax proceeds would have been had such Asset
Sale complied with the aforementioned 75% limitation.
(b) If all or a portion of the Net Cash Proceeds of any Asset Sale are not
required to be applied to repay permanently any Senior Indebtedness or
Senior Guarantor Indebtedness then outstanding as required by the terms
thereof, or Sleepmaster determines not to apply such Net Cash Proceeds
to the permanent prepayment of such Senior Indebtedness or Senior
Guarantor Indebtedness, or if no such Senior Indebtedness or Senior
Guarantor Indebtedness is then outstanding, then Sleepmaster or a
Restricted Subsidiary may within 365 days of the Asset Sale invest the
Net Cash Proceeds in properties and other assets that, as determined by
the board of directors of Sleepmaster, replace the properties and
assets that were the subject of the Asset Sale or in properties and
assets that will be used in the businesses of Sleepmaster or its
Restricted Subsidiaries existing on the date of the Indenture or in
businesses reasonably related thereto. The amount of such Net Cash
Proceeds not used or invested within 365 days of the Asset Sale as
described in this paragraph constitutes "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds exceeds $5 million or
more, Sleepmaster will apply the Excess Proceeds to the repayment of
the exchange notes and any other Pari Passu Indebtedness outstanding
with similar provisions requiring Sleepmaster to make an offer to
purchase such Indebtedness with the proceeds from any Asset Sale as
follows:
(A) Sleepmaster will make an offer to purchase (an "Offer") from all
holders of the exchange notes in accordance with the procedures in
the indenture in the maximum principal amount, expressed as a
multiple of $1,000, of exchange notes that may be purchased out of
an amount equal to the product of such Excess Proceeds multiplied by
a fraction, the numerator of which is the outstanding principal
amount of the exchange notes, and the denominator of which is the
sum of the outstanding principal amount, or accreted value in the
case of Indebtedness issued with original issue discount, of the
exchange notes and such Pari Passu Indebtedness, subject to
proration in the event such amount is less than the aggregate
Offered Price as defined herein of all exchange notes tendered, and
(B) to the extent required by such Pari Passu Indebtedness to
permanently reduce the principal amount of such Pari Passu
Indebtedness, or accreted value in the case of Indebtedness issued
with original issue discount, Sleepmaster will make an offer to
purchase or otherwise repurchase or redeem Pari Passu Indebtedness,
a "Pari Passu Offer" in an amount, the "Pari Passu Debt Amount",
equal to the excess of the Excess Proceeds over the Note
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Amount; provided that in no event will Sleepmaster be required to
make a Pari Passu Offer in a Pari Passu Debt Amount exceeding the
principal amount, or accreted value, of such Pari Passu Indebtedness
plus the amount of any premium required to be paid to repurchase
such Pari Passu Indebtedness.
The offer price for the exchange notes will be payable in cash in an
amount equal to 100% of the principal amount of the exchange notes plus
accrued and unpaid interest, if any, to the date, the "Offer Date", such
offer is consummated, the "Offered Price", in accordance with the
procedures in the indenture. To the extent that the aggregate Offered
Price of the exchange notes tendered pursuant to the offer is less than
the exchange note amount relating thereto or the aggregate amount of
Pari Passu Indebtedness that is purchased in a Pari Passu Offer is less
than the Pari Passu Debt Amount, Sleepmaster may use any remaining
Excess Proceeds for general corporate purposes. If the aggregate
principal amount of exchange notes and Pari Passu Indebtedness
surrendered by holders thereof exceeds the amount of Excess Proceeds,
the trustee shall select the exchange notes to be purchased on a pro
rata basis. Upon the completion of the purchase of all the exchange
notes tendered pursuant to an offer and the completion of a Pari Passu
Offer, the amount of Excess Proceeds, if any, shall be reset at zero.
(d) If Sleepmaster becomes obligated to make an offer pursuant to clause
(c) above, the exchange notes and the Pari Passu Indebtedness shall be
purchased by Sleepmaster, at the option of the holders thereof, in
whole or in part in integral multiples of $1,000, on a date that is not
earlier than 30 days and not later than 60 days from the date the
notice of the offer is given to holders, or such later date as may be
necessary for Sleepmaster to comply with the requirements under the
Securities Exchange Act of 1934.
(e) The indenture will provide that Sleepmaster will comply with the
applicable tender offer rules, including Rule 14e-1 under the
Securities Exchange Act of 1934, and any other applicable securities
laws or regulations in connection with an offer. (Section 1012)
LIMITATION ON ISSUANCES OF GUARANTEES OF AND PLEDGES FOR INDEBTEDNESS.
(a) Sleepmaster will not cause or permit any Restricted Subsidiary, other
than a guarantor, directly or indirectly, to secure the payment of any
Senior Indebtedness of Sleepmaster and Sleepmaster will not, and will
not permit any Restricted Subsidiary to, pledge any intercompany notes
representing obligations of any Restricted Subsidiary, other than a
guarantor, to secure the payment of any Senior Indebtedness unless in
each case such Restricted Subsidiary simultaneously executes and
delivers a supplemental indenture to the indenture providing for a
guarantee of payment of the exchange notes by such Restricted
Subsidiary, which guarantee shall be on the same terms as the guarantee
of the Senior Indebtedness, if a guarantee of Senior Indebtedness is
granted by any such Restricted Subsidiary, except that the guarantee of
the exchange notes need not be secured and shall be subordinated to the
claims against such Restricted Subsidiary in respect of Senior
Indebtedness to the same extent as the exchange notes are subordinated
to Senior Indebtedness of Sleepmaster under the indenture.
(b) Sleepmaster will not cause or permit any Restricted Subsidiary, which
is not a guarantor, directly or indirectly, to guarantee, assume or in
any other manner become liable with respect to any Indebtedness of
Sleepmaster or any Restricted Subsidiary unless such Restricted
Subsidiary simultaneously executes and delivers a supplemental
indenture to the indenture providing for a guarantee of the exchange
notes on the same terms as the guarantee of such Indebtedness except
that
(A) such guarantee need not be secured unless required pursuant to
"-- Limitation on Liens,"
(B) if such Indebtedness is by its terms Senior Indebtedness, any such
assumption, guarantee or other liability of such Restricted
Subsidiary with respect to such Indebtedness shall be senior to such
Restricted Subsidiary's guarantee of the exchange notes to the same
extent as such Senior Indebtedness is senior to the exchange notes
and
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(C) if such Indebtedness is by its terms expressly subordinated to the
exchange notes, any such assumption, guarantee or other liability of
such Restricted Subsidiary with respect to such Indebtedness shall
be subordinated to such Restricted Subsidiary's guarantee of the
exchange notes at least to the same extent as such Indebtedness is
subordinated to the exchange notes.
(c) Notwithstanding the foregoing, any guarantee by a Restricted Subsidiary
of the exchange notes shall provide by its terms that it, and all Liens
securing the same, shall be automatically and unconditionally released
and discharged upon
(1) any sale, exchange or transfer, to any Person not an Affiliate of
Sleepmaster, of all of Sleepmaster's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary, which
transaction is in compliance with the terms of the indenture and
such Restricted Subsidiary is released from all guarantees, if any,
by it of other Indebtedness of Sleepmaster or any Restricted
Subsidiaries and
(2) with respect to any guarantees created after the date of the
indenture, the release by the holders of the Indebtedness of
Sleepmaster described in clauses (a) and (b) above of their security
interest or their guarantee by such Restricted Subsidiary, including
any deemed release upon payment in full of all obligations under
such Indebtedness, at such time as
(A) no other Indebtedness of Sleepmaster has been secured or
guaranteed by such Restricted Subsidiary, as the case may be, or
(B) the holders of all such other Indebtedness which is secured or
guaranteed by such Restricted Subsidiary also release their
security interest in or guarantee by such Restricted Subsidiary,
including any deemed release upon payment in full of all
obligations under such Indebtedness. (Section 1013)
LIMITATION ON SENIOR SUBORDINATED INDEBTEDNESS. Each of Sleepmaster and
Sleepmaster Finance Corporation will not, and will not permit or cause any
guarantor to, directly or indirectly, create, incur, issue, assume, guarantee or
otherwise in any manner become directly or indirectly liable for or with respect
to or otherwise permit to exist any Indebtedness that is subordinate in right of
payment to any Indebtedness of Sleepmaster, Sleepmaster Finance Corporation or
such guarantor, as the case may be, unless such Indebtedness is also pari passu
with the exchange notes or the guarantee of such guarantor or subordinated in
right of payment to the exchange notes or such guarantee at least to the same
extent as the exchange notes or such guarantee are subordinated in right of
payment to Senior Indebtedness or Senior Indebtedness of such guarantor, as the
case may be, as described in the indenture. (Section 1014)
LIMITATION ON SUBSIDIARY CAPITAL STOCK.
(a) Sleepmaster will not permit any Restricted Subsidiary of Sleepmaster to
issue, sell or transfer any Capital Stock, except
(1) if after giving effect to such issuance, sale or transfer of Capital
Stock such Restricted Subsidiary would be a Majority Owned
Restricted Subsidiary,
(2) for Capital Stock issued or sold to, held by or transferred to
Sleepmaster or a Wholly Owned Restricted Subsidiary, and
(3) for Capital Stock issued by a Person prior to the time
(A) such Person becomes a Restricted Subsidiary,
(B) such Person merges with or into a Restricted Subsidiary or
(C) a Restricted Subsidiary merges with or into such Person; provided
that such Capital Stock was not issued or incurred by such Person
in anticipation of the type of transaction contemplated by
subclause (A), (B) or (C). This clause (a) shall not
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apply upon the acquisition of all the outstanding Capital Stock
of such Restricted Subsidiary in accordance with the terms of the
indenture.
(b) Sleepmaster will not permit any Person (other than Sleepmaster or a
Wholly Owned Restricted Subsidiary) to acquire Capital Stock of any
Restricted Subsidiary from Sleepmaster or any Restricted Subsidiary
except (1) upon the acquisition of all the outstanding Capital Stock of
such Restricted Subsidiary in accordance with the terms of the
indenture or (2) if after giving effect to such acquisition such
Restricted Subsidiary would be a Majority Owned Subsidiary.
(c) Notwithstanding the foregoing, this covenant shall not prohibit any
issuance or sale of the Capital Stock of any Restricted Subsidiary if
immediately after giving effect to such issuance or sale, any
Investment in such Person remaining after giving effect to such
issuance or sale would have been permitted to be made under the
"Limitation on Restricted Payments" covenant if made on the date of
such issuance or sale. Any such Investment shall be deemed a Restricted
Payment. (Section 1016)
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. Sleepmaster will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause to
exist or become effective any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary to
(A) pay dividends or make any other distribution on its Capital Stock or
any other interest or participation in or measured by its profits,
(B) pay any Indebtedness owed to Sleepmaster or any other Restricted
Subsidiary,
(C) make any Investment in Sleepmaster or any other Restricted Subsidiary
or
(D) transfer any of its properties or assets to Sleepmaster or any other
Restricted Subsidiary.
However, this covenant will not prohibit any encumbrance or restriction
(1) pursuant to an agreement in effect on the date of the indenture;
(2) with respect to a Restricted Subsidiary that is not a Restricted
Subsidiary of Sleepmaster on the date of the indenture, in existence at
the time such Person becomes a Restricted Subsidiary of Sleepmaster and
not incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary, provided that such encumbrances and
restrictions are not applicable to Sleepmaster or any Restricted
Subsidiary or the properties or assets of Sleepmaster or any Restricted
Subsidiary other than such Subsidiary which is becoming a Restricted
Subsidiary;
(3) under the Credit Facility as in effect on the date of the indenture,
and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof, provided
that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings are not more
restrictive in the aggregate, as determined in the good faith judgment
of Sleepmaster's board of directors, with respect to such dividend and
other payment restrictions than those contained in the Credit Facility
as in effect on the date of the indenture;
(4) under the indenture and the exchange notes, including the additional
exchange notes;
(5) under any applicable law, rule, regulation or order;
(6) by reason of customary non-assignment provisions in leases entered into
in the ordinary course of business and consistent with past practices,
(7) under purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in
clause (D) above on the property so acquired;
(8) under contracts for the sale of assets, including without limitation
customary restrictions with respect to a Subsidiary pursuant to an
agreement that has been entered into for the sale or
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disposition of all or substantially all of the Capital Stock or assets
of such Restricted Subsidiary; and
(9) under any agreement that extends, renews, refinances or replaces the
agreements containing the encumbrances or restrictions in the foregoing
clauses (1) through (8), or in this clause (9), provided that the terms
and conditions of any such encumbrances or restrictions are no more
restrictive in any material respect than those under or pursuant to the
agreement evidencing the Indebtedness so extended, renewed, refinanced
or replaced. (Section 1017)
LIMITATION ON UNRESTRICTED SUBSIDIARIES. Sleepmaster may designate after
the Issue Date any Subsidiary, other than a guarantor, as an "Unrestricted
Subsidiary" under the indenture (a "Designation") only if:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(b) Sleepmaster would be permitted to make an Investment, other than a
Permitted Investment, at the time of Designation, assuming the
effectiveness of such Designation, pursuant to the first paragraph of
"-- Limitation on Restricted Payments" above in an amount, the
"Designation Amount", equal to the greater of (1) the net book value of
Sleepmaster's interest in such Subsidiary calculated in accordance with
GAAP or (2) the Fair Market Value of Sleepmaster's interest in such
Subsidiary as determined in good faith by Sleepmaster's board of
directors;
(c) such Unrestricted Subsidiary does not own any Capital Stock in any
Restricted Subsidiary of Sleepmaster which is not simultaneously being
designated an Unrestricted Subsidiary;
(d) such Unrestricted Subsidiary is not liable, directly or indirectly,
with respect to any Indebtedness other than Unrestricted Subsidiary
Indebtedness, provided that an Unrestricted Subsidiary may provide a
guarantee for the exchange notes; and
(e) such Unrestricted Subsidiary is not a party to any agreement, contract,
arrangement or understanding at such time with Sleepmaster or any
Restricted Subsidiary unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to Sleepmaster or
such Restricted Subsidiary than those that might be obtained at the
time from Persons who are not Affiliates of Sleepmaster or, in the
event such condition is not satisfied, the value of such agreement,
contract, arrangement or understanding to such Unrestricted Subsidiary
shall be deemed a Restricted Payment.
In the event of any such Designation, Sleepmaster shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the "Limitation
on Restricted Payments" covenant for all purposes of the indenture equal to the
Designation Amount.
The indenture will also provide that Sleepmaster shall not and shall not
cause or permit any Restricted Subsidiary to at any time
(a) provide credit support for, guarantee or subject any of its property or
assets, other than the Capital Stock of any Unrestricted Subsidiary, to
the satisfaction of, any Indebtedness of any Unrestricted Subsidiary
(including any undertaking, agreement or instrument evidencing such
Indebtedness, other than Permitted Investments in Unrestricted
Subsidiaries, or
(b) be directly or indirectly liable for any Indebtedness of any
Unrestricted Subsidiary. For purposes of the foregoing, the Designation
of a Subsidiary of Sleepmaster as an Unrestricted Subsidiary shall be
deemed to be the Designation of all of the Subsidiaries of such
Subsidiary as Unrestricted Subsidiaries.
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Sleepmaster may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary, a "Revocation", if:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation;
(b) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if incurred at such time,
have been permitted to be incurred for all purposes of the indenture;
and
(c) unless such redesignated Subsidiary shall not have any Indebtedness
outstanding, other than Indebtedness that would be Permitted
Indebtedness, immediately after giving effect to such proposed
Revocation, and after giving pro forma effect to the incurrence of any
such Indebtedness of such redesignated Subsidiary as if such
Indebtedness was incurred on the date of the Revocation, Sleepmaster
could incur $1.00 of additional Indebtedness, other than Permitted
Indebtedness, pursuant to the covenant described under "-- Limitation
on Indebtedness."
All Designations and Revocations must be evidenced by a resolution of the
board of directors of Sleepmaster delivered to the trustee certifying compliance
with the foregoing provisions. (Section 1018)
LIMITATION ON ACTIVITIES OF SLEEPMASTER FINANCE CORPORATION. Sleepmaster
Finance Corporation shall have no material assets and shall not engage in any
activities other than in connection with the indenture and the exchange notes.
(Section 1019)
PROVISION OF FINANCIAL STATEMENTS. After May 18, 1999, whether or not
Sleepmaster is subject to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, Sleepmaster and any guarantor will, to the extent permitted under the
Securities Exchange Act of 1934, file with the Securities and Exchange
Commission the annual reports, quarterly reports and other documents which
Sleepmaster and such guarantor would have been required to file with the
Securities and Exchange Commission pursuant to Sections 13(a) or 15(d) if
Sleepmaster or such guarantor were so subject, such documents to be filed with
the Securities and Exchange Commission on or prior to the date, the "Required
Filing Date", by which Sleepmaster and such guarantor would have been required
so to file such documents if Sleepmaster and such guarantor were so subject.
Sleepmaster and any guarantor will also in any event, whether or not
required to file reports with the Securities and Exchange Commission,
(a) within 15 days of each Required Filing Date
(1) transmit by mail to all holders, as their names and addresses appear
in the security register, without cost to such holders and
(2) file with the trustee copies of the annual reports, quarterly
reports and other documents which Sleepmaster and such guarantor
would have been required to file with the Securities and Exchange
Commission pursuant to Sections 13(a) or 15(d) of the Securities
Exchange Act of 1934 if Sleepmaster and such guarantor were subject
to either of such sections and
(b) if filing such documents by Sleepmaster and such guarantor with the
Securities and Exchange Commission is not permitted under the Exchange
Act of 1934, promptly upon written request and payment of the
reasonable cost of duplication and delivery, supply copies of such
documents to any prospective holder at Sleepmaster's cost.
If any guarantor's financial statements would be required to be included in
the financial statements filed or delivered pursuant to the indenture if
Sleepmaster were subject to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, Sleepmaster shall include such guarantor's financial statements in
any filing or delivery pursuant to the indenture.
The indenture also provides that, so long as any of the exchange notes
remain outstanding, Sleepmaster will make available to any prospective purchaser
of exchange notes or beneficial owner of
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exchange notes in connection with any sale thereof the information required by
Rule 144A(d)(4) under the Securities Act of 1933, until such time as Sleepmaster
has either exchanged the exchange notes for securities identical in all material
respects which have been registered under the Securities Act of 1933 or until
such time as the holders thereof have disposed of such exchange notes pursuant
to an effective registration statement under the Securities Act of 1933.
(Section 1020)
ADDITIONAL COVENANTS. The indenture also contains covenants with respect
to the following matters:
(1) payment of principal, premium and interest;
(2) maintenance of an office or agency in The City of New York;
(3) arrangements regarding the handling of money held in trust;
(4) maintenance of corporate existence;
(5) payment of taxes and other claims;
(6) maintenance of properties; and
(7) maintenance of insurance.
CONSOLIDATION, MERGER, SALE OF ASSETS
Sleepmaster will not, in a single transaction or through a series of
related transactions, consolidate with or merge with or into any other Person or
sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its properties and assets to any Person or group of
Persons, or permit any of its Restricted Subsidiaries to enter into any such
transaction or series of transactions, if such transaction or series of
transactions, in the aggregate, would result in a sale, assignment, conveyance,
transfer, lease or disposition of all or substantially all of the properties and
assets of Sleepmaster and its Restricted Subsidiaries on a Consolidated basis to
any other Person or group of Persons, unless at the time and after giving effect
thereto
(1) either
(a) Sleepmaster will be the continuing corporation or limited liability
company or
(b) the Person, if other than Sleepmaster, formed by such consolidation
or into which Sleepmaster is merged or the Person which acquires by
sale, assignment, conveyance, transfer, lease or disposition all or
substantially all of the properties and assets of Sleepmaster and
its Restricted Subsidiaries on a Consolidated basis, the "Surviving
Entity", will be a corporation or limited liability company duly
organized and validly existing under the laws of the United States
of America, any state thereof or the District of Columbia and such
Person expressly assumes, by a supplemental indenture, in a form
reasonably satisfactory to the trustee, all the obligations of
Sleepmaster under the exchange notes and the indenture and the
registration rights agreement, as the case may be, and the exchange
notes and the indenture and the registration rights agreement will
remain in full force and effect as so supplemented, and any
guarantees will be confirmed as applying to such Surviving Entity's
obligations;
(2) immediately before and immediately after giving effect to such
transaction on a pro forma basis (and treating any Indebtedness not
previously an obligation of Sleepmaster or any of its Restricted
Subsidiaries which becomes the obligation of Sleepmaster or any of its
Restricted Subsidiaries as a result of such transaction as having been
incurred at the time of such transaction), no Default or Event of
Default will have occurred and be continuing;
(3) immediately after giving effect to such transaction on a pro forma
basis, on the assumption that the transaction occurred on the first day
of the four-quarter period for which financial statements are available
ending immediately prior to the consummation of such transaction with
the
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appropriate adjustments with respect to the transaction being included
in such pro forma calculation, either
(a) Sleepmaster, or the Surviving Entity if Sleepmaster is not the
continuing obligor under the indenture, could incur $1.00 of
additional Indebtedness, other than Permitted Indebtedness, under
the provisions of "-- Covenants -- Limitation on Indebtedness;" or
(b) the Consolidated Fixed Charge Coverage Ratio of Sleepmaster, or the
Surviving Entity if Sleepmaster is not the continuing obligor under
the indenture, immediately following such transaction is at least
1.75 to 1.0 and such Consolidated Fixed Charge Coverage Ratio is
higher than the Consolidated Fixed Charge Coverage Ratio immediately
prior to such transaction; provided that nothing in this clause (3)
shall prohibit a merger between Sleepmaster and an Affiliate of
Sleepmaster incorporated solely for the purpose of reincorporation
of Sleepmaster in another state of the United States or for
conversion of Sleepmaster from a limited liability company to a
corporation;
(4) at the time of each transaction each of Sleepmaster and Sleepmaster
Finance Corporation, unless it is the other party to the transaction
described above, will have by supplemental indenture confirmed that it
is an issuer under the indenture and the exchange notes;
(5) at the time of the transaction each guarantor, if any, unless it is the
other party to the transactions described above, will have by
supplemental indenture confirmed that its guarantee shall apply to such
Person's obligations under the indenture and the exchange notes; and
(6) at the time of the transaction Sleepmaster or the Surviving Entity will
have delivered, or caused to be delivered, to the trustee, in form and
substance reasonably satisfactory to the trustee, an officers'
certificate and an opinion of counsel, each to the effect that such
consolidation, merger, transfer, sale, assignment, conveyance,
transfer, lease or other transaction and the supplemental indenture in
respect thereof comply with the indenture and that all conditions
precedent therein provided for relating to such transaction have been
complied with. (Section 801)
Each guarantor will not, and Sleepmaster will not permit a guarantor to, in
a single transaction or through a series of related transactions, consolidate
with or merge with or into any other Person, other than Sleepmaster or any
guarantor, or sell, assign, convey, transfer, lease or otherwise dispose of all
or substantially all of its properties and assets to any Person or group of
Persons, other than Sleepmaster or any guarantor, or permit any of its
Restricted Subsidiaries to enter into any such transaction or series of
transactions if such transaction or series of transactions, in the aggregate,
would result in a sale, assignment, conveyance, transfer, lease or disposition
of all or substantially all of the properties and assets of the guarantor and
its Restricted Subsidiaries on a Consolidated basis to any other Person or group
of Persons, other than Sleepmaster or any guarantor, unless at the time and
after giving effect thereto
(1) either
(a) the guarantor will be the continuing entity in the case of a
consolidation or merger involving the guarantor or
(b) the Person, if other than the guarantor, formed by such
consolidation or into which such guarantor is merged or the Person
which acquires by sale, assignment, conveyance, transfer, lease or
disposition all or substantially all of the properties and assets of
the guarantor and its Restricted Subsidiaries on a Consolidated
basis, the "Surviving Guarantor Entity", will be duly organized and
validly existing under the laws of the United States of America, any
state thereof or the District of Columbia and such Person expressly
assumes, by a supplemental indenture, in a form reasonably
satisfactory to the trustee, all the obligations of such guarantor
under its guarantee of the exchange notes and the indenture and the
registration rights agreement and such guarantee, indenture and
registration rights agreement will remain in full force and effect;
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(2) immediately before and immediately after giving effect to such
transaction on a pro forma basis, no Default or Event of Default will
have occurred and be continuing; and
(3) at the time of the transaction such guarantor or the Surviving
Guarantor Entity will have delivered, or caused to be delivered, to the
trustee, in form and substance reasonably satisfactory to the trustee,
an officers' certificate and an opinion of counsel, each to the effect
that such consolidation, merger, transfer, sale, assignment,
conveyance, lease or other transaction and the supplemental indenture
in respect thereof comply with the indenture and that all conditions
precedent therein provided for relating to such transaction have been
complied with; provided, however, that this paragraph shall not apply
to any guarantor whose guarantee of the exchange notes is
unconditionally released and discharged in accordance with paragraph
(c) under the provisions of "-- Covenants -- Limitation on Issuances of
Guarantees of and Pledges for Indebtedness." (Section 801)
In the event of any transaction, other than a lease, described in and
complying with the conditions listed in the three immediately preceding
paragraphs in which Sleepmaster, Sleepmaster Finance Corporation or any
guarantor, as the case may be, is not the successor Person, the successor Person
formed or remaining or to which such transfer is made shall succeed to, and be
substituted for, and may exercise every right and power of, Sleepmaster,
Sleepmaster Finance Corporation or such guarantor, as the case may be, and
Sleepmaster, Sleepmaster Finance Corporation or any guarantor, as the case may
be, would be discharged (other than in a transaction that results in the
transfer of assets constituting or accounting for less than 95% of the
Consolidated assets (as of the last balance sheet date available to Sleepmaster)
of Sleepmaster or the Consolidated revenue of Sleepmaster (as of the last
12-month period for which financial statements are available)) from all
obligations and covenants under the indenture and the exchange notes or its
guarantee, as the case may be, and the registration rights agreement. (Section
802)
EVENTS OF DEFAULT
An Event of Default will occur under the indenture if:
(1) there shall be a default in the payment of any interest on any exchange
note when it becomes due and payable, and such default shall continue
for a period of 30 days, whether or not prohibited by the subordination
provisions of the indenture;
(2) there shall be a default in the payment of the principal of, or
premium, if any, on any exchange note at its Maturity, upon
acceleration, optional or mandatory redemption, if any, required
repurchase or otherwise, whether or not prohibited by the subordination
provisions of the indenture;
(3) (a) there shall be a default in the performance, or breach, of any
covenant or agreement of Sleepmaster, Sleepmaster Finance
Corporation, or any guarantor under the indenture or any guarantee,
other than a default in the performance, or breach, of a covenant
or agreement which is specifically dealt with in clause (1), (2) or
in clause (b), (c) or (d) of this clause (3), and such default or
breach shall continue for a period of 30 days after written notice
has been given, by certified mail,
(1) to Sleepmaster by the trustee or
(2) to Sleepmaster and the trustee by the holders of at least 25%
in aggregate principal amount of the outstanding exchange
notes;
(b) there shall be a default in the performance or breach of the
provisions described in "-- Consolidation, Merger, Sale of Assets;"
(c) Sleepmaster and Sleepmaster Finance Corporation shall have failed to
make or consummate an offer in accordance with the provisions of
"-- Sleepmaster Covenants -- Limitation on Sale of Assets;" or
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(d) Sleepmaster and Sleepmaster Finance Corporation shall have failed to
make or consummate a Change of Control Offer in accordance with the
provisions of "-- Purchase of Notes Upon a Change of Control;"
(4) one or more defaults shall have occurred under any of the agreements,
indentures or instruments under which Sleepmaster, Sleepmaster Finance
Corporation, any guarantor or any Restricted Subsidiary then has
outstanding Indebtedness in excess of $5 million, individually or in
the aggregate, and either
(a) such default results from the failure to pay such Indebtedness at
its stated final maturity or
(b) such default or defaults have resulted in the acceleration of the
maturity of such Indebtedness;
(5) any guarantee shall for any reason cease to be, or shall for any reason
be asserted in writing by any guarantor, Sleepmaster or Sleepmaster
Finance Corporation not to be, in full force and effect and enforceable
in accordance with its terms, except to the extent contemplated by the
indenture and any such guarantee, or Sleepmaster Finance Corporation
shall for any reason cease to be, or shall for any reason be asserted
in writing by Sleepmaster, any guarantor or Sleepmaster Finance
Corporation not to be, a co-obligor pursuant to the exchange notes,
except to the extent contemplated by the indenture;
(6) one or more judgments, orders or decrees of any court or regulatory or
administrative agency for the payment of money in excess of $5 million,
either individually or in the aggregate, shall be rendered against
Sleepmaster, Sleepmaster Finance Corporation, any guarantor or any
Restricted Subsidiary or any of their respective properties and shall
not be discharged and either
(a) any creditor shall have commenced an enforcement proceeding upon
such judgment, order or decree or
(b) there shall have been a period of 60 consecutive days during which a
stay of enforcement of such judgment or order, by reason of an
appeal or otherwise, shall not be in effect;
(7) there shall have been the entry by a court of competent jurisdiction of
(a) a decree or order for relief in respect of Sleepmaster, Sleepmaster
Finance Corporation, any guarantor or any Restricted Subsidiary in
an involuntary case or proceeding under any applicable Bankruptcy
Law or
(b) a decree or order adjudging Sleepmaster, Sleepmaster Finance
Corporation, any guarantor or any Restricted Subsidiary bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment or
composition of or in respect of Sleepmaster, Sleepmaster Finance
Corporation, any guarantor or any Restricted Subsidiary under any
applicable federal or state law, or appointing a custodian,
receiver, liquidator, assignee, trustee, sequestrator, or other
similar official, of Sleepmaster, Sleepmaster Finance Corporation,
any guarantor or any Restricted Subsidiary or of any substantial
part of their respective properties, or ordering the winding up or
liquidation of their affairs, and any such decree or order for
relief shall continue to be in effect, or any such other decree or
order shall be unstayed and in effect, for a period of 60
consecutive days; or
(8) (a) Sleepmaster, Sleepmaster Finance Corporation, any guarantor or any
Restricted Subsidiary commences a voluntary case or proceeding
under any applicable Bankruptcy Law or any other case or proceeding
to be adjudicated bankrupt or insolvent,
(b) Sleepmaster, Sleepmaster Finance Corporation, any guarantor or any
Restricted Subsidiary consents to the entry of a decree or order for
relief in respect of Sleepmaster, such guarantor or such Restricted
Subsidiary in an involuntary case or proceeding under any applicable
Bankruptcy Law or to the commencement of any bankruptcy or
insolvency case or proceeding against it,
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(c) Sleepmaster, Sleepmaster Finance Corporation, any guarantor or any
Restricted Subsidiary files a petition or answer or consent seeking
reorganization or relief under any applicable federal or state law,
(d) Sleepmaster, Sleepmaster Finance Corporation, any guarantor or any
Restricted Subsidiary
(1) consents to the filing of such petition or the appointment of, or
taking possession by, a custodian, receiver, liquidator,
assignee, trustee, sequestrator or similar official of
Sleepmaster, Sleepmaster Finance Corporation, any guarantor or
such Restricted Subsidiary or of any substantial part of their
respective properties,
(2) makes an assignment for the benefit of creditors or
(3) admits in writing its inability to pay its debts generally as
they become due or
(e) Sleepmaster, Sleepmaster Finance Corporation, any guarantor or any
Restricted Subsidiary takes any corporate action in furtherance of
any such actions in this paragraph (8). (Section 501)
If an Event of Default, other than as specified in clauses (7) and (8) of
the prior paragraph, shall occur and be continuing with respect to the
indenture, the trustee or the holders of not less than 25% in aggregate
principal amount of the exchange notes then outstanding may, and the trustee at
the request of such holders shall, declare all unpaid principal of, premium, if
any, and accrued interest on all exchange notes to be due and payable
immediately, by a notice in writing to Sleepmaster and to Sleepmaster Finance
Corporation, and to the trustee if given by the holders of the exchange notes,
and upon any such declaration, such principal, premium, if any, and interest
shall become due and payable immediately. If an Event of Default specified in
clause (7) or (8) of the prior paragraph occurs and is continuing, then all the
exchange notes shall ipso facto become and be due and payable immediately in an
amount equal to the principal amount of the exchange notes, together with
accrued and unpaid interest, if any, to the date the exchange notes become due
and payable, without any declaration or other act on the part of the trustee or
any holder. Thereupon, the trustee may, at its discretion, proceed to protect
and enforce the rights of the holders of exchange notes by appropriate judicial
proceedings.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the trustee, the holders of a
majority in aggregate principal amount of exchange notes outstanding by written
notice to Sleepmaster, Sleepmaster Finance Corporation and the trustee, may
rescind and annul such declaration and its consequences if
(a) Sleepmaster has paid or deposited with the trustee a sum sufficient to
pay
(1) all sums paid or advanced by the trustee under the indenture and the
reasonable compensation, expenses, disbursements and advances of the
trustee, its agents and counsel,
(2) all overdue interest on all exchange notes then outstanding,
(3) the principal of, and premium, if any, on any exchange notes then
outstanding which have become due otherwise than by such declaration
of acceleration and interest thereon at the rate borne by the
exchange notes and
(4) to the extent that payment of such interest is lawful, interest upon
overdue interest at the rate borne by the exchange notes;
(b) the rescission would not conflict with any judgment or decree of a
court of competent jurisdiction; and
(c) all Events of Default, other than the non-payment of principal of,
premium, if any, and interest on the exchange notes which have become
due solely by such declaration of acceleration, have been cured or
waived as provided in the indenture.
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No such rescission shall affect any subsequent default or impair any right
consequent thereon. (Section 502)
The holders of not less than a majority in aggregate principal amount of
the exchange notes outstanding may on behalf of the holders of all outstanding
exchange notes waive any past default under the indenture and its consequences,
except a default
(1) in the payment of the principal of, premium, if any, or interest on any
exchange note, which may only be waived with the consent of each holder
of exchange notes affected, or
(2) in respect of a covenant or provision which under the indenture cannot
be modified or amended without the consent of the holder of each
exchange note affected by such modification or amendment. (Section
513)
No holder of any of the exchange notes has any right to institute any
proceedings with respect to the indenture or any remedy thereunder, unless the
holders of at least 25% in aggregate principal amount of the outstanding
exchange notes have made written request, and offered reasonable indemnity, to
the trustee to institute such proceeding as trustee under the exchange notes and
the indenture, the trustee has failed to institute such proceeding within 15
days after receipt of such notice and the trustee, within such 15-day period,
has not received directions inconsistent with such written request by holders of
a majority in aggregate principal amount of the outstanding exchange notes. Such
limitations do not, however, apply to a suit instituted by a holder of a
exchange note for the enforcement of the payment of the principal of, premium,
if any, or interest on such exchange note on or after the respective due dates
expressed in such exchange note. (Sections 507, 508)
Sleepmaster and Sleepmaster Finance Corporation are required to notify the
trustee within five business days of the occurrence of any Default. Sleepmaster
and Sleepmaster Finance Corporation are required to deliver to the trustee, on
or before a date not more than 60 days after the end of each fiscal quarter and
not more than 120 days after the end of each fiscal year, a written statement as
to compliance with the indenture, including whether or not any Default has
occurred. (Section 1021) The trustee is under no obligation to exercise any of
the rights or powers vested in it by the indenture at the request or direction
of any of the holders of the exchange notes unless such holders offer to the
trustee security or indemnity satisfactory to the trustee against the costs,
expenses and liabilities which might be incurred thereby. (Section 603)
The Trust Indenture Act of 1939 contains limitations on the rights of the
trustee, should it become a creditor of Sleepmaster, Sleepmaster Finance
Corporation or any guarantor, if any, to obtain payment of claims or to realize
on property received by it in respect of any such claims, as security or
otherwise. The trustee is permitted to engage in other transactions, but if it
acquires any conflicting interest it must eliminate such conflict upon the
occurrence of an Event of Default or else resign.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
Sleepmaster and Sleepmaster Finance Corporation may, at their option and at
any time, elect to have the obligations of Sleepmaster and Sleepmaster Finance
Corporation, any guarantor and any other obligor upon the exchange notes
discharged with respect to the outstanding exchange notes. Such defeasance means
that Sleepmaster and Sleepmaster Finance Corporation, any such guarantor and any
other obligor under the indenture shall be deemed to have paid and discharged
the entire Indebtedness represented by the outstanding exchange notes, except
for
(1) the rights of holders of such outstanding exchange notes to receive
payments in respect of the principal of, premium, if any, and interest
on such exchange notes when such payments are due,
(2) Sleepmaster and Sleepmaster Finance Corporation's obligations with
respect to the exchange notes concerning issuing temporary exchange
notes, registration of exchange notes, mutilated, destroyed, lost or
stolen exchange notes, and the maintenance of an office or agency for
payment and money for security payments held in trust,
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(3) the rights, powers, trusts, duties and immunities of the trustee and
(4) the defeasance provisions of the indenture.
In addition, Sleepmaster and Sleepmaster Finance Corporation may, at their
option and at any time, elect to have the obligations of Sleepmaster and
Sleepmaster Finance Corporation and any guarantor released, with respect to
covenants described in the indenture, and thereafter any omission to comply with
such obligations shall not constitute a Default or an Event of Default with
respect to the exchange notes. In the event covenant defeasance occurs, some
events described under "Events of Default", not including non-payment,
bankruptcy and insolvency events, will no longer constitute an Event of Default
with respect to the exchange notes. (Sections 401, 402 and 403)
In order to exercise either defeasance or covenant defeasance,
(a) Sleepmaster must irrevocably deposit with the trustee, in trust, for
the benefit of the holders of the exchange notes cash in United States
dollars, U.S. Government Obligations, as defined in the indenture, or
a combination thereof, in such amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent public
accountants or a nationally recognized investment banking firm, to pay
and discharge the principal of, premium, if any, and interest on the
outstanding exchange notes on the Stated Maturity, or on any date
after May 15, 2004, such date being referred to as the "Defeasance
Redemption Date", if at or prior to electing either defeasance or
covenant defeasance, Sleepmaster has delivered to the trustee an
irrevocable notice to redeem all of the outstanding exchange notes on
the Defeasance Redemption Date;
(b) in the case of defeasance, Sleepmaster shall have delivered to the
trustee an opinion of independent counsel in the United States stating
that
(A) Sleepmaster has received from, or there has been published by, the
Internal Revenue Service a ruling or
(B) since the date of the indenture, there has been a change in the
applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of independent counsel in the
United States shall confirm that, the holders of the outstanding
exchange notes will not recognize income, gain or loss for Federal
income tax purposes as a result of such defeasance and will be
subject to Federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such
defeasance had not occurred;
(c) in the case of covenant defeasance, Sleepmaster shall have delivered
to the trustee an opinion of independent counsel in the United States
to the effect that the holders of the outstanding exchange notes will
not recognize income, gain or loss for federal income tax purposes as
a result of such covenant defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same
times as would have been the case if such covenant defeasance had not
occurred;
(d) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit or insofar as clauses (7) or (8) under the
first paragraph under "-- Events of Default" are concerned, at any
time during the period ending on the 91st day after the date of
deposit;
(e) such defeasance or covenant defeasance shall not cause the trustee for
the exchange notes to have a conflicting interest as defined in the
Indenture and for purposes of the Trust Indenture Act of 1939 with
respect to any securities of Sleepmaster, Sleepmaster Finance
Corporation or any guarantor;
(f) such defeasance or covenant defeasance shall not result in a breach or
violation of, or constitute a Default under, the indenture or any
other material agreement or instrument to which
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Sleepmaster, Sleepmaster Finance Corporation, any guarantor or any
Restricted Subsidiary is a party or by which it is bound;
(g) such defeasance or covenant defeasance shall not result in the trust
arising from such deposit constituting an investment company within
the meaning of the Investment Company Act of 1940, as amended, unless
such trust shall be registered under the Investment Company Act of
1940 or exempt from registration thereunder;
(h) Sleepmaster will have delivered to the trustee an opinion of
independent counsel in the United States to the effect that after the
91st day following the deposit, the trust funds will not be subject to
the effect of any applicable bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally;
(i) Sleepmaster shall have delivered to the trustee an officers'
certificate stating that the deposit was not made by Sleepmaster with
the intent of preferring the holders of the exchange notes or any
guarantee over the other creditors of Sleepmaster, Sleepmaster Finance
Corporation or any guarantor with the intent of defeating, hindering,
delaying or defrauding creditors of Sleepmaster, Sleepmaster Finance
Corporation, any guarantor or others;
(j) no event or condition shall exist that would prevent Sleepmaster and
Sleepmaster Finance Corporation from making payments of the principal
of, premium, if any, and interest on the exchange notes on the date of
such deposit or at any time ending on the 91st day after the date of
such deposit; and
(k) Sleepmaster will have delivered to the trustee an officers'
certificate and an opinion of independent counsel, each stating that
all conditions precedent, other than conditions which cannot be
satisfied for 91 days, provided for relating to either the defeasance
or the covenant defeasance, as the case may be, have been complied
with. (Section 404)
SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect,
except as to surviving rights of registration of transfer or exchange of the
exchange notes as expressly provided for in the indenture, as to all outstanding
exchange notes under the indenture when
(a) either
(1) all such exchange notes theretofore authenticated and delivered,
except lost, stolen or destroyed exchange notes which have been
replaced or paid or exchange notes whose payment has been deposited
in trust or segregated and held in trust by Sleepmaster and
thereafter repaid to Sleepmaster or discharged from such trust as
provided for in the indenture, have been delivered to the trustee
for cancellation or
(2) all exchange notes not theretofore delivered to the trustee for
cancellation
(a) have become due and payable,
(b) will become due and payable at their Stated Maturity within one
year, or
(c) are to be called for redemption within one year under
arrangements satisfactory to the trustee for the giving of
notice of redemption by the trustee in the name, and at the
expense, of Sleepmaster;
(b) Sleepmaster, Sleepmaster Finance Corporation or any guarantor has
irrevocably deposited or caused to be deposited with the trustee as
trust funds in trust an amount in United States dollars sufficient to
pay and discharge the entire indebtedness on the exchange notes not
theretofore delivered to the trustee for cancellation, including
principal of, premium, if any, and accrued interest at such Maturity,
Stated Maturity or redemption date;
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(c) Sleepmaster, Sleepmaster Finance Corporation or any guarantor has paid
or caused to be paid all other sums payable under the indenture by
Sleepmaster and any guarantor; and
(d) Sleepmaster and Sleepmaster Finance Corporation have delivered to the
trustee an officers' certificate and an opinion of independent counsel
each stating that
(1) all conditions precedent under the indenture relating to the
satisfaction and discharge of such indenture have been complied
with and
(2) such satisfaction and discharge will not result in a breach or
violation of, or constitute a default under, the indenture or any
other material agreement or instrument to which Sleepmaster,
Sleepmaster Finance Corporation, any guarantor or any Subsidiary is
a party or by which Sleepmaster, Sleepmaster Finance Corporation,
any guarantor or any Subsidiary is bound. (Section 1301)
MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the indenture may be made by Sleepmaster,
Sleepmaster Finance Corporation, each guarantor, if any, and the trustee with
the consent of the holders of at least a majority in aggregate principal amount
of the exchange notes then outstanding (including consents obtained in
connection with a tender offer or exchange offer for exchange notes); provided,
however, that no such modification or amendment may, without the consent of the
holder of each outstanding exchange note affected thereby:
(1) change the Stated Maturity of the principal of, or any installment of
interest on, or change to an earlier date any redemption date of, or
waive a default in the payment of the principal of, premium, if any, or
interest on, any such exchange note or reduce the principal amount
thereof or the rate of interest thereon or any premium payable upon the
redemption thereof, or change the coin or currency in which the
principal of any such exchange note or any premium or the interest
thereon is payable, or impair the right to institute suit for the
enforcement of any such payment after the Stated Maturity thereof (or,
in the case of redemption, on or after the redemption date);
(2) amend, change or modify the obligation of Sleepmaster and Sleepmaster
Finance Corporation to make and consummate an offer with respect to any
Asset Sale or Asset Sales in accordance with
"-- Covenants -- Limitation on Sale of Assets" or the obligation of
Sleepmaster and Sleepmaster Finance Corporation to make and consummate
a change of control offer in the event of a change of control in
accordance with "-- Purchase of Notes Upon a Change of Control,"
including, in each case, amending, changing or modifying any
definitions related thereto;
(3) reduce the percentage in principal amount of such outstanding exchange
notes, the consent of whose holders is required for any such
supplemental indenture, or the consent of whose holders is required for
any waiver or compliance with provisions of the indenture;
(4) modify any of the provisions relating to supplemental indentures
requiring the consent of holders or relating to the waiver of past
defaults or relating to the waiver of covenants, except to increase the
percentage of such outstanding exchange notes required for such actions
or to provide that other provisions of the indenture cannot be modified
or waived without the consent of the holder of each such exchange note
affected thereby;
(5) except as otherwise permitted under "-- Consolidation, Merger, Sale of
Assets," consent to the assignment or transfer by Sleepmaster,
Sleepmaster Finance Corporation or any guarantor of any of its rights
and obligations under the indenture; or
(6) amend or modify any of the provisions of the indenture relating to the
subordination of the exchange notes or any guarantee in any manner
adverse to the holders of the exchange notes or any guarantee. (Section
902)
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Notwithstanding the foregoing, without the consent of any holders of the
exchange notes, Sleepmaster, Sleepmaster Finance Corporation, any guarantor, any
other obligor under the exchange notes and the trustee may modify or amend the
indenture:
(1) to evidence the succession of another Person to Sleepmaster,
Sleepmaster Finance Corporation or a guarantor, and the assumption by
any such successor of the covenants of Sleepmaster, Sleepmaster Finance
Corporation or such guarantor in the indenture and in the exchange
notes and in any guarantee in accordance with "-- Consolidation,
Merger, Sale of Assets;"
(2) to add to the covenants of Sleepmaster, Sleepmaster Finance
Corporation, any guarantor or any other obligor upon the exchange notes
for the benefit of the holders of the exchange notes or to surrender
any right or power conferred upon Sleepmaster, Sleepmaster Finance
Corporation or any guarantor or any other obligor upon the exchange
notes, as applicable, in the indenture, in the exchange notes or in any
guarantee;
(3) to cure any ambiguity, or to correct or supplement any provision in the
indenture, the exchange notes or any guarantee which may be defective
or inconsistent with any other provision in the indenture, the exchange
notes or any guarantee or make any other provisions with respect to
matters or questions arising under the indenture, the exchange notes or
any guarantee; provided that, in each case, such provisions shall not
adversely affect the interest of the holders of the exchange notes;
(4) to comply with the requirements of the Securities and Exchange
Commission in order to effect or maintain the qualification of the
indenture under the Trust Indenture Act of 1939;
(5) to add a guarantor under the indenture;
(6) to evidence and provide the acceptance of the appointment of a
successor trustee under the indenture; or
(7) to mortgage, pledge, hypothecate or grant a security interest in favor
of the trustee for the benefit of the holders of the exchange notes as
additional security for the payment and performance of Sleepmaster's
and any guarantor's obligations under the indenture, in any property,
or assets, including any of which are required to be mortgaged, pledged
or hypothecated, or in which a security interest is required to be
granted to the trustee pursuant to the indenture or otherwise. (Section
901)
The holders of a majority in aggregate principal amount of the exchange
notes outstanding may waive compliance with restrictive covenants and provisions
of the indenture. (Section 1021)
GOVERNING LAW
The indenture, the exchange notes and any Guarantee will be governed by,
and construed in accordance with, the laws of the State of New York, without
giving effect to the conflicts of law principles thereof.
CONCERNING THE TRUSTEE
The indenture contains limitations on the rights of the trustee, should it
become a creditor of Sleepmaster or Sleepmaster Finance Corporation, to obtain
payment of claims in cases, or to realize on property received in respect of any
such claim as security or otherwise. The trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Securities and Exchange
Commission for permission to continue as trustee with such conflict or resign as
trustee. (Sections 608 and 613)
The holders of a majority in principal amount of the then outstanding
exchange notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the trustee,
subject to exceptions. The indenture provides that in case an Event of Default
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occurs (which has not been cured), the trustee will be required, in the exercise
of its power, to use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the trustee will be under no obligation
to exercise any of its rights or powers under the indenture at the request of
any holder of exchange notes unless such holder shall have offered to the
trustee security and indemnity satisfactory to it against any loss, liability or
expense. (Section 512, 601, 603)
DEFINITIONS
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person
(1) existing at the time such Person becomes a Restricted Subsidiary or
(2) assumed in connection with the acquisition of assets from such Person,
in each case, other than Indebtedness incurred in connection with, or
in contemplation of, such Person becoming a Restricted Subsidiary or
such acquisition, as the case may be.
Acquired Indebtedness shall be deemed to be incurred on the date of the related
acquisition of assets from any Person or the date the acquired Person becomes a
Restricted Subsidiary, as the case may be.
"AFFILIATE" means, with respect to any specified Person:
(1) any other Person directly or indirectly controlling or controlled by or
under direct or indirect common control with such specified Person;
(2) any other Person that owns, directly or indirectly, 10% or more of any
class or series of such specified Person's (or any of such Person's
direct or indirect parent's) Capital Stock or any officer or director
of any such specified Person or other Person or, with respect to any
natural Person, any person having a relationship with such Person by
blood, marriage or adoption not more remote than first cousin; or
(3) any other Person 10% or more of the Voting Stock of which is
beneficially owned or held directly or indirectly by such specified
Person.
For the purposes of this definition, "control" when used with respect to
any specified Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"ASSET SALE" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of:
(1) any Capital Stock of any Restricted Subsidiary;
(2) all or substantially all of the properties and assets of any division
or line of business of Sleepmaster or any Restricted Subsidiary; or
(3) any other properties or assets of Sleepmaster or any Restricted
Subsidiary other than in the ordinary course of business.
For the purposes of this definition, the term "Asset Sale" shall not
include any transfer of properties and assets
(A) that is governed by the provisions described under "Consolidation,
Merger, Sale of Assets,"
(B) that is by Sleepmaster to any Majority Owned Restricted Subsidiary, or
by any Restricted Subsidiary to Sleepmaster or any Majority Owned
Restricted Subsidiary in accordance with the terms of the indenture,
(C) to an Unrestricted Subsidiary to the extent permitted by the terms of
"-- Covenants -- Limitation on Restricted Payments,"
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(D) that is of obsolete equipment in the ordinary course of business, or
(E) the Fair Market Value of which in the aggregate does not exceed
$500,000 in any transaction or series of related transactions.
"AVERAGE LIFE TO STATED MATURITY" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing
(1) the sum of the products of
(a) the number of years from the date of determination to the date or
dates of each successive scheduled principal payment of such
Indebtedness multiplied by
(b) the amount of each such principal payment by
(2) the sum of all such principal payments.
"BANKRUPTCY LAW" means Title 11, United States Bankruptcy Code of 1978, or
any similar United States federal or state law or foreign law relating to
bankruptcy, insolvency, receivership, winding up, liquidation, reorganization or
relief of debtors or any amendment to, succession to or change in any such law.
"CAPITAL LEASE OBLIGATION" of any Person means any obligation of such
Person and its Restricted Subsidiaries on a Consolidated basis under any capital
lease of (or other agreement conveying the right to use) real or personal
property which, in accordance with GAAP, is required to be recorded as a
capitalized lease obligation.
"CAPITAL STOCK" of any Person means any and all shares, interests,
participations, rights in or other equivalents (however designated) of such
Person's capital stock, other equity interests whether now outstanding or issued
after the date of the indenture, partnership or membership interests (whether
general or limited), limited liability company interests, any other interest or
participation that confers on a Person that right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person,
including any Preferred Stock, and any rights (other than debt securities
convertible into Capital Stock), warrants or options exchangeable for or
convertible into such Capital Stock.
"CASH EQUIVALENT" means
(1) securities issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of
America is pledged in support thereof) in each case maturing within one
year after the closing of the offering,
(2) time deposits and certificates of deposit and commercial paper issued
by the parent corporation of any domestic commercial bank of recognized
standing having capital and surplus in excess of $500 million and
commercial paper issued by others rated at least A-2 or the equivalent
thereof by Standard & Poor's Ratings Group or at least P-2 or the
equivalent thereof by Moody's Investors Service, Inc. and in each case
maturing within one year after the closing of the offering and
(3) investments in money market funds substantially all of whose assets
comprise securities of the types described in clauses (1) and (2)
above.
"CHANGE OF CONTROL" means the occurrence of any of the following events:
(1) any "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934), other than Permitted
Holders, is or becomes the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that
a Person shall be deemed to have beneficial ownership of all shares
that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time),
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directly or indirectly, of more than 50% of the total outstanding
Voting Stock of Sleepmaster or Sleepmaster Finance Corporation;
(2) during any period of two consecutive years, individuals who
(a) at the beginning of such period constituted the board of directors
of Sleepmaster or Sleepmaster Finance Corporation (together with
any new directors whose election to such board or whose nomination
for election by the stockholders of Sleepmaster or Sleepmaster
Finance Corporation was approved by a vote of a majority of the
directors then still in office who were either directors at the
beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to
constitute a majority of such board of directors then in office or
(b) were designated by the Permitted Holders cease for any reason to
constitute a majority of such board of directors then in office;
(3) Sleepmaster or Sleepmaster Finance Corporation consolidates with or
merges with or into any Person or sells, assigns, conveys, transfers,
leases or otherwise disposes of all or substantially all of its assets
to any Person, or any Person consolidates with or merges into or with
Sleepmaster or Sleepmaster Finance Corporation, in any such event
pursuant to a transaction in which the outstanding Voting Stock of
Sleepmaster or Sleepmaster Finance Corporation is converted into or
exchanged for cash, securities or other property, other than any such
transaction where
(A) the outstanding Voting Stock of Sleepmaster or Sleepmaster Finance
Corporation is changed into or exchanged for
(1) Voting Stock of the surviving corporation which is not Redeemable
Capital Stock or
(2) cash, securities and other property (other than Capital Stock of
the surviving corporation) in an amount which could be paid by
Sleepmaster as a Restricted Payment as described under
"-- Covenants -- Limitation on Restricted Payments" (and such
amount shall be treated as a Restricted Payment subject to the
provisions in the indenture described under
"-- Covenants -- Limitation on Restricted Payments") and
(B) immediately after such transaction, no "person" or "group," other
than Permitted Holders, is the beneficial owner (as defined in Rules
13d-3 and 13d-5 under the Securities Exchange Act of 1934, except
that a person shall be deemed to have beneficial ownership of all
securities that such person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the total outstanding
Voting Stock of the surviving corporation; or
(4) Sleepmaster or Sleepmaster Finance Corporation is liquidated or
dissolved or adopts a plan of liquidation or dissolution other than in
a transaction which complies with the provisions described under
" -- Consolidation, Merger, Sale of Assets."
For purposes of this definition, any transfer of an equity interest of an entity
that was formed for the purpose of acquiring voting stock of Sleepmaster or
Sleepmaster Finance Corporation will be deemed to be a transfer of such portion
of such voting stock as corresponds to the portion of the equity of such entity
that has been so transferred.
"COMPARABLE TREASURY ISSUE" means the United States Treasury Security
selected by an Independent Investment Banker, having a maturity comparable to
the first redemption date of the exchange notes, that would be utilized, at the
time of selection and in accordance with customary financial practice, in
pricing new issues of corporate debt securities of a comparable maturity to the
first redemption date of such exchange notes. "Independent Investment Banker"
means one of the Reference Treasury Dealers appointed by the trustee after
consultation with Sleepmaster and Sleepmaster Finance Corporation.
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"COMPARABLE TREASURY PRICE" means, with respect to any redemption date,
(A) the average of the Reference Treasury Dealer Quotations for such
redemption date, after excluding the highest and lowest such Reference
Treasury Dealer Quotations, or
(B) if the trustee obtains fewer than four such Reference Treasury Dealer
Quotations, the average of all such quotations. "Reference Treasury
Dealer Quotations" means, with respect to each Reference Treasury
Dealer and any redemption date, the average, as determined by the
trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted
in writing to the trustee by such Reference Treasury Dealer at 3:30
p.m., New York time, on the third business day preceding such
redemption date.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" of any Person means, for any
period, the ratio of
(a) the sum of:
(1) Consolidated Net Income (Loss), and in each case to the extent
deducted in computing Consolidated Net Income (Loss) for such
period,
(2) Consolidated Interest Expense,
(3) Consolidated Income Tax Expense and
(4) Consolidated Non-cash Charges for such period,
of such Person and its Restricted Subsidiaries on a Consolidated basis,
all determined in accordance with GAAP, less
(1) all noncash items increasing Consolidated Net Income for such period
and
(2) all cash payments during such period relating to noncash charges
that were added back to Consolidated Net Income in determining the
Consolidated Fixed Charge Coverage Ratio in any prior period to
(b) the sum of Consolidated Interest Expense for such period and cash plus
noncash dividends (except for dividends on Qualified Capital Stock paid
in shares of Qualified Capital Stock) paid on any Preferred Stock of
such Person and its Restricted Subsidiaries on a Consolidated basis
during such period,
in each case after giving pro forma effect (as calculated in accordance
with Article 11 of Regulation S-X under the Securities Act of 1933 as in
effect on the date of the Indenture) to
(1) the incurrence of the Indebtedness giving rise to the need to make such
calculation and (if applicable) the application of the net proceeds
therefrom, including to refinance other Indebtedness, as if such
Indebtedness was incurred, and the application of such proceeds
occurred, on the first day of such period;
(2) the incurrence, repayment or retirement of any other Indebtedness by
Sleepmaster and Sleepmaster Finance Corporation and their Restricted
Subsidiaries since the first day of such period as if such Indebtedness
was incurred, repaid or retired at the beginning of such period (except
that, in making such computation, the amount of Indebtedness under any
revolving credit facility shall be computed based upon the average
daily balance of such Indebtedness during such period);
(3) in the case of Acquired Indebtedness or any acquisition occurring at
the time of the incurrence of such Indebtedness, the related
acquisition, assuming such acquisition had been consummated on the
first day of such period; and
(4) any acquisition or disposition by Sleepmaster and Sleepmaster Finance
Corporation and their Restricted Subsidiaries of any company or any
business or any assets out of the ordinary course of business, whether
by merger, stock purchase or sale or asset purchase or sale, or any
related
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repayment of Indebtedness, in each case since the first day of such
period, assuming such acquisition or disposition had been consummated
on the first day of such period;
provided that
(1) in making such computation, the Consolidated Interest Expense
attributable to interest on any Indebtedness computed on a pro forma
basis and
(A) bearing a floating interest rate shall be computed as if the rate
in effect on the date of computation had been the applicable rate
for the entire period and
(B) which was not outstanding during the period for which the
computation is being made but which bears, at the option of such
Person, a fixed or floating rate of interest, shall be computed by
applying at the option of such Person either the fixed or floating
rate and
(2) in making such computation, the Consolidated Interest Expense of such
Person attributable to interest on any Indebtedness under a revolving
credit facility computed on a pro forma basis shall be computed based
upon the average daily balance of such Indebtedness during the
applicable period.
"CONSOLIDATED INCOME TAX EXPENSE" of any Person means, for any period, the
provision for federal, state, local and foreign income taxes of such Person and
its Consolidated Restricted Subsidiaries for such period as determined in
accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" of any Person means, without duplication,
for any period, the sum of
(a) the interest expense of such Person and its Restricted Subsidiaries for
such period, on a Consolidated basis, including, without limitation,
(1) amortization of debt discount,
(2) the net costs associated with Interest Rate Agreements and Currency
Hedging Agreements (including amortization of discounts),
(3) the interest portion of any deferred payment obligation,
(4) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers acceptance financing and
(5) accrued interest, plus
(b) (1) the interest component of the Capital Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by such Person and
its Restricted Subsidiaries during such period and
(2) all capitalized interest of such Person and its Restricted
Subsidiaries, plus
(c) the interest expense under any Guaranteed Debt of such Person and any
Restricted Subsidiary to the extent not included under clause (a)(4)
above, whether or not paid by such Person or its Restricted
Subsidiaries, less
(d) for purposes of calculating the Consolidated Fixed Charge Coverage
Ratio, amortization of deferred financing costs incurred in connection
with the offering of the exchange notes (other than any additional
exchange notes), entering into of the credit facility as in effect on
the date of the indenture and the transactions related thereto and any
other deferred financing costs incurred prior to the date of the
indenture.
"CONSOLIDATED NET INCOME (LOSS)" of any Person means, for any period, the
Consolidated net income (or loss) of such Person and its Restricted Subsidiaries
for such period on a Consolidated basis as determined in accordance with GAAP,
adjusted, to the extent included in calculating such net income (or loss), by
excluding, without duplication,
(1) all extraordinary gains or losses net of taxes (less all fees and
expenses relating thereto),
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(2) the portion of net income (or loss) of such Person and its Restricted
Subsidiaries on a Consolidated basis allocable to minority interests in
unconsolidated Persons or Unrestricted Subsidiaries to the extent that
cash dividends or distributions have not actually been received by such
Person or one of its Consolidated Restricted Subsidiaries,
(3) net income (or loss) of any Person combined with such Person or any of
its Restricted Subsidiaries on a "pooling of interests" basis
attributable to any period prior to the date of combination,
(4) any gain or loss, net of taxes, realized upon the termination of any
employee pension benefit plan,
(5) gains or losses, net of taxes (less all fees and expenses relating
thereto), in respect of dispositions of assets other than in the
ordinary course of business,
(6) the net income of any Restricted Subsidiary to the extent that the
declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its
stockholders,
(7) any restoration to net income of any contingency reserve, except to the
extent provision for such reserve was made out of income accrued at any
time following the date of the indenture, or
(8) any net gain arising from the acquisition of any securities or
extinguishment, under GAAP, of any Indebtedness of such Person.
"CONSOLIDATED NET TANGIBLE ASSETS" of any Person means as of any date of
determination, the total assets, less goodwill, patents, trade names, trade
marks, copyrights, franchises and other intangible assets, and less deferred tax
assets, if any, in each case as shown on the balance sheet of Sleepmaster and
its Restricted Subsidiaries for the most recently ended fiscal quarter for which
financial statements are available, determined on a consolidated basis in
accordance with GAAP.
"CONSOLIDATED NON-CASH CHARGES" of any Person means, for any period, the
aggregate depreciation, amortization and other non-cash charges of such Person
and its Restricted Subsidiaries on a Consolidated basis for such period, as
determined in accordance with GAAP (excluding any non-cash charge which requires
an accrual or reserve for cash charges for any future period).
"CONSOLIDATION" means, with respect to any Person, the consolidation of the
accounts of such Person and each of its subsidiaries if and to the extent the
accounts of such Person and each of its Restricted Subsidiaries would normally
be consolidated with those of such Person, all in accordance with GAAP. The term
"Consolidated" shall have a similar meaning.
"CURRENCY HEDGING AGREEMENTS" means one or more of the following agreements
which shall be entered into by one or more financial institutions: foreign
exchange contracts, currency swap agreements or other similar agreements or
arrangements designed to protect against the fluctuations in currency values.
"DEFAULT" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"DISINTERESTED DIRECTOR" means, with respect to any transaction or series
of related transactions, a member of the board of directors of Sleepmaster who
does not have any material direct or indirect financial interest in or with
respect to such transaction or series of related transactions.
"ESCROW AGREEMENT" means the Escrow Agreement, dated as of the date of the
indenture, among Sleepmaster, Finance Corporation and the trustee.
"FAIR MARKET VALUE" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length free market transaction between
an informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy. Fair Market Value
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shall be determined by the board of directors of Sleepmaster acting in good
faith and shall be evidenced by a resolution of the board of directors.
"GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, which
are in effect on the date of the indenture.
"GUARANTEE" means the guarantee by any guarantor of Sleepmaster's and
Sleepmaster Finance Corporation's Indenture Obligations.
"GUARANTEED DEBT" of any Person means, without duplication, all
Indebtedness of any other Person referred to in the definition of Indebtedness
below guaranteed directly or indirectly in any manner by such Person, or in
effect guaranteed directly or indirectly by such Person through an agreement
(1) to pay or purchase such Indebtedness or to advance or supply funds for
the payment or purchase of such Indebtedness,
(2) to purchase, sell or lease (as lessee or lessor) property, or to
purchase or sell services, primarily for the purpose of enabling the
debtor to make payment of such Indebtedness or to assure the holder of
such Indebtedness against loss,
(3) to supply funds to, or in any other manner invest in, the debtor
(including any agreement to pay for property or services without
requiring that such property be received or such services be rendered),
(4) to maintain working capital or equity capital of the debtor, or
otherwise to maintain the net worth, solvency or other financial
condition of the debtor or to cause such debtor to achieve levels of
financial performance or
(5) otherwise to assure a creditor against loss;
provided that the term "guarantee" shall not include endorsements for collection
or deposit, in either case in the ordinary course of business.
"INDEBTEDNESS" means, with respect to any Person, without duplication,
(1) all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables
and other accrued current liabilities arising in the ordinary course
of business, but including, without limitation, all obligations,
contingent or otherwise, of such Person in connection with any letters
of credit issued under letter of credit facilities, acceptance
facilities or other similar facilities,
(2) all obligations of such Person evidenced by bonds, notes, debentures
or other similar instruments,
(3) all indebtedness created or arising under any conditional sale or
other title retention agreement with respect to property acquired by
such Person (even if the rights and remedies of the seller or lender
under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade payables
arising in the ordinary course of business,
(4) all obligations under Interest Rate Agreements or Currency Hedging
Agreements of such Person,
(5) all Capital Lease Obligations of such Person,
(6) all Indebtedness referred to in clauses (1) through (5) above of other
Persons and all dividends of other Persons, the payment of which is
secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien,
upon or with respect to property (including, without limitation,
accounts and contract rights) owned by such Person, even though such
Person has not assumed or become liable for the payment of such
Indebtedness,
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(7) all Guaranteed Debt of such Person,
(8) all Redeemable Capital Stock issued by such Person valued at the
greater of its voluntary or involuntary maximum fixed repurchase price
plus accrued and unpaid dividends,
(9) Preferred Stock of any Restricted Subsidiary of Sleepmaster or any
guarantor and
(10) any amendment, supplement, modification, deferral, renewal, extension,
refunding or refinancing of any liability of the types referred to in
clauses (1) through (9) above.
For purposes hereof, the "maximum fixed repurchase price" of any Redeemable
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Redeemable Capital Stock as if such
Redeemable Capital Stock were purchased on any date on which Indebtedness shall
be required to be determined pursuant to the indenture, and if such price is
based upon, or measured by, the Fair Market Value of such Redeemable Capital
Stock, such Fair Market Value to be determined in good faith by the board of
directors of the issuer of such Redeemable Capital Stock.
"INDENTURE OBLIGATIONS" means the obligations of the Issuers and any other
obligor under the indenture or under the exchange notes, including any
guarantor, to pay principal of, premium, if any, and interest when due and
payable, and all other amounts due or to become due under or in connection with
the indenture, the exchange notes and the performance of all other obligations
to the trustee and the holders under the indenture and the exchange notes,
according to the respective terms thereof.
"INTEREST RATE AGREEMENTS" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest rate
protection agreements (including, without limitation, interest rate swaps, caps,
floors, collars and similar agreements) and/or other types of interest rate
hedging agreements from time to time.
"INVESTMENT" means, with respect to any Person, directly or indirectly, any
advance, loan (including guarantees), or other extension of credit or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase, acquisition or ownership by such Person of any Capital Stock, bonds,
notes, debentures or other securities issued or owned by any other Person and
all other items that would be classified as investments on a balance sheet
prepared in accordance with GAAP.
"ISSUE DATE" means the original issue date of the exchange notes under the
indenture.
"LIEN" means any mortgage or deed of trust, charge, pledge, lien (statutory
or otherwise), privilege, security interest, assignment, deposit, arrangement,
easement, hypothecation, claim, preference, priority or other encumbrance upon
or with respect to any property of any kind (including any conditional sale,
capital lease or other title retention agreement, any leases in the nature
thereof, and any agreement to give any security interest), real or personal,
movable or immovable, now owned or hereafter acquired. A Person will be deemed
to own subject to a Lien any property which it has acquired or holds subject to
the interest of a vendor or lessor under any conditional sale agreement,
Capitalized Lease Obligation or other title retention agreement.
"MAJORITY OWNED RESTRICTED SUBSIDIARY" means any Restricted Subsidiary at
least 90% of the Capital Stock of which is owned beneficially by Sleepmaster.
"MATURITY" means, when used with respect to the exchange notes, the date on
which the principal of the exchange notes becomes due and payable as therein
provided or as provided in the indenture, whether at Stated Maturity, the Offer
Date or the redemption date and whether by declaration of acceleration, offer in
respect of Excess Proceeds, change of control offer in respect of a change of
control, call for redemption or otherwise.
"NET CASH PROCEEDS" means with respect to any Asset Sale by any Person, the
proceeds thereof (without duplication in respect of all Asset Sales) in the form
of cash or Temporary Cash Investments including payments in respect of deferred
payment obligations when received in the form of, or stock or
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other assets when disposed of for, cash or Temporary Cash Investments (except to
the extent that such obligations are financed or sold with recourse to
Sleepmaster or any Restricted Subsidiary) net of
(1) brokerage commissions and other reasonable fees and expenses (including
fees and expenses of counsel and investment bankers) related to such
Asset Sale,
(2) provisions for all taxes payable as a result of such Asset Sale,
(3) payments made to retire Indebtedness where payment of such Indebtedness
is secured by the assets or properties the subject of such Asset Sale,
(4) amounts required to be paid to any Person (other than Sleepmaster or
any Restricted Subsidiary) owning a beneficial interest in the assets
subject to the Asset Sale and
(5) appropriate amounts to be provided by Sleepmaster or any Restricted
Subsidiary, as the case may be, as a reserve, in accordance with GAAP,
against any liabilities associated with such Asset Sale and retained by
Sleepmaster or any Restricted Subsidiary, as the case may be, after
such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as reflected in an
officers' certificate delivered to the trustee.
"PARI PASSU INDEBTEDNESS" means
(a) with respect to Sleepmaster, any Indebtedness of Sleepmaster that is
equal in right of payment to the exchange notes,
(b) with respect to Sleepmaster Finance Corporation, any Indebtedness of
Sleepmaster Finance Corporation that is equal in right of payment to
the exchange notes and
(c) with respect to any guarantee, Indebtedness which ranks equal in right
of payment to such guarantee.
"PERMITTED HOLDERS" means
(1) Citicorp Venture Capital, Ltd., a New York Corporation, and its
Affiliates (provided that for purposes of this provision only the
definition of "Affiliate" shall not include clauses (2) or (3) included
in the definition thereof) and
(2) Charles Schweitzer, James Koscica, Michael Reilly, Timothy Dupont and
Michael Bubis, their respective spouses and children, and trusts for
their benefit or for the benefit of their spouses and/or children.
"PERMITTED INVESTMENT" means
(1) Investments in any Majority Owned Restricted Subsidiary or any Person
which, as a result of such Investment,
(a) becomes a Majority Owned Restricted Subsidiary or
(b) is merged or consolidated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into,
Sleepmaster or any Majority Owned Restricted Subsidiary;
(2) Indebtedness of Sleepmaster or a Restricted Subsidiary described under
clauses (4), (5) and (6) of the definition of "Permitted Indebtedness;"
(3) Investments in any of the exchange notes;
(4) Temporary Cash Investments;
(5) Investments acquired by Sleepmaster or any Restricted Subsidiary in
connection with an Asset Sale permitted under
"-- Covenants -- Limitation on Sale of Assets" to the extent such
Investments are non-cash proceeds as permitted under such covenant;
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(6) Investments in existence on the date of the indenture; and
(7) Investments, in addition to those listed above, not to exceed $5
million at any one time outstanding.
In connection with any assets or property contributed or transferred to any
Person as an Investment, such property and assets shall be equal to the Fair
Market Value (as determined by Sleepmaster's board of directors) at the time of
Investment.
"PERSON" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"PREFERRED STOCK" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class in such Person.
"PUBLIC EQUITY OFFERING" means an underwritten public offering of common
stock (other than Redeemable Capital Stock) of Sleepmaster with gross proceeds
to Sleepmaster of at least $40 million pursuant to a registration statement that
has been declared effective by the Securities and Exchange Commission pursuant
to the Securities Act of 1933 (other than a registration statement on Form S-4
(or any successor form covering substantially the same transactions), Form S-8
(or any successor form covering substantially the same transactions) or
otherwise relating to equity securities issuable under any employee benefit plan
of Sleepmaster).
"PURCHASE MONEY OBLIGATION" means any Indebtedness secured by a Lien on
assets related to the business of Sleepmaster and any additions and accessions
thereto, which are purchased by Sleepmaster at any time after the exchange notes
are issued; provided that
(1) the security agreement or conditional sales or other title retention
contract pursuant to which the Lien on such assets is created
(collectively a "Purchase Money Security Agreement") shall be entered
into within 90 days after the purchase or substantial completion of the
construction of such assets and shall at all times be confined solely
to the assets so purchased or acquired, any additions and accessions
thereto and any proceeds therefrom,
(2) at no time shall the aggregate principal amount of the outstanding
Indebtedness secured thereby be increased, except in connection with
the purchase of additions and accessions thereto and except in respect
of fees and other obligations in respect of such Indebtedness and
(3) (A) the aggregate outstanding principal amount of Indebtedness secured
thereby (determined on a per asset basis in the case of any
additions and accessions) shall not at the time such Purchase Money
Security Agreement is entered into exceed 100% of the purchase
price to Sleepmaster of the assets subject thereto or
(B) the Indebtedness secured thereby shall be with recourse solely to
the assets so purchased or acquired, any additions and accessions
thereto and any proceeds therefrom.
"QUALIFIED CAPITAL STOCK" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"REDEEMABLE CAPITAL STOCK" means any Capital Stock that, either by its
terms or by the terms of any security into which it is convertible or
exchangeable or otherwise, is or upon the happening of an event or passage of
time would be, required to be redeemed prior to the final Stated Maturity of the
principal of the exchange notes or is redeemable at the option of the holder
thereof at any time prior to such final Stated Maturity (other than upon a
change of control of Sleepmaster or Sleepmaster Finance Corporation. in
circumstances where the holders of the exchange notes would have similar
rights), or is convertible into or exchangeable for debt securities at any time
prior to such final Stated Maturity at the option of the holder thereof.
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"REFERENCE TREASURY DEALER" means each of Merrill Lynch, Pierce, Fenner &
Smith Incorporated and three other primary U.S. Government securities dealers in
The City of New York to be selected by Sleepmaster and their respective
successors.
"RESTRICTED SUBSIDIARY" means any Subsidiary of Sleepmaster that has not
been designated by the board of directors of Sleepmaster by a board resolution
delivered to the trustee as an Unrestricted Subsidiary pursuant to and in
compliance with the covenant described under "-- Covenants -- Limitation on
Unrestricted Subsidiaries."
"SECURITIES ACT OF 1933" means the Securities Act of 1933, as amended, or
any successor statute, and the rules and regulations promulgated by the
Securities and Exchange Commission thereunder.
"SECURITIES AND EXCHANGE COMMISSION" means the Securities and Exchange
Commission, as from time to time constituted, created under the Securities
Exchange Act of 1934, or if at any time after the execution of the indenture
such Securities and Exchange Commission is not existing and performing the
duties now assigned to it under the Securities Act of 1933, Securities and
Exchange Act of 1934 and Trust Indenture Act of 1939 then the body performing
such duties at such time.
"SECURITIES EXCHANGE ACT OF 1934" means the Securities Exchange Act of
1934, or any successor statute, and the rules and regulations promulgated by the
Securities and Exchange Commission thereunder.
"SLEEP INVESTOR PROMISSORY NOTES" means the Junior Subordinated Notes,
dated November 14, 1996, as in effect on the date of the indenture, of Sleep
Investor L.L.C. issued to each of the individuals and entities listed on a
schedule to the indenture.
"SLEEPMASTER FINANCE CORPORATION" means Sleepmaster Finance Corporation, a
corporation organized under the laws of Delaware, until a successor Person shall
have become such pursuant to the applicable provisions of the indenture.
"SPECIAL PREFERRED STOCK" means Preferred Stock of Sleepmaster, in an
aggregate amount not to exceed $40 million, which after the Issue Date is issued
to and held solely by Citicorp Venture Capital Ltd. or Sleepmaster Holdings
L.L.C., provided that
(1) dividends on such Preferred Stock are not payable until the earlier of
the Stated Maturity of the exchange notes and the date on which the
exchange notes have been repaid in full and
(2) such Preferred Stock is not Redeemable Capital Stock.
"STATED MATURITY" means, when used with respect to any Indebtedness or any
installment of interest thereon, the dates specified in such Indebtedness as the
fixed date on which the principal of such Indebtedness or such installment of
interest, as the case may be, is due and payable.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of Sleepmaster Finance
Corporation or a guarantor subordinated in right of payment to the exchange
notes or a guarantee, as the case may be.
"SUBSIDIARY" of a Person means
(1) any corporation more than 50% of the outstanding voting power of the
Voting Stock of which is owned or controlled, directly or indirectly,
by such Person or by one or more other Subsidiaries of such Person, or
by such Person and one or more other Subsidiaries thereof, or
(2) any limited partnership of which such Person or any Subsidiary of such
Person is a general partner, or
(3) any other Person in which such Person, or one or more other
Subsidiaries of such Person, or such Person and one or more other
Subsidiaries, directly or indirectly, has more than 50% of the
outstanding partnership or similar interests or has the power, by
contract or otherwise, to direct or cause the direction of the
policies, management and affairs thereof.
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"TAX AMOUNTS" means, with respect to a calendar year or portion thereof, an
amount equal to the sum of
(1) the Federal income tax that would be imposed on the Taxable Income (as
defined below) of Sleepmaster for such calendar year or portion thereof
at the highest marginal tax rate applicable to corporate taxpayers in
such calendar year or portion thereof, and
(2) the state and local income tax that would be imposed on the Taxable
Income of Sleepmaster for such calendar year or portion thereof in the
state and local jurisdictions in which Sleepmaster qualifies as a
corporation within the meaning of state and local provisions which are
analogous to Section 7701 of the Internal Revenue Code, at the highest
marginal tax rates applicable to corporate taxpayers in such
jurisdictions,
in each case computed taking into account all available deductions or credits
for federal, state or local income tax purposes of state and local income taxes
described in clause (2) (such rate, the "Applicable Tax Rate").
"TAXABLE INCOME" means the taxable income of Sleepmaster computed as if
Sleepmaster filed a tax return for such calendar year as the parent of a
consolidated group of corporations that includes Sleepmaster and each domestic
Subsidiary of Sleepmaster (provided that any amount distributed by Sleepmaster
to Sleepmaster Holdings L.L.C. to allow Sleep Investor LLC to make current cash
interest payments on the Sleep Investor Promissory Notes shall be treated as a
deduction from Taxable Income), except that such taxable income shall be reduced
by any tax losses of Sleepmaster for prior years which actually are available to
offset the taxable income of Sleepmaster and were not previously taken into
account hereunder for prior years.
"TEMPORARY CASH INVESTMENTS" means
(1) any evidence of Indebtedness, maturing not more than one year after the
date of acquisition, issued by the United States of America, or an
instrumentality or agency thereof, and guaranteed fully as to
principal, premium, if any, and interest by the full faith and credit
of the United States of America,
(2) any certificate of deposit, maturing not more than one year after the
date of acquisition, issued by, or time deposit of, a commercial
banking institution that is a member of the Federal Reserve System and
that has combined capital and surplus and undivided profits of not less
than $500 million, whose debt has a rating, at the time as of which any
investment therein is made, of "P-1" (or higher) according to Moody's
Investors Service, Inc. ("Moody's") or any successor rating agency or
"A-1" (or higher) according to Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. ("S&P") or any successor
rating agency,
(3) commercial paper, maturing not more than one year after the date of
acquisition, issued by a corporation (other than an Affiliate or
Subsidiary of Sleepmaster) organized and existing under the laws of the
United States of America, any state thereof or the District of Columbia
with a rating, at the time as of which any investment therein is made,
of "P-1" (or higher) according to Moody's or "A-1" (or higher)
according to S&P and
(4) any money market deposit accounts issued or offered by a domestic
commercial bank having capital and surplus in excess of $500 million;
provided that the short term debt of such commercial bank has a rating,
at the time of Investment, of "P-1" (or higher) according to Moody's or
"A-1" (or higher) according to S&P.
"TREASURY RATE" means, with respect to any redemption date, the rate per
annum equal to the semiannual equivalent yield to maturity of the Comparable
Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as
a percentage of its principal amount) equal to the Comparable Treasury Price for
such redemption date.
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"TRUST INDENTURE ACT OF 1939" means the Trust Indenture Act of 1939, as
amended, or any successor statute.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of Sleepmaster (other than a
guarantor) designated as such pursuant to and in compliance with the covenant
described under "-- Covenants -- Limitation on Unrestricted Subsidiaries."
"UNRESTRICTED SUBSIDIARY INDEBTEDNESS" of any Unrestricted Subsidiary means
Indebtedness of such Unrestricted Subsidiary
(1) as to which neither Sleepmaster, Sleepmaster Finance Corporation nor
any Restricted Subsidiary is directly or indirectly liable (by virtue
of Sleepmaster, Sleepmaster Finance Corporation or any such Restricted
Subsidiary being the primary obligor on, guarantor of, or otherwise
liable in any respect to, such Indebtedness), except Guaranteed Debt of
Sleepmaster, Sleepmaster Finance Corporation or any Restricted
Subsidiary to any Affiliate, in which case (unless the incurrence of
such Guaranteed Debt resulted in a Restricted Payment at the time of
incurrence) Sleepmaster shall be deemed to have made a Restricted
Payment equal to the principal amount of any such Indebtedness to the
extent guaranteed at the time such Affiliate is designated an
Unrestricted Subsidiary and
(2) which, upon the occurrence of a default with respect thereto, does not
result in, or permit any holder of any Indebtedness of Sleepmaster,
Sleepmaster Finance Corporation or any Subsidiary to declare, a default
on such Indebtedness of Sleepmaster, Sleepmaster Finance Corporation or
any Restricted Subsidiary or cause the payment thereof to be
accelerated or payable prior to its Stated Maturity; provided that
notwithstanding the foregoing any Unrestricted Subsidiary may guarantee
the exchange notes.
"VOTING STOCK" of a Person means Capital Stock of such Person of the class
or classes pursuant to which the holders thereof have the general voting power
under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not
at the time Capital Stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency).
"WHOLLY OWNED RESTRICTED SUBSIDIARY" means a Restricted Subsidiary all the
Capital Stock (other than directors' qualifying shares or shares of foreign
Restricted Subsidiaries required to be owned by foreign nationals pursuant to
applicable law) of which is owned by Sleepmaster or another Wholly Owned
Restricted Subsidiary.
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EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions in this prospectus and in the
letter of transmittal, we will accept any and all notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on the expiration date. We
will issue $1,000 principal amount of exchange notes in exchange for each $1,000
principal amount of outstanding notes accepted in the exchange offer. Holders
may tender some or all of their notes pursuant to the exchange offer. However,
notes may be tendered only in integral multiples of $1,000.
The form and terms of the exchange notes are the same as the form and terms
of the notes except that:
(1) the exchange notes have been registered under the Securities Act of
1933 and hence will not bear legends restricting their transfer
thereof; and
(2) the holders of the exchange notes will not be entitled to rights under
the registration rights agreement. These rights include the provisions
for an increase in the interest rate on the notes in some circumstances
relating to the timing of the exchange offer. All of these rights will
terminate when the exchange offer is terminated. The exchange notes
will evidence the same debt as the notes. Holders of exchange notes
will be entitled to the benefits of the indenture.
As of the date of this prospectus, $115.0 million aggregate principal
amount of notes was outstanding. We have fixed the close of business on [
], 1999 as the record date for the exchange offer for purposes of determining
the persons to whom this prospectus and the letter of transmittal will be mailed
initially.
We intend to conduct the exchange offer in accordance with the applicable
requirements of the Securities Exchange Act of 1934 and the rules and
regulations of the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
We shall be deemed to have accepted validly tendered notes when, as and if
we have given oral or written notice to the exchange agent. The exchange agent
will act as agent for the tendering holders for the purpose of receiving the
exchange notes from the issuers.
If any tendered notes are not accepted for exchange because of an invalid
tender, the occurrence of other events in this prospectus or otherwise, we will
return the certificates for any unaccepted notes, at our expense, to the
tendering holder as promptly as practicable after the expiration date.
Holders who tender notes in the exchange offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the letter of
transmittal, transfer taxes with respect to the exchange of notes. We will pay
all charges and expenses, other than transfer taxes in some circumstances, in
connection with the exchange offer as described under the subheading "-- Fees
and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "expiration date" shall mean 5:00 p.m., New York City time, on
[ ], 1999, unless we extend the exchange offer. In that case, the term
"expiration date" shall mean the latest date and time to which the exchange
offer is extended. Notwithstanding the foregoing, we will not extend the
expiration date beyond [ ], 1999.
In order to extend the exchange offer, prior to 9:00 a.m., New York City
time, on the next business day after the previously scheduled expiration date,
we will:
(1) notify the exchange agent of any extension by oral or written notice
and
(2) mail to the registered holders an announcement of any extension.
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We reserve the right, in our sole discretion,
(1) if any of the conditions below under the heading "Conditions" shall not
have been satisfied,
(A) to delay accepting any notes,
(B) to extend the exchange offer or
(C) to terminate the exchange offer, or
(2) to amend the terms of the exchange offer in any manner.
Any delay in acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice of delay to the registered
holders. We will give oral or written notice of any delay, extension or
termination to the exchange agent.
INTEREST ON THE EXCHANGE NOTES
The exchange notes will bear interest from their date of issuance. Holders
of notes that are accepted for exchange will receive, in cash, accrued interest
on the exchange notes to, but not including, the date of issuance of the
exchange notes. We will make the first interest payment on the exchange notes on
November 15, 1999. Interest on the notes accepted for exchange will cease to
accrue upon issuance of the exchange notes.
Interest on the exchange notes is payable semi-annually on each May 15 and
November 15, commencing on November 15, 1999.
PROCEDURES FOR TENDERING OLD NOTES
Only a holder of notes may tender notes in the exchange offer. To tender in
the exchange offer, a holder must
- complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal,
- have the signatures guaranteed if required by the letter of transmittal,
and
- mail or otherwise deliver the letter of transmittal or such facsimile,
together with the notes and any other required documents, to the exchange
agent prior to 5:00 p.m., New York City time, on the expiration date.
To tender notes effectively, the holder must complete the letter of transmittal
and other required documents and the exchange agent must receive all the
documents prior to 5:00 p.m., New York City time, on the expiration date.
Delivery of the notes may be made by book-entry transfer in accordance with the
procedures described below. The exchange agent must receive confirmation of
book-entry transfer prior to the expiration date.
The tender by a holder and the acceptance of the tender by us will
constitute agreement between the holder and us under the terms and subject to
the conditions in this prospectus and in the letter of transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK OF THE
HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO CONSIDER
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO US. HOLDERS MAY REQUEST THEIR
RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO
EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should promptly instruct the registered holder to tender on the beneficial
owner's behalf. See "Instruction to Registered Holder and/or Book-Entry Transfer
Facility Participant from Owner" included with the letter of transmittal.
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An institution that is a member firm of the Medallion system must guarantee
signatures on a letter of transmittal or a notice of withdrawal unless the notes
are tendered:
(1) by a registered holder who has not completed the box entitled "Special
Registration Instructions" or "Special Delivery Instructions" on the
letter of transmittal; or
(2) for the account of member firm of the Medallion system.
If the letter of transmittal is signed by a person other than the
registered holder of any notes listed in that letter of transmittal, the notes
must be endorsed or accompanied by a properly completed bond power, signed by
the registered holder as the registered holder's name appears on the notes. An
institution that is a member firm of the Medallion System must guarantee the
signature.
Trustees, executors, administrators, guardians, attorneys-in-fact, offices
of corporations or others acting in a fiduciary or representative capacity
should indicate their capacities when signing the letter of transmittal or any
notes or bond powers. Evidence satisfactory to us of their authority to so act
must be submitted with the letter of transmittal.
We understand that the exchange agent will make a request promptly after
the date of this prospectus to establish accounts with respect to the notes at
the book-entry transfer facility, The Depository Trust Company, for the purpose
of facilitating the exchange offer. Subject to the establishment of the
accounts, any financial institution that is a participant in The Depository
Trust Company's system may make book-entry delivery of notes. To do so, the
financial institution should cause the book-entry transfer facility to transfer
the notes into the exchange agent's account with respect to the notes following
the book-entry transfer facility's procedures for transfer. Delivery of the
notes may be effected through book-entry transfer into the exchange agent's
account at the book-entry transfer facility. However, the holder must transmit
and the exchange agent must receive or confirm an appropriate letter of
transmittal properly completed and duly executed with any required signature
guarantee and all other required documents on or prior to the expiration date,
or, if the guaranteed delivery procedures described below are complied with,
within the time period provided under such procedures. Delivery of documents to
the book-entry transfer facility does not constitute delivery to the exchange
agent.
The Depositary and The Depository Trust Company have confirmed that the
exchange offer is eligible for The Depository Trust Company Automated Tender
Offer Program. Accordingly, The Depository Trust Company participants may
electronically transmit their acceptance of the exchange offer by causing The
Depository Trust Company to transfer notes to the depositary in accordance with
The Depository Trust Company's Automated Tender Offer Program procedures for
transfer. The Depository Trust Company will then send an "agent's message" to
the Depositary.
The term "agent's message" means a message transmitted by The Depository
Trust Company, received by the Depositary and forming part of the confirmation
of a book-entry transfer, which states that
(1) The Depository Trust Company has received an express acknowledgment
from the participant in The Depository Trust Company tendering notes
subject of the book-entry confirmation,
(2) the participant has received and agrees to be bound by the terms of the
letter of transmittal and
(3) we may enforce such agreement against such participant.
In the case of an agent's message relating to guaranteed delivery, the term
means a message transmitted by The Depository Trust Company and received by the
Depositary, which states that The Depository Trust Company has received an
express acknowledgment from the participant in The Depository Trust Company
tendering notes that such participant has received and agrees to be bound by the
notice of guaranteed delivery.
Notwithstanding the foregoing, in order to validly tender in the exchange
offer with respect to securities transferred through the Automated Tender Offer
Program, a The Depository Trust Company participant using Automated Tender Offer
Program must also properly complete and duly execute the applicable letter of
transmittal and deliver it to the Depositary.
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By the authority granted by The Depository Trust Company, any The
Depository Trust Company participant which has notes credited to its The
Depository Trust Company account at any time (and held of record by The
Depository Trust Company's nominee) may directly provide a tender as though it
were the registered holder by completing, executing and delivering the
applicable letter of transmittal to the Depositary. DELIVERY OF DOCUMENTS TO THE
DEPOSITORY TRUST COMPANY DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY.
All questions as to the
- validity,
- form,
- eligibility (including time of receipt),
- acceptance of tendered notes and
- withdrawal of tendered notes
will be determined by us in our sole discretion. Our determination will be final
and binding. We reserve the absolute right to reject any and all notes not
properly tendered. We reserve the absolute right to reject any notes which would
be unlawful if accepted, in the opinion of our counsel. We also reserve the
right in our sole discretion to waive any defects, irregularities or conditions
of tender as to particular notes. Our interpretation of the terms and conditions
of the exchange offer, including the instructions in the letter of transmittal,
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of notes must be cured within such
time as we shall determine. We intend to notify holders of defects or
irregularities with respect to tenders of notes. However, neither we, the
exchange agent nor any other person shall incur any liability for failure to
give such notification. Tenders of notes will not be deemed to have been made
until such defects or irregularities have been cured or waived. Any notes
received by the exchange agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned by
the exchange agent to the tendering holders, unless otherwise provided in the
letter of transmittal, as soon as practicable following the expiration date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their notes and:
(1) whose notes are not immediately available;
(2) who cannot deliver their notes, the letter of transmittal or any other
required documents to the exchange agent; or
(3) who cannot complete the procedures for book-entry transfer, prior to
the expiration date
may effect a tender if:
(1) they tender through an institution that is a member firm of the
Medallion system;
(2) prior to the expiration date, the exchange agent receives from an
institution that is a member firm of the Medallion system a properly
completed and duly executed notice of guaranteed delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and address
of the holder, the certificate number(s) of such notes and the
principal amount of notes tendered, stating that the tender is being
made and guaranteeing that, within five New York Stock Exchange trading
days after the expiration date, the letter of transmittal (or facsimile
thereof) together with the certificate(s) representing the notes (or a
confirmation of book-entry transfer of such notes into the exchange
agent's account at the book-entry transfer facility), and any other
documents required by the letter of transmittal will be deposited by
the firm with the exchange agent; and
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(3) the exchange agent receives
(A) such properly completed and executed letter of transmittal (of
facsimile thereof),
(B) the certificate(s) representing all tendered notes in proper form
for transfer (or a confirmation of book-entry transfer of such notes
into the exchange agent's account at the book-entry transfer
facility), and
(C) all other documents required by the letter of transmittal
upon five New York Stock Exchange trading days after the expiration date.
Upon request to the exchange agent, we will send a notice of guaranteed
delivery to holders who wish to tender their notes according to the guaranteed
delivery procedures described above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, holders may withdraw
tenders of notes at any time prior to 5:00 p.m., New York City time, on the
expiration date. To withdraw a tender of notes in the exchange offer, the
exchange agent must receive a telegram, telex, letter or facsimile transmission
notice of withdrawal at its address in this prospectus prior to 5:00 p.m., New
York City time, on the expiration date. Any such notice of withdrawal must:
(1) specify the name of the person having deposited the notes to be
withdrawn;
(2) identify the notes to be withdrawn (including the certificate number(s)
and principal amount of such notes, or, in the case of notes
transferred by book-entry transfer, the name and number of the account
at the book-entry transfer facility to be credited);
(3) be signed by the holder in the same manner as the original signature on
the letter of transmittal by which such notes were tendered (including
any required signature guarantees) or be accompanied by documents of
transfer sufficient to have the trustee with respect to the notes
register the transfer of notes into the name of the person withdrawing
the tender; and
(4) specify the name in which any notes are to be registered, if different
from that of the person who deposited the notes.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of such notices. Our determination shall be final and
binding on all parties. We will not deem notes so withdrawn to have been validly
tendered for purposes of the exchange offer. We will not issue exchange notes
for withdrawn notes unless you validly retender the withdrawn notes. We will
return any notes which have been tendered but which are not accepted for
exchange to the holder of the notes at our cost as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer. You may
retender properly withdrawn notes by following one of the procedures described
above under the heading "Procedures for Tendering Old Notes" at any time prior
to the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we shall not be
required to accept for exchange, or exchange exchange notes for, any notes, and
may terminate or amend the exchange offer as provided in this prospectus before
the acceptance of the notes, if:
(1) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the exchange offer
which, in our sole judgment, might materially impair our ability to
proceed with the exchange offer or any development has occurred in any
existing action or proceeding which may be harmful to us or any of our
subsidiaries; or
(2) any law, statute, rule, regulation or interpretation by the staff of
the Securities and Exchange Commission is proposed, adopted or enacted,
which, in our sole judgment, might impair our ability to proceed with
the exchange offer or impair the contemplated benefits of the exchange
offer to us; or
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<PAGE> 118
(3) any governmental approval has not been obtained, which we believe, in
our sole discretion, is necessary for the consummation of the exchange
offer as outlined in this prospectus.
If we determine in our sole discretion that any of the conditions are not
satisfied, we may:
(1) refuse to accept any notes and return all tendered notes to the
tendering holders;
(2) extend the exchange offer and retain all notes tendered prior to the
expiration of the exchange offer, subject, however, to the rights of
holders to withdraw their notes; or
(3) waive such unsatisfied conditions of the exchange offer and accept all
properly tendered notes which have not been withdrawn.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as the exchange
agent for the exchange offer. You should direct all
- executed letters of transmittal,
- questions,
- requests for assistance,
- requests for additional copies of this prospectus or of the letter of
transmittal and
- requests for Notices of Guaranteed Delivery
to the exchange agent addressed as follows:
<TABLE>
<S> <C> <C>
By Overnight Courier and By Hand: By Registered or
by Hand after 4:30 pm United States Trust Certified Mail:
on the Expiration Date: Company of New York United States Trust
United States Trust 111 Broadway, Lower Level Company of New York
Company of New York New York, New York 10006 P.O. Box 844
770 Broadway, 13th Floor Attn: Corporate Trust Services Cooper Station
New York, New York 10003 Via Facsimile: New York, New York 10276-0844
Attn: Corporate (212) 780-0592 Attn: Corporate
Trust Services Attn: Corporate Trust Services Trust Services
Confirm by Telephone:
(800) 548-6565
</TABLE>
DELIVERY OTHER THAN THOSE ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. We are mailing the
principal solicitation. However, our officers and regular employees and those of
our affiliates may make additional solicitation by telegraph, telecopy,
telephone or in person.
We have not retained any dealer-manager in connection with the exchange
offer. We will not make any payments to brokers, dealers, or others soliciting
acceptances of the exchange offer. However, we will pay the exchange agent
reasonable and customary fees for its services. We will reimburse the exchange
agent for its reasonable out-of-pocket expenses.
We will pay the cash expenses incurred in connection with the exchange
offer. These expenses include fees and expenses of the exchange agent and
trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The exchange notes will be recorded at the same carrying value as the
notes. The carrying value is face value, as reflected in our accounting records
on the date of exchange. Accordingly, we will recognize
114
<PAGE> 119
no gain or loss for accounting purposes. The expenses of the exchange offer will
be expensed over the term of the exchange notes.
TRANSFER TAXES
Holders who tender their old notes for exchange will not be obligated to
pay any transfer taxes in connection with the exchange. However, holders who
instruct us to register exchange notes in the name of, or request that old notes
not tendered or not accepted in the exchange offer be returned to, a person
other than the registered tendering holder will be responsible for the payment
of any applicable transfer tax on that transfer.
CONSEQUENCES OF FAILURE TO EXCHANGE; RESALES OF EXCHANGE NOTES
The notes that are not exchanged for exchange notes under the exchange
offer will remain restricted securities. Accordingly, those notes may be resold
only:
(1) to us (upon redemption of the notes or otherwise);
(2) so long as the notes are eligible for resale pursuant to Rule 144A, to
a person inside the United States who is a qualified institutional
buyer according to Rule 144A under the Securities Act of 1933 or
pursuant to another exemption from the registration requirements of the
Securities Act of 1933, based upon an opinion of counsel reasonably
acceptable to us;
(3) outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act of 1933; or
(4) under an effective registration statement under the Securities Act of
1933
in each case in accordance with any applicable securities laws of any state of
the United States.
RESALES OF THE EXCHANGE NOTES
Based on interpretations by the staff of the Securities and Exchange
Commission in no-action letters issued to third parties, we believe that a
holder or other person who receives exchange notes will be allowed to resell the
exchange notes to the public without further registration under the Securities
Act of 1933 and without delivering a prospectus that satisfies the requirements
of Section 10 of the Securities Act of 1933. The holder (other than a person
that is our "affiliate" within the meaning of Rule 405 under the Securities Act
of 1933) who receives exchange notes in exchange for notes in the ordinary
course of business and who is not participating, need not intend to participate
or have an arrangement or understanding with any person to participate in the
distribution of the exchange notes. However, if any holder acquires exchange
notes in the exchange offer for the purpose of distributing or participating in
a distribution of the exchange notes, the holder cannot rely on the position of
the staff of the Securities and Exchange Commission enunciated in the no-action
letters or any similar interpretive letters. A holder who acquires exchange
notes in order to distribute them must comply with the registration and
prospectus delivery requirements of the Securities Act of 1933 in connection
with any resale transaction, unless an exemption from registration is otherwise
available. Further, each broker-dealer that receives exchange notes for its own
account in exchange for notes as a result of market-making activities or other
trading activities must acknowledge that it will deliver a prospectus in
connection with any resale of such exchange notes.
115
<PAGE> 120
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion, including the opinion of counsel described below,
is based upon current provisions of the Internal Revenue Code of 1986, as
amended, applicable Treasury regulations, judicial authority and administrative
rulings and practice. The Internal Revenue Service may take a contrary view, and
no ruling from the Service has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter or
modify the following statements and conditions. Any changes or interpretations
may or may not be retroactive and could affect the tax consequences to holders.
Some holders (including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) may be subject to special rules not
discussed below. We recommend that each holder consult his own tax advisor as to
the particular tax consequences of exchanging such holder's old notes for
exchange notes, including the applicability and effect of any state, local or
foreign tax laws.
Kirkland & Ellis, counsel to Sleepmaster and its subsidiaries, has advised
us that in its opinion, the exchange of the old notes for exchange notes
pursuant to the exchange offer will not be treated as an "exchange" for federal
income tax purposes because the exchange notes will not be considered to differ
materially in kind or extent from the old notes. Rather, the exchange notes
received by a holder will be treated as a continuation of the old notes in the
hands of such holder. As a result, there will be no federal income tax
consequences to holders exchanging old notes for exchange notes pursuant to the
exchange offer.
116
<PAGE> 121
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account under
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of exchange notes.
This prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of exchange notes
received in exchange for old notes if the old senior subordinated notes were
acquired as a result of market-making activities or other trading activities.
We and our guarantor subsidiaries have agreed to make this prospectus, as
amended or supplemented, available to any broker-dealer to use in connection
with any such resale for a period of at least 90 days after the expiration date.
In addition, until [ ], 1999, all dealers effecting transactions in the
exchange notes may be required to deliver a prospectus.
Neither we nor our guarantor subsidiaries will receive any proceeds from
any sale of exchange notes by broker-dealers. Exchange notes received by
broker-dealers for their own accounts under the exchange offer may be sold from
time to time in one or more transactions
- in the over-the-counter market,
- in negotiated transactions,
- through the writing of options on the exchange notes or a combination of
such methods of resale,
- at market prices prevailing at the time of resale,
- at prices related to such prevailing market prices or
- at negotiated prices.
Any resale may be made directly to purchasers or to or through brokers or
dealers. Brokers or dealers may receive compensation in the form of commissions
or concessions from any broker-dealer or the purchasers of any such exchange
notes. An "underwriter" within the meaning of the Securities Act of 1933
includes
(1) any broker-dealer that resells exchange notes that were received by it
for its own account pursuant to the exchange offer or
(2) any broker or dealer that participates in a distribution of such
exchange notes.
Any profit on any resale of exchange notes and any commissions or concessions
received by any persons may be deemed to be underwriting compensation under the
Securities Act of 1933. The letter of transmittal states that, by acknowledging
that it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act of 1933.
Based on interpretations by the staff of the Securities and Exchange
Commission in no-action letters issued to third parties, we believe that a
holder or other person who receives exchange notes will be allowed to resell the
exchange notes to the public without further registration under the Securities
Act of 1933 and without delivering to the purchasers of the exchange notes a
prospectus that satisfies the requirements of Section 10 of the Securities Act
of 1933. The holder (other than a person that is an "affiliate" of Sleepmaster
LLC or Sleepmaster Finance Corporation within the meaning of Rule 405 under the
Securities Act of 1933) who receives exchange notes in exchange for old notes in
the ordinary course of business and who is not participating, need not intend to
participate or have an arrangement or understanding with person to participate
in the distribution of the exchange notes.
However, if any holder acquires exchange notes in the exchange offer for
the purpose of distributing or participating in a distribution of the exchange
notes, the holder cannot rely on the position of the staff of the Securities and
Exchange Commission enunciated in such no-action letters or any similar
interpretive letters. The holder must comply with the registration and
prospectus delivery requirements of the Securities Act of 1933 in connection
with any resale transaction. A secondary resale transaction should be covered by
an effective registration statement containing the selling security holder
information required by
117
<PAGE> 122
Item 507 or 508, as applicable, of Regulation S-K under the Securities Act of
1933, unless an exemption from registration is otherwise available.
Further, each broker-dealer that receives exchange notes for its own
account in exchange for old notes, where the old notes were acquired by such
participating broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of any exchange notes. We and each of our guarantor
subsidiaries have agreed, for a period of not less than 90 days from the
consummation of the exchange offer, to make this prospectus available to any
broker-dealer for use in connection with any such resale.
For a period of not less than 90 days after the expiration date we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests those documents
in the letter of transmittal. We and each of our guarantor subsidiaries have
jointly and severally agreed to pay all expenses incident to the exchange offer,
including the expenses of one counsel for the holders of the old notes, other
than commissions or concessions of any brokers or dealers. We will indemnify the
holders of the old notes against liabilities under the Securities Act of 1933,
including any broker-dealers.
LEGAL MATTERS
Certain legal matters with respect to the validity of the notes offered
hereby will be passed upon for Sleepmaster by Kirkland & Ellis, New York, New
York. Kirkland & Ellis will issue an opinion for Sleepmaster and Sleepmaster
Finance Corporation with respect to the issuance of the exchange notes offered
hereby, including
1) the existence and good standing of each of Sleepmaster and Sleepmaster
Finance Corporation under its state of incorporation,
2) the authorization of the sale and issuance of the exchange notes by each
of Sleepmaster and Sleepmaster Finance Corporation, and
3) the enforceability of the exchange notes.
EXPERTS
The financial statements of Sleepmaster, Palm Beach, Herr and Star included
in this prospectus have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on authority of said
firm as experts in auditing and accounting.
AVAILABLE INFORMATION
We and our guarantor subsidiaries have filed with the Securities and
Exchange Commission a Registration Statement on Form S-4, the "Exchange Offer
Registration Statement," which term shall encompass all amendments, exhibits,
annexes and schedules thereto, pursuant to the Securities Act of 1933, and the
rules and regulations promulgated thereunder, covering the exchange notes being
offered. This prospectus does not contain all the information in the exchange
offer registration statement. For further information with respect to
Sleepmaster L.L.C., Sleepmaster Finance Corporation, the guarantor subsidiaries
and the exchange offer, reference is made to the exchange offer registration
statement. Statements made in this prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
For a more complete understanding and description of each contract, agreement or
other document filed as an exhibit to the exchange offer registration statement,
we encourage you to read the documents contained in the exhibits.
The exchange offer registration statement, including the exhibits thereto,
can be inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Regional Offices of the Securities and
118
<PAGE> 123
Exchange Commission at Seven World Trade Center, Suite 1300, New York, New York
10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained from the Public Reference Section of
the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. In addition, the Securities and Exchange
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Securities and Exchange Commission. The address of such Web site is:
http://www.sec.gov.
We are currently subject to the informational requirements of the
Securities Act of 1933, and in accordance therewith will be required to file
periodic reports and other information with the Securities and Exchange
Commission. Our obligation to file periodic reports and other information with
the Securities and Exchange Commission will be suspended if the exchange notes
are held of record by fewer than 300 holders as of the beginning of our fiscal
year other than the fiscal year in which the exchange offer registration
statement is declared effective.
We will nevertheless be required to continue to file reports with the
Securities and Exchange Commission if the exchange notes are listed on a
national securities exchange. In the event we cease to be subject to the
informational requirements of the Securities Exchange Act of 1934, we will be
required under the indenture to continue to file with the Securities and
Exchange Commission the annual and quarterly reports, information, documents or
other reports, including reports on Forms 10-K, 10-Q and 8-K, which would be
required pursuant to the informational requirements of the Securities Exchange
Act of 1934.
Under the indenture, we shall file with the trustee annual, quarterly and
other reports after it files such reports with the Securities and Exchange
Commission. Annual reports delivered to the trustee and the holders of exchange
notes will contain financial information that has been examined and reported
upon, with an opinion expressed by an independent public accountant. We will
also furnish such other reports as may be required by law.
Information contained in this prospectus contains "forward-looking
statements" which can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should," or "anticipates" or the
negative thereof or other similar terminology, or by discussions of strategy.
Our actual results could differ materially from those anticipated by any such
forward-looking statements as a result of factors described in the "Risk
Factors" beginning on page 10 and elsewhere in this prospectus.
The market and industry data presented in this prospectus are based upon
third-party data, including information compiled by the International Sleep
Products Association and Furniture/Today, data provided to us by Serta, Inc. and
reports filed by other market participants with the Securities and Exchange
Commission. While we believe that such estimates are reasonable and reliable,
estimates cannot always be verified by information available from independent
sources. Accordingly, readers are cautioned not to place undue reliance on such
market share data. Unless otherwise indicated, market share data is based on net
shipments and is for the 1998 year.
------------------------
Serta(R), Sertapedic(R), Perfect Sleeper(R), Body Pillow(R), Comfort
Quilt(R), ModuCoil(R), Perfect Night(R), Posture Spiral(R), Dual Posture(R),
Body Loft(R), Pillo-Fill(R), Masterpiece(R), Triple Beam(R), Nightstar(TM),
Double Micro-Offset Coils(TM), Master Weld Torsion System(TM), Perfect Sleeper
Nightstar(TM), Perfect Sleeper Showcase(TM), Posture Edge(TM), Perimeter Edge
Foam(TM), Ultimate Edge Support(TM) and Posture Pad(TM) are trademarks used by
Sleepmaster and its subsidiaries. Tradenames and trademarks of other companies
appearing in this prospectus are the property of their respective holders.
119
<PAGE> 124
INDEX TO FINANCIAL STATEMENTS
SLEEPMASTER L.L.C. AND SUBSIDIARIES
<TABLE>
<S> <C>
SLEEPMASTER L.L.C.
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997................................................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996....................... F-4
Consolidated Statements of Changes in Members' Equity
(Deficit) for the Years Ended December 31, 1998, 1997
and 1996............................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996....................... F-6
Notes to Consolidated Financial Statements................ F-7
Unaudited Condensed Consolidated Balance Sheet as of June
30, 1999............................................... F-18
Unaudited Condensed Consolidated Statements of Income for
the Three Months Ended
June 30, 1999 and 1998 and for the Six Months Ended
June 30, 1999 and 1998................................. F-19
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1999 and 1998........ F-20
Notes to Unaudited Condensed Consolidated Financial
Statements............................................. F-21
PALM BEACH BEDDING COMPANY
Report of Independent Accountants......................... F-32
Balance Sheet as of December 31, 1997..................... F-33
Statements of Income for the Years Ended December 31, 1997
and 1996............................................... F-34
Statements of Stockholders' Equity for the Years Ended
December 31, 1997 and 1996............................. F-35
Statements of Cash Flows for the Years Ended December 31,
1997 and 1996.......................................... F-36
Notes to Financial Statements............................. F-37
HERR MANUFACTURING COMPANY
Report of Independent Accountants......................... F-41
Balance Sheet as of December 31, 1998..................... F-42
Statement of Income for the Year Ended December 31,
1998................................................... F-43
Statement of Stockholders' Equity for the Year Ended
December 31, 1998...................................... F-44
Statement of Cash Flows for the Year Ended December 31,
1998................................................... F-45
Notes to Financial Statements............................. F-46
STAR BEDDING PRODUCTS (1986) LIMITED
Auditors' Report.......................................... F-50
Consolidated Balance Sheet as at December 31, 1998........ F-51
Consolidated Statement of Income and Retained Earnings for
the Year Ended December 31, 1998....................... F-52
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1998...................................... F-53
Notes to Consolidated Financial Statements................ F-54
Unaudited Condensed Consolidated Balance Sheet as of March
31, 1999............................................... F-58
Unaudited Condensed Consolidated Statements of Income for
the Three Months Ended March 31, 1999 and 1998......... F-59
Unaudited Condensed Consolidated Cash Flows for the Three
Months Ended March 31, 1999 and 1998................... F-60
Notes to Unaudited Condensed Consolidated Financial
Statements............................................. F-61
</TABLE>
F-1
<PAGE> 125
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Advisors and
Members of Sleepmaster L.L.C.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, members' deficit and of cash flows present
fairly, in all material respects, the consolidated financial position of
Sleepmaster L.L.C. (the "Company") and its subsidiary at December 31, 1998 and
the Company at 1997 and the results of their operations and their cash flows for
each of the three years ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
April 2, 1999, except as to the
second paragraph of Note 18,
which is as of April 30, 1999
F-2
<PAGE> 126
SLEEPMASTER L.L.C.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 161,695 $ 591,683
Accounts receivable, less allowance for doubtful accounts
of $1,657,365 and $1,131,035, respectively............. 12,570,315 7,494,182
Accounts receivable -- other.............................. 1,199,002 667,622
Inventories............................................... 4,746,574 2,679,133
Other current assets...................................... 346,637 93,290
Deferred tax assets....................................... 1,605,977 1,541,674
------------ ------------
Total current assets................................... 20,630,200 13,067,584
Property, plant and equipment, net.......................... 10,429,511 1,596,827
Intangible assets........................................... 45,302,505 18,406,538
Other assets................................................ 1,779,743 1,030,745
Deferred tax assets......................................... 11,397,747 13,237,785
------------ ------------
Total assets........................................... $ 89,539,706 $ 47,339,479
============ ============
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 9,930,782 $ 5,270,766
Accrued advertising expenses.............................. 1,517,347 1,777,648
Accrued sales allowances.................................. 3,188,903 3,273,037
Other current liabilities................................. 3,082,313 1,844,958
Current portion of long-term debt......................... 7,130,000 3,500,000
------------ ------------
Total current liabilities.............................. 24,849,345 15,666,409
------------ ------------
Long-term debt............................................ 63,565,544 35,602,177
Other liabilities......................................... 375,296 235,141
------------ ------------
Total long-term liabilities............................ 63,940,840 35,837,318
------------ ------------
Commitments and contingencies (Note 16)
Redeemable cumulative preferred interests................... 18,266,940 15,927,443
Members' Deficit:
Class A common interests.................................. 1,640,000 1,000,000
Class B common interests.................................. -- --
Accumulated deficit....................................... (19,157,419) (21,091,691)
------------ ------------
Total members' deficit................................. (17,517,419) (20,091,691)
------------ ------------
Total liabilities and members' deficit................. $ 89,539,706 $ 47,339,479
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 127
SLEEPMASTER L.L.C.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Net sales.......................................... $110,250,548 $67,472,130 $59,762,889
Cost of sales...................................... 68,987,610 42,448,055 37,497,450
------------ ----------- -----------
Gross profit.................................. 41,262,938 25,024,075 22,265,439
------------ ----------- -----------
Operating expenses
Selling, general and administrative expenses..... 25,793,631 15,043,545 14,130,410
Amortization of intangibles...................... 1,223,134 644,095 644,095
------------ ----------- -----------
Total operating expenses...................... 27,016,765 15,687,640 14,774,505
------------ ----------- -----------
Operating income................................... 14,246,173 9,336,435 7,490,934
------------ ----------- -----------
Interest expense, net.............................. 7,096,489 4,663,050 2,578,107
Other (income) expense, net........................ (17,834) (97,212) 216,267
------------ ----------- -----------
Income before income taxes.................... 7,167,518 4,770,597 4,696,560
Provision for income taxes......................... 3,019,510 2,013,861 91,024
------------ ----------- -----------
Net income.................................... $ 4,148,008 $ 2,756,736 $ 4,605,536
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 128
SLEEPMASTER L.L.C.
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON INTERESTS
-----------------------------------
CLASS A CLASS B RETAINED
------------------ -------------- MEMBERS' EARNINGS
UNITS AMOUNT UNITS AMOUNT INTERESTS (DEFICIT) TOTAL
----- ---------- ----- ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1996................. -- $ -- -- $ -- $ 1,395,500 $ 1,321,579 $ 2,717,079
Capital contributions........... 1 129 129
Conversion of members' interests
to common interests upon
Recapitalization of Company... 7,999 999,871 (1,395,500) (620,345) (1,015,974)
Net income...................... 4,605,536 4,605,536
Distributions................... (43,994,429) (43,994,429)
Tax benefit attributable to
Recapitalization of Company... 16,792,432 16,792,432
Accretion of redeemable
cumulative preferred
interests..................... (220,932) (220,932)
----- ---------- ----- ------ ----------- ------------ ------------
DECEMBER 31, 1996............... 8,000 1,000,000 -- -- -- (22,116,159) (21,116,159)
Net income...................... 2,756,736 2,756,736
Distributions................... (25,756) (25,756)
Accretion of redeemable
cumulative preferred
interests..................... (1,706,512) (1,706,512)
----- ---------- ----- ------ ----------- ------------ ------------
DECEMBER 31, 1997............... 8,000 1,000,000 -- -- -- (21,091,691) (20,091,691)
Capital contributions........... 640,000 640,000
Net income...................... 4,148,008 4,148,008
Distributions................... (234,240) (234,240)
Accretion of redeemable
cumulative preferred
interests..................... (1,979,496) (1,979,496)
----- ---------- ----- ------ ----------- ------------ ------------
DECEMBER 31, 1998............... 8,000 $1,640,000 -- $ -- $ -- $(19,157,419) $(17,517,419)
===== ========== ===== ====== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 129
SLEEPMASTER L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $ 4,148,008 $ 2,756,736 $ 4,605,536
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............... 2,088,840 1,092,650 1,043,488
Provision for doubtful accounts............. 286,916 249,604 200,004
Loss (gain) on sale of equipment............ 9,004 (63,779) --
Deferred income taxes....................... 1,775,735 1,752,297 91,024
Other non-cash charges...................... 319,957 201,869 422,326
Changes in operating assets and liabilities,
net of acquisition:
(Increase) decrease in accounts
receivable............................. (2,410,920) 208,668 (2,467,435)
Increase in accounts
receivable -- other.................... (207,783) (543,063) (49,700)
Decrease (increase) in inventories........ 113,503 (563,408) (816,410)
(Increase) decrease in other current
assets................................. (196,291) 40,645 (7,280)
Increase in other assets.................. (41,327) -- --
Increase (decrease) in accounts payable... 2,834,075 (103,983) 2,113,193
Increase in accrued liabilities........... 13,891 947,972 387,899
Increase in other liabilities............. 140,155 60,006 60,066
------------ ------------ ------------
Net cash provided by operating activities... 8,873,763 6,036,214 5,582,711
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................... (1,095,262) (572,003) (166,939)
Proceeds from sale of equipment................ -- 66,855 --
Acquisition, net of cash acquired.............. (32,756,038) -- --
------------ ------------ ------------
Net cash used in investing activities....... (33,851,300) (505,148) (166,939)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term debt................... 48,308,360 1,025,000 42,000,000
Payments on long term debt..................... (23,698,994) (1,232,191) (17,989,000)
Borrowings under revolving line of credit...... 7,396,328 18,100,000 3,877,111
Payments on revolving line of credit........... (7,397,328) (22,821,664) (1,846,130)
Loan origination fees.......................... (826,577) -- (1,161,175)
Distributions.................................. (234,240) (25,756) (38,196,328)
Capital contribution........................... 1,000,000 -- 12,984,155
Payments to purchase warrants.................. -- -- (3,800,000)
Recapitalization costs......................... -- -- (1,998,102)
------------ ------------ ------------
Net cash provided by (used in) financing
activities................................ 24,547,549 (4,954,611) (6,129,469)
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents.................................... (429,988) 576,455 (713,697)
Cash and cash equivalents at beginning of year... 591,683 15,228 728,925
------------ ------------ ------------
Cash and cash equivalents at end of year......... $ 161,695 $ 591,683 $ 15,228
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for
Interest....................................... $ 7,125,489 $ 4,301,877 $ 2,172,472
Income taxes................................... $ 561,600 -- --
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES
In connection with the issuance of redeemable cumulative preferred
interests upon the leveraged recapitalization of the Company in 1996 (see Note
4), the Company recorded a charge to retained earnings (deficit) of $1,979,496,
$1,706,512 and $220,932 for the years ended December 31, 1998, 1997 and 1996,
respectively, representing the accretion of redeemable cumulative preferred
interests at a compounded annual rate of 12.0%.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 130
SLEEPMASTER L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Sleepmaster L.L.C. ("Sleepmaster" or the "Company"), is a leading
manufacturer and distributor of Serta brand mattresses and box springs in
certain regions of the northeastern United States and Florida. The Company was
formed on January 2, 1995 by acquiring substantially all of the assets and
liabilities of Sleepmaster Products Company, L.P., a Delaware limited
partnership. The business and affairs of the Company are governed by the Limited
Liability Company Operating Agreement of Sleepmaster L.L.C. (the "Sleepmaster
L.L.C. Agreement"), which established a board of advisors having duties
comparable to a corporate board of directors.
Prior to November 1996, 98% of the Company was owned by Sleepmaster
Holdings L.L.C. ("Holdings") and 2% was owned by Brown/Schweitzer Holdings Inc.
("B/S Holdings"). Holdings was owned by management of Sleepmaster. On November
14, 1996, the Company entered into a recapitalization agreement (the
"Recapitalization"). Under the Recapitalization, the members of Holdings sold
their respective interests in part to Holdings, followed by the sale of a
portion of the membership interest to new investors. As a result of the
Recapitalization, Holdings' ownership of Sleepmaster was increased to almost
100% and B/S Holdings was replaced by Sleep Investor L.L.C. ("Sleep Investor"),
a group of investors led by Citicorp Venture Capital and PMI Mezzanine Fund
L.L.P. Because of the ownership change of Holdings as a result of the
Recapitalization, management of Sleepmaster owns 28% of Holdings. The
Sleepmaster L.L.C. Agreement was amended following the completion of this
transaction (the "Amended Sleepmaster L.L.C. Agreement"). See Note 4 for further
details of the transaction and impact on members of the Company.
On March 3, 1998, the Company acquired the capital stock of Palm Beach
Bedding Company ("Palm Beach") for cash and the assumption of Palm Beach County,
Florida, variable rate industrial development revenue bonds.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Palm Beach, for the year ended December 31,
1998. All significant intercompany balances and transactions are eliminated. The
1997 and 1996 financial statements include the accounts of the Company only.
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. The most significant estimates include the allowance for
doubtful accounts and the recoverability of long-lived assets. Actual results
could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investment instruments
with an original maturity of three months or less.
F-7
<PAGE> 131
SLEEPMASTER L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Company recognizes revenue at the time of shipment. Appropriate
accruals for returns, discounts, rebates and other allowances are recorded as
reductions in sales. The Company's bedding products offer limited warranties of
up to 10 years against manufacturing defects. The Company's cost of honoring
warranty claims is immaterial.
Inventories
Inventories are stated at the lower of cost or market and include the cost
of materials, labor and manufacturing overhead. Cost is determined on a
first-in, first-out basis. Inventories are produced on a made-to-order basis.
Long-Lived Assets
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated on a straight-line basis over the
following estimated useful lives:
<TABLE>
<S> <C>
Land improvements................................... 40 years
Building and improvements........................... 40 years
Machinery and equipment............................. 5-10 years
Office furniture and equipment...................... 3-5 years
Vehicles............................................ 7 years
Leasehold improvements.............................. length of lease (10 years)
</TABLE>
Expenditures for maintenance and routine repairs are expensed as incurred.
Upon the disposition of property, plant and equipment, the accumulated
depreciation is deducted from the original cost and any gain or loss is
reflected in current income.
Intangible Assets
Intangible assets include goodwill, which represents the excess of purchase
price over the fair value of net assets acquired, and licenses, which are
amortized using the straight-line basis over forty years from the date of
acquisition.
Intangible assets also include a covenant not-to-compete as a result of an
acquisition of a Serta Philadelphia licensee, which is amortized using the
straight-line method over the life of the agreement.
Accumulated amortization at December 31, 1998 and 1997 was approximately
$3,264,000 and $2,064,000, respectively.
The Company reviews goodwill and other intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable by comparing the carrying value of the asset
with its estimated future undiscounted cash flows. If it is determined that an
impairment loss has occurred, the loss would be recognized during that period.
The impairment loss is calculated as the difference between the asset carrying
value and the present value of estimated net cash flows or comparable market
values, giving consideration to recent operating performance and pricing trends.
At December 31, 1998, management believes there was no impairment to long-lived
assets.
F-8
<PAGE> 132
SLEEPMASTER L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Advertising Costs
The Company expenses advertising costs, consisting principally of
cooperative advertising with dealers and retailers, when the revenue from sales
to customers is recorded. Advertising costs for the years ended December 31,
1998, 1997 and 1996 amounted to approximately $8,154,000, $5,779,000 and
$5,234,000, respectively.
New Accounting Pronouncements
In February 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee ("AcSEC") issued Statement of Position
("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 requires certain costs incurred in
connection with developing or obtaining internal use software to be capitalized
and other costs to be expensed.
In March 1998, AcSEC issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities" ("SOP 98-5"). SOP 98-5 provides guidance on the financial
reporting of start-up costs and organization costs and requires that such costs
be expensed as incurred. The effect of adopting SOP 98-5 will be reported as a
change in accounting principle.
These standards are effective for the Company's consolidated financial
statements for the first quarter 1999. The Company is currently evaluating the
impact, if any, of these new standards on its financial position and results of
operations.
Income Taxes
The Company files a consolidated federal income tax return with its Parent,
Holdings. Additionally, the Company files a state tax return in New Jersey and
will file in Florida as a result of the Palm Beach acquisition. In accordance
with the provisions of Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", the
current and deferred income tax provisions and related current and deferred
income tax assets and liabilities for the Company were determined on a separate
company basis. Currently the Company does not maintain a tax sharing agreement
with its Parent.
3. ACQUISITION
On March 3, 1998, Sleepmaster acquired the capital stock of Palm Beach for
approximately $32,800,000 in cash and the assumption of Palm Beach County,
Florida Industrial Development Revenue Bonds in the aggregate principal amount
of $6,985,000. The cash payment was financed by borrowings under the Company's
amended and restated credit agreement (see Note 10).
The acquisition was accounted for under the purchase method and,
accordingly, Palm Beach's results are included in the consolidated financial
statements since the date of acquisition. The assets and liabilities have been
recorded at their estimated fair values at the date of acquisition. The excess
of the purchase price over the estimated fair values of the net assets acquired,
aggregating approximately $28,100,000, has been recorded as goodwill and is
being amortized over 40 years.
F-9
<PAGE> 133
SLEEPMASTER L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the purchase price allocation is as follows:
<TABLE>
<S> <C>
Current assets.............................................. $ 5,563,336
Property, plant and equipment............................... 8,612,132
Other assets................................................ 201,051
Goodwill.................................................... 28,119,110
Current liabilities......................................... (2,704,970)
Debt........................................................ (6,985,000)
-----------
Total............................................. $32,805,659
===========
</TABLE>
The following unaudited pro forma income statement data for the years ended
December 31, 1998 and 1997 has been prepared as if the acquisition occurred as
of the beginning of each year presented.
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net sales....................................... $117,307,031 $102,464,996
Net income...................................... 5,642,212 2,482,231
</TABLE>
In management's opinion, the unaudited pro forma combined results of
operations are not necessarily indicative of the actual results that would have
occurred had the acquisition been consummated at the beginning of each period
presented, nor are they necessarily indicative of future consolidated results.
4. RECAPITALIZATION
On November 16, 1996, the Company's Parent, Holdings, entered into a
recapitalization agreement (the "Recapitalization Agreement") with the Company,
B/S Holdings and Sleep Investor. As part of the Recapitalization, all
outstanding membership interests were converted to redeemable cumulative
preferred interests and common interests pursuant to the terms of the Amended
Sleepmaster L.L.C. Agreement (See Note 1).
Pursuant to the Recapitalization Agreement, Holdings redeemed all of the
membership interests of its members, except for four members who are members of
management of the Company ("Retained Members"), for an aggregate amount of cash
equal to approximately $34,700,000 and then sold such membership interests to
Sleep Investor. In addition, Sleep Investor purchased 8,714 units of redeemable
cumulative preferred interests and 6,099 units of common interests of Holdings
for approximately $12,900,000 plus issuance of a $7,000,000 pay-in-kind note
payable to all former members of Holdings, including the Retained Members. The
remaining redeemable cumulative preferred and common interests of Holdings were
allocated to the Retained Members. As a result of the Recapitalization, Sleep
Investor owns 72% of the outstanding units of Holdings and the Retained Members
retained a 28% ownership.
Financing for the Recapitalization, including the refinancing of existing
indebtedness and fees and expenses incurred, was provided by (1) the Company's
borrowings under a new $29,700,000 Senior Secured Credit Facility, (2) the
Company's borrowing under $15,000,000 Senior Subordinated Notes and (3) the
$12,900,000 of capital provided by Sleep Investor.
The Company has accounted for the Recapitalization as a leveraged
recapitalization, whereby the historical bases of the assets and liabilities of
the Company have been maintained for financial reporting purposes.
F-10
<PAGE> 134
SLEEPMASTER L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Raw materials....................................... $3,540,796 $2,314,165
Work-in-process..................................... 286,958 208,375
Finished goods...................................... 918,820 156,593
---------- ----------
Total inventories.............................. $4,746,574 $2,679,133
========== ==========
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Building and improvements.......................... $ 5,045,762 $ --
Land and improvements.............................. 1,705,680 --
Machinery and equipment............................ 3,726,747 1,757,227
Office furniture and fixtures...................... 867,073 443,538
Vehicles........................................... 208,579 --
Leasehold improvements............................. 680,778 374,904
Construction-in-progress........................... 184,123 173,060
----------- ----------
12,418,742 2,748,729
Less: accumulated depreciation..................... 1,989,231 1,151,902
----------- ----------
$10,429,511 $1,596,827
=========== ==========
</TABLE>
Depreciation expense was approximately $866,000, $449,000 and $400,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
7. CONCENTRATION OF CREDIT RISK
The Company manufactures and markets sleep products including mattresses
and box springs to department stores and specialty shops in certain licensed
territories in the United States. In 1998, two customers accounted for
approximately 13% and 11%, respectively, of consolidated net sales. In 1997,
three customers accounted for approximately 17%, 14% and 12%, respectively, of
net sales and the same customers represented 13%, 15% and 13%, respectively, of
net sales in 1996.
Amounts receivable from these customers represented approximately 30% and
51%, respectively, of the trade accounts receivable balance at December 31, 1998
and 1997.
Purchases of raw materials from one vendor represented approximately 43%,
34% and 34% of total raw material purchases for 1998, 1997 and 1996,
respectively.
8. LICENSE AGREEMENT
Serta, Inc. ("Serta") is a national non-profit organization consisting of
12 domestic licensed operating mattress manufacturing companies. The
organization aids the manufacturers in marketing, merchandising, manufacturing
specifications, trademarks and related activities through license fees paid by
the licensees. Serta owns the rights to the Serta trademark and licenses
companies to manufacture and sell mattresses under the Serta brand name. The
Company's license with Serta is effective until terminated by mutual
F-11
<PAGE> 135
SLEEPMASTER L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
written agreement by both parties or if the Company does not comply with the
provisions of the license agreement. In 1998, 1997 and 1996, the Company paid
approximately $3,400,000, $2,400,000 and $2,400,000, respectively, in license
fees to Serta.
9. EMPLOYEE BENEFIT PLANS
The Company maintains a noncontributory profit sharing plan ("Profit
Sharing Plan") covering substantially all non-union employees who meet certain
eligibility requirements, such as age and length of service. Contributions are
determined annually by management, but are limited to an amount deductible for
income tax purposes. The Company reserves the right to terminate or amend the
Profit Sharing Plan at any time. The Company elected to contribute approximately
$345,000 for 1998, $210,000 for 1997 and $200,000 for 1996.
Non-union employees of the Company may participate in a 401(k) savings plan
("Savings Plan"), to which the employees may elect to make contributions
pursuant to a salary reduction agreement upon meeting certain age and length of
service requirements. The Company contributes a matching 50% up to the first 4%
of the employee contributions. Matching contributions to the Savings Plan were
approximately $83,000 for 1998, $45,000 for 1997 and $41,000 for 1996.
Union employees, pursuant to a collective bargaining agreement, are covered
under a 401(k) savings plan established by the Company. For the year ended
December 31, 1998, 1997 and 1996, the Company contributed $250, $200 and $150,
respectively, to the account of each eligible employee. Contribution expense for
this plan was approximately $35,000 for 1998, $24,000 for 1997 and $18,000 for
1996.
10. DEBT
The following is a summary of the Company's long-term debt:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Term Loan A due in variable quarterly installments through
March 2003 at variable interest rates (8.63% at December
31, 1998 and 9.50% at December 31, 1997)................ $22,745,544 $12,101,177
Term Loan B due in variable quarterly installments through
February 2004 at variable interest rates (9.06% at
December 31, 1998 and 9.75% at December 31, 1997)....... 21,250,000 12,000,000
Series A Senior Subordinated Notes, 12.00%, due in
quarterly installments from March 2005 through December
2007.................................................... 15,000,000 15,000,000
Series B Senior Subordinated Notes, 12.00% due in
quarterly installments from March 2005 through December
2007.................................................... 5,000,000 --
Industrial Development Revenue Bonds due through 2016 at
variable interest rates (3.70% at December 31, 1998)
collateralized by an irrevocable letter of credit issued
to the Bond agent in the amount of $6,968,000........... 6,700,000 --
Other..................................................... -- 1,000
----------- -----------
70,695,544 39,102,177
Less, current portion..................................... 7,130,000 3,500,000
----------- -----------
$63,565,544 $35,602,177
=========== ===========
</TABLE>
The letter of credit issued to the agent for the Industrial Development
Revenue Bonds is in turn, collateralized by a first lien against certain land
and buildings of Palm Beach. In connection with the
F-12
<PAGE> 136
SLEEPMASTER L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition of Palm Beach on March 3, 1998, the Company was required by the Bond
agent to issue another letter of credit in their favor in an equivalent amount
to the initial letter of credit, secured by a second lien against certain land
and buildings of Palm Beach. This second letter of credit was issued under the
Company's amended and restated secured credit agreement (the "Credit Agreement")
with a bank, entered into in connection with the acquisition of Palm Beach.
Under the terms of the Credit Agreement, which matures on March 3, 2004, the
Company may borrow up to $53.7 million, reduced by the $6,968,000 letter of
credit issued to the Bond agent, comprising a working capital line of credit and
revolving term loans. The revolving credit facility provides sublimits for a
further $1.5 million letter of credit facility.
The Company pays commitment fees of 1/2% per annum on the unused amount of
the credit facilities. At December 31, 1998 the Company had no borrowings
outstanding under the working capital line of credit. The weighted average
interest rate under the revolving working capital line of credit was 8.30% and
10.00% at December 31, 1998 and 1997, respectively.
The carrying amount of long-term debt under the Revolving Credit Facility
and Term Loan Facility approximates fair value because the interest rate adjusts
to market interest rates. The fair values of the 12.00% Senior Subordinated
Notes based on quoted market prices of debt securities with similar terms and
maturities were $20.4 million and $16.8 million at December 31, 1998 and 1997,
respectively.
Under the terms of the Credit Agreement and Senior Subordinated Notes, the
Company is required to maintain certain financial ratios and other financial
conditions. The Credit Agreement and Senior Subordinated Notes also prohibit the
Company from incurring certain additional indebtedness and limit certain
investments, capital expenditures and cash dividends. At December 31, 1998, the
Company was not in compliance with certain non-financial covenants; however
waivers and amendments were obtained.
Additionally, the Company has a letter of credit with a bank in the amount
of $720,462 as a rental security deposit on its Linden, New Jersey, facility.
The Company pays a commitment fee of 3% per year of the face amount. The letter
of credit reduces the amount available to the Company under the working capital
line of credit sublimit associated with its Credit Agreement.
Long term debt at December 31, 1998 is scheduled to mature as follows:
<TABLE>
<S> <C>
1999.................................................. $ 7,130,000
2000.................................................. 8,880,000
2001.................................................. 10,130,000
2002.................................................. 7,375,544
2003.................................................. 9,880,000
Thereafter............................................ 27,300,000
-----------
$70,695,544
===========
</TABLE>
11. MEMBERS' EQUITY
In accordance with the Sleepmaster L.L.C. Agreement, the Company's board of
advisors may issue three classes of membership interests: preferred interests,
Class A common interests and Class B common interests. Class A common interests
entitle the holder to one vote per Class A common unit. The holders of Class B
common interests and preferred interests have no voting or participating rights
except in the case of mergers, consolidations, recapitalizations or
reorganizations.
The Company had outstanding Class A common units of 8,000 as of December
31, 1998 and 1997. No Class B common units have been issued by the Company as of
December 31, 1998.
F-13
<PAGE> 137
SLEEPMASTER L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. REDEEMABLE CUMULATIVE PREFERRED INTERESTS
The Company had outstanding 9999.96 units of cumulative redeemable
preferred units as of December 31, 1998 and 1997. The preferred units are not
convertible into any other security of the Company and the holders have no
voting rights except in the case of mergers, consolidations, recapitalizations
or reorganizations. The preferred units accrue dividends at a compounded rate of
12% per annum. The preferred units are redeemable on November 14, 2008, along
with the accrued and unpaid dividends unless the maturity date of the Senior
Subordinated Notes is extended, at which point the redemption date will be the
earlier of (i) the twelve month anniversary of the extended maturity date of the
Senior Subordinated Notes and (ii) November 14, 2011; provided further that the
redemption date shall only be extended one time.
13. WARRANTS
Series A and Series B warrants (collectively the "Warrants") were issued
under a Warrant Agreement dated as of March 2, 1998 between Holdings and PMI
Mezzanine Fund, L.P. as warrant holder concurrent with the issuance of Series A
and Series B Senior Subordinated Notes by Sleepmaster. The Warrants entitle the
warrantholder to purchase one unit of the Class A common interests of Holdings
at an exercise price of $0.01 per unit, subject to certain conditions. The
Warrants are exercisable on or prior to March 2010. As of December 31, 1998, the
Series A and Series B Warrants were exercisable into 2,403 common units of
Holdings (approximately 22% of the Class A common interests). Since these
Warrants were issued by Holdings and the only operation of Holdings is its
investment in Sleepmaster, the Company would record an adjustment to reduce the
carrying amount of debt issued, with an offsetting charge to accumulated deficit
to the extent of the fair value of the Warrants issued, if material. No
adjustment was recorded when the Warrants were issued, since management
considered the fair value of the Warrants to be immaterial.
14. STOCK OPTIONS
In 1998 and 1996, pursuant to the employment agreements of certain
employees, Holdings issued options to purchase 100 shares and 530 shares,
respectively, of Class A common units of Holdings at an exercise price of $100
(the "Options"). The Options vest 50% on December 31, 1999 and 50% on December
31, 2001 subject to the achievement of certain earnings targets by Sleepmaster.
Any unexercised options terminate on the tenth anniversary of the date of grant
or earlier, in connection with the termination of employment.
Since this is a variable stock compensation plan of Holdings and the only
operation of Holdings is its investment in Sleepmaster, the Company will record
compensation expense based on the difference between the exercise price and the
fair value of the Options at the balance sheet date, when it believes it
probable that the Company will meet the earning targets. No compensation cost
related to the Options has been recorded in 1998, 1997, or 1996 since, based on
the Company's current trend of earnings, management considers it unlikely that
they will achieve the earnings targets set forth in the option agreements.
F-14
<PAGE> 138
SLEEPMASTER L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- -------
<S> <C> <C> <C>
CURRENT
Federal........................................ $ 967,515 $ 208,744 $ --
State.......................................... 276,260 52,820 --
---------- ---------- -------
Total current............................... 1,243,775 261,564 --
---------- ---------- -------
DEFERRED
Federal........................................ 1,400,766 1,437,707 77,766
State.......................................... 374,969 314,590 13,258
---------- ---------- -------
Total deferred.............................. 1,775,735 1,752,297 91,024
---------- ---------- -------
Provision for income taxes................ $3,019,510 $2,013,861 $91,024
========== ========== =======
</TABLE>
For the period January 1, 1996 through November 13, 1996, the Company had
elected to be taxed as a partnership. No provision was made for income taxes
during this period as income or loss of the partnership is included in the
income tax returns of the individual members.
The Company's effective tax rate differs from the Federal statutory rate as
indicated in the following reconciliation for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- -----
<S> <C> <C> <C>
Income tax expense at Federal statutory rate................ 35.0% 35.0% 35.0%
State income tax expense, net of Federal benefit............ 5.9% 5.0% 0.3%
Partnership income, not subject to tax...................... -- -- (33.8)%
Other, net.................................................. 1.2% 2.2% 0.4%
---- ---- -----
42.1% 42.2% 1.9%
==== ==== =====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax-reporting purposes. The significant
component of the Company's net deferred tax assets represents the tax effect of
goodwill attributable to the step-up in the tax bases of the Company's assets
and liabilities as a result of the leveraged recapitalization on November 14,
1996 (see Note 4). The Company recognized a net deferred tax asset of
$16,490,727 in connection with this recapitalization. At December 31, 1998 and
1997, no valuation allowance has been recorded since management considers it
more likely than not that the deferred tax assets will be realized.
The components of net deferred tax assets as of December 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Goodwill................................................ $12,224,999 $14,271,452
Sales allowance reserves................................ 306,375 300,000
Bad debt reserves....................................... 175,008 60,266
Other................................................... 297,342 147,741
----------- -----------
Net deferred tax assets.............................. $13,003,724 $14,779,459
=========== ===========
</TABLE>
F-15
<PAGE> 139
SLEEPMASTER L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. COMMITMENTS AND CONTINGENCIES
Employment Contracts
Both Sleepmaster and Palm Beach have employment agreements with its
executive officers, the terms of which expire at various dates through November
1, 2001. Such agreements provide for minimum salaries as well as incentive
bonuses that are payable if specified management goals are attained. The
employment agreements also provide for benefits, including medical, life
insurance and disability benefits. In addition, executive securities (as
defined) will automatically vest in connection with a sale of the Company. The
Company's potential minimum obligation to its executive officers, excluding
bonuses, was approximately $3,600,000 at December 31, 1998.
Operating Leases
On January 12, 1995 the Company assumed the balance of a 10 year,
noncancelable operating lease agreement entered into by the former owner of the
Company for facilities in Linden, New Jersey. The lease expires on January 31,
2004, with renewal options. In addition, the Company leases office furniture and
equipment, manufacturing equipment and distribution trucks under noncancelable
operating leases with various expiration dates through November 30, 2003. Rent
expense under operating leases was approximately $1,221,000, $780,000 and
$780,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999..................................................... $1,047,872
2000..................................................... 925,437
2001..................................................... 913,802
2002..................................................... 876,429
2003..................................................... 868,721
----------
$4,632,261
==========
</TABLE>
17. SUMMARIZED FINANCIAL INFORMATION
The following is summarized financial information of Sleepmaster as of
December 31, 1998 and for the year then ended.
Balance Sheet Summary:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Current assets.......................................... $ 13,483
Noncurrent assets....................................... 66,249
Current liabilities..................................... 23,776
Noncurrent liabilities.................................. 57,591
Redeemable cumulative preferred interests............... 18,267
Members' deficit........................................ (19,902)
</TABLE>
F-16
<PAGE> 140
SLEEPMASTER L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Statement Summary:
<TABLE>
<CAPTION>
YEAR ENDED
------------
DECEMBER 31,
1998
------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Net sales............................................... $73,476
Cost of sales........................................... 47,005
Net income.............................................. 1,763
</TABLE>
18. SUBSEQUENT EVENTS
(AUDITED)
On February 26, 1999, the Company acquired all the capital stock of Herr
Manufacturing Company ("Herr") for approximately $25,600,000 in cash. In order
to finance the acquisition of Herr, the Company increased its existing Senior
Credit Facility by $25,300,000.
On April 30, 1999, Sleepmaster Finance Corporation was formed solely for
the purpose of acting as co-issuer of $115,000,000 of 11% Senior Subordinated
Notes (the "Notes") due 2009 to be issued during the second quarter of 1999.
Sleepmaster Finance Corporation is a wholly owned subsidiary of Sleepmaster and
has no assets or operations.
(UNAUDITED)
On May 18, 1999, the Company issued the Notes described above. Concurrent
with the issuance of the Notes, the Company acquired substantially all the
assets of Star Bedding Products (1986) Limited, including its subsidiary,
Burrell Bedding Limited (collectively, "Star"), for CAN $24,500,000
(approximately US $16,700,000) in cash and a promissory note issued by
Sleepmaster Holdings L.L.C. (the Company's Parent) of CAN $1,000,000
(approximately US $680,000).
As of May 18, 1999, the Company and each of its direct and indirect wholly
owned subsidiaries will fully and unconditionally guarantee, on a joint and
several basis, the obligation to pay the principal and interest with respect to
the Notes. To the extent the Company acquires future subsidiaries, only the
Company's direct and indirect domestic subsidiaries will be obligated to
guarantee the Notes. Star is a foreign subsidiary and, as such, will become a
non-guarantor subsidiary. The Company expects to generate the funds necessary to
satisfy its debt service obligations from either its own operations or by
distributions or advances from its subsidiaries. There are no contractual or
legal restrictions that limit the Company's ability to obtain cash from its
subsidiaries for the purpose of meeting its debt service obligations, including
the payment of principal and interest on the Notes.
Since the Company conducts its own operations separately from those of its
subsidiary and at December 31, 1998 there were no non-guarantor direct or
indirect subsidiaries, management has presented in note 17 summarized
Company-only financial information as of and for the year ended December 31,
1998.
F-17
<PAGE> 141
SLEEPMASTER L.L.C. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,431,874
Accounts receivable....................................... 20,402,983
Accounts receivable -- other.............................. 939,684
Inventories............................................... 5,909,184
Other current assets...................................... 733,702
Deferred tax assets....................................... 744,319
------------
Total current assets.............................. 30,161,746
Property, plant and equipment, net.......................... 15,797,967
Intangible assets........................................... 79,186,382
Other assets................................................ 5,622,685
Deferred tax assets......................................... 12,100,317
------------
Total assets...................................... $142,869,097
============
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 12,577,508
Accrued sales allowances and advertising expenses......... 3,820,061
Other current liabilities................................. 4,685,371
Current portion of long-term debt......................... 380,000
------------
Total current liabilities......................... 21,462,940
------------
Deferred income tax liability............................... 752,638
Long-term debt.............................................. 121,035,000
Other liabilities........................................... 373,820
------------
Total long-term liabilities....................... 122,161,458
------------
Redeemable cumulative preferred interests................... 19,377,849
Members' deficit............................................ (20,133,150)
------------
Total liabilities and members' deficit............ $142,869,097
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE> 142
SLEEPMASTER L.L.C. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales............................. $39,759,636 $27,066,626 $73,986,748 $47,502,653
Cost of sales......................... 24,806,811 16,981,761 46,069,563 30,007,285
----------- ----------- ----------- -----------
Gross profit..................... 14,952,825 10,084,865 27,917,185 17,495,368
----------- ----------- ----------- -----------
Operating expenses
Selling, general and administrative
expenses......................... 9,829,136 6,347,097 18,207,702 11,108,675
Amortization of intangibles......... 458,262 340,194 836,281 559,091
----------- ----------- ----------- -----------
Total operating expenses......... 10,287,398 6,687,291 19,043,983 11,667,766
----------- ----------- ----------- -----------
Operating income...................... 4,665,427 3,397,574 8,873,202 5,827,602
Interest expense, net................. 2,847,871 1,946,122 4,875,930 3,423,674
Other (income) expense, net........... 43,395 (8,776) (36,251) (7,862)
----------- ----------- ----------- -----------
Income before income taxes and
extraordinary items............ 1,774,161 1,460,228 4,033,523 2,411,790
Provision for income taxes............ 833,440 613,272 1,717,582 1,022,072
----------- ----------- ----------- -----------
Income before extraordinary
items.......................... 940,721 846,956 2,315,941 1,389,718
Extraordinary items, net of income
taxes............................... (3,166,968) -- (3,166,968) --
----------- ----------- ----------- -----------
Net (loss) income................ $(2,226,247) $ 846,956 $ (851,027) $ 1,389,718
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE> 143
SLEEPMASTER L.L.C. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income......................................... $ (851,027) $ 1,389,718
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization.......................... 1,492,295 946,424
Loss on sale of asset.................................. 3,411 --
Extraordinary items.................................... 3,166,968 --
Deferred income taxes.................................. 3,205,046 890,058
Other non-cash charges................................. 291,034 213,914
Changes in operating assets and liabilities, net of
acquisitions:
Increase in accounts receivable...................... (4,299,124) (1,000,765)
Decrease in accounts receivable -- other............. 259,321 144,667
Increase in inventories.............................. (126,566) (121,574)
Increase in other current assets..................... (146,740) (308,942)
Increase in other assets............................. (155,002) (137,474)
Increase in accounts payable......................... 1,210,609 2,051,144
Decrease in accrued liabilities...................... (36,711) (1,652,367)
Increase in other liabilities........................ 145,208 70,078
----------- -----------
Net cash provided by operating activities.............. 4,158,722 2,484,881
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................... (1,970,638) (559,134)
Proceeds from sale of asset............................... 10,700 --
Acquisitions, net of cash acquired........................ (41,469,975) (32,802,028)
----------- -----------
Net cash used in investing activities.................. (43,429,913) (33,361,162)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior subordinated notes....... 115,000,000 --
Proceeds from long-term debt.............................. -- 37,803,360
Payments on long-term debt................................ (64,280,544) (7,435,614)
Borrowings under revolving line of credit................. -- 7,396,328
Payments on revolving line of credit...................... -- (7,397,328)
Loan origination fees/bond issuance costs................. (5,787,017) (701,343)
Penalties on early extinguishment of debt................. (3,645,000) --
Distributions............................................. (747,906) (234,240)
Capital contribution...................................... -- 1,000,000
----------- -----------
Net cash provided by financing activities.............. 40,539,533 30,431,163
----------- -----------
Effect of exchange rate changes on cash and cash
equivalents............................................... 1,837 --
Net increase (decrease) in cash and cash equivalents........ 1,270,179 (445,118)
Cash and cash equivalents at beginning of period............ 161,695 591,683
----------- -----------
Cash and cash equivalents at end of period.................. $ 1,431,874 $ 146,565
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE> 144
SLEEPMASTER L.L.C. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Sleepmaster L.L.C. ("Sleepmaster") and its wholly-owned subsidiaries (the
"Company"). All material intercompany balances and transactions have been
eliminated. In the opinion of management, the accompanying interim unaudited
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the Company's
financial position at June 30, 1999 and the results of their operations and of
their cash flows for the interim periods presented. The results of operations
for the periods presented should not necessarily be taken as indicative of the
results of operations that may be expected for the entire year. In accordance
with the rules of the Securities and Exchange Commission, these financial
statements do not include all disclosures required by generally accepted
accounting principles.
The accompanying financial information should be read in conjunction with
the financial statements contained elsewhere in this prospectus.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1999
----------
<S> <C>
Raw materials............................................... $4,596,114
Work-in-process............................................. 348,058
Finished goods.............................................. 965,012
----------
Total inventories................................. $5,909,184
==========
</TABLE>
3. ACCOUNTING PRONOUNCEMENTS
In February 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee ("AcSEC") issued Statement of Position
("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 requires certain costs incurred in
connection with developing or obtaining internal use software to be capitalized
and other costs to be expensed.
In March 1998, AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5 provides guidance on the financial reporting
of start-up costs and organization costs and requires that such costs be
expensed as incurred. The effect of adopting SOP 98-5 will be reported as a
change in accounting principle.
The Company adopted these standards effective January 1, 1999. The impact
of adopting SOP 98-1 was an increase in pre-tax income of $569,000 and
$1,000,000 for the three and six months ended June 30, 1999, respectively. The
adoption of SOP 98-5 had an immaterial impact on the Company's consolidated
financial position and results of operations.
4. ACQUISITIONS
On February 26, 1999, the Company acquired all the capital stock of Herr
Manufacturing Company ("Herr") for approximately $25,600,000 in cash. In order
to finance the acquisition of Herr, the Company increased its existing Senior
Credit Facility by $25,300,000.
On May 18, 1999, the Company acquired substantially all the assets of Star
Bedding Products (1986) Limited, including its subsidiary, Burrell Bedding
Limited (collectively, "Star"), for CAN $24,500,000
F-21
<PAGE> 145
SLEEPMASTER L.L.C. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(approximately US $16,700,000 as of May 18, 1999) in cash and a promissory note
issued by Sleepmaster Holdings L.L.C. (the Company's Parent) in the amount of
CAN $1,000,000 (approximately US $680,000 as of May 18, 1999).
These acquisitions were accounted for under the purchase method and,
accordingly, Herr's and Star's results are included in the consolidated
financial statements since their respective dates of acquisition. The assets
acquired and liabilities assumed have been recorded at their estimated fair
values at the dates of acquisition. The excess of the purchase price over the
estimated fair values of the net assets acquired has been recorded as goodwill
and is being amortized over 40 years.
A summary of the purchase price allocations are as follows:
<TABLE>
<CAPTION>
HERR STAR
----------- -----------
<S> <C> <C>
Current assets...................................... $ 3,277,130 $ 2,464,978
Property, plant and equipment....................... 3,224,727 820,103
Other assets........................................ 2,500 2,379
Goodwill............................................ 19,599,730 15,390,084
Current liabilities................................. (1,057,693) (1,450,347)
----------- -----------
Total..................................... $25,046,394 $17,227,197
=========== ===========
</TABLE>
The following unaudited pro forma income statement data for the six month
periods ended June 30, 1999 and 1998 has been prepared as if the acquisitions
occurred as of the beginning of each period presented. The following also gives
effect to the issuance of $115,000,000 of 11% senior subordinated notes (see
Note 5) and the application of proceeds therefrom.
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
----------- -----------
<S> <C> <C>
Net sales....................................... $ 82,464 $ 70,894
Income before extraordinary items............... 1,949 3,325
Net (loss) income............................... (1,218) 158
</TABLE>
In management's opinion, the unaudited pro forma combined results of
operations are not necessarily indicative of the actual results that would have
occurred had the acquisitions been consummated at the beginning of each period
presented, nor are they necessarily indicative of future consolidated results.
5. DEBT
During the first quarter of 1999, the Company amended and restated its
credit facility to provide for an aggregate amount of borrowings of up to
$86,000,000 and used a portion of this increased facility to finance its
acquisition of Herr on February 26, 1999. The terms of the amended facility were
substantially equivalent to those of the prior credit facility.
On May 18, 1999, the Company issued $115,000,000 of 11% senior subordinated
notes due 2009 (the "Notes"). A portion of the proceeds of the note offering was
used to prepay the existing credit facility, redeem the Company's Series A and
Series B Senior Subordinated Notes due 2007 and complete the acquisition of
Star. In connection with the repayment of the credit facility and Series A and
Series B Senior Subordinated Notes, the Company wrote-off unamortized debt
issuance costs and incurred prepayment penalties. These transactions resulted in
an extraordinary loss of $3,167,000 net of the associated income tax benefit of
$2,293,000. Also on May 18, 1999, the Company entered into a new six-year
$25,000,000 revolving credit facility which replaced the prior credit facility.
The new credit facility includes a letter of credit sublimit of $8,000,000.
Borrowings under the new credit facility bear interest at
F-22
<PAGE> 146
SLEEPMASTER L.L.C. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
floating rates based on LIBOR or applicable alternative base rates. The new
credit facility imposes certain restrictions on the Company and requires
compliance with certain financial ratios and other requirements customary to
credit facilities of this nature.
6. GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION
As of May 18, 1999, Sleepmaster and each of the domestic wholly owned
subsidiaries ("Guarantor Subsidiaries") has fully and unconditionally
guaranteed, on a joint and several basis, the obligation to pay principal and
interest with respect to the Notes. The Company generates funds necessary to
satisfy its debt service obligations from either its own operations or by
distributions or advances from its subsidiaries. There are no contractual or
legal restrictions that could limit the Company's ability to obtain cash from
its subsidiaries for the purpose of meeting its debt service obligations,
including the payment of principal and interest on the Notes. Although holders
of the Notes will be direct creditors of Sleepmaster's principal direct
subsidiaries by virtue of the guarantees, Sleepmaster has a foreign subsidiary
("Non-Guarantor Subsidiary") that are not included among the Guarantor
Subsidiaries and such subsidiaries will not be obligated with respect to the
Notes. As a consequence, the claims of creditors of the Non-Guarantor
Subsidiaries will effectively have priority with respect to the assets and
earnings of such companies over the claims of creditors of Sleepmaster,
including the holders of the Notes.
The following supplemental consolidating condensed financial statements
present:
1. Consolidating condensed balance sheets as of June 30, 1999 and December
31, 1998, consolidating condensed statements of operations for the
three months and six months ended June 30, 1999 and 1998, respectively,
and cash flows for the six months ended June 30, 1999 and 1998.
2. Sleepmaster, combined Guarantor Subsidiaries and Non-Guarantor
Subsidiary with their investments in subsidiaries accounted for using
the equity method.
3. Elimination entries necessary to consolidate Sleepmaster and all of its
subsidiaries.
Management does not believe that separate financial statements of the
Guarantor Subsidiaries are material to investors in the Notes.
F-23
<PAGE> 147
SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
COMBINED NON-
GUARANTOR GUARANTOR
SLEEPMASTER SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ 1,171,511 $ 111,800 $ 148,153 $ 410 $ 1,431,874
Accounts receivable............. 10,446,250 7,144,938 2,842,157 (30,362) 20,402,983
Accounts receivable -- other.... 717,179 222,505 -- -- 939,684
Intercompany receivable
(payable).................... (9,800,664) 10,150,664 (340,610) (9,390) --
Inventories..................... 2,528,226 2,970,371 410,587 -- 5,909,184
Other current assets............ 318,943 369,854 44,905 -- 733,702
Deferred tax assets............. 589,535 154,784 -- -- 744,319
------------ ----------- ----------- ------------ ------------
Total current assets.... 5,970,980 21,124,916 3,105,192 (39,342) 30,161,746
Property, plant and equipment,
net............................. 3,214,365 11,749,496 834,106 -- 15,797,967
Intangible assets................. 17,440,689 46,540,652 15,205,041 -- 79,186,382
Investment in subsidiaries........ 74,970,842 -- -- (74,970,842) --
Other assets...................... 5,437,258 183,060 2,367 -- 5,622,685
Deferred tax assets............... 12,054,337 45,980 -- -- 12,100,317
------------ ----------- ----------- ------------ ------------
Total assets............ $119,088,471 $79,644,104 $19,146,706 $(75,010,184) $142,869,097
============ =========== =========== ============ ============
LIABILITIES AND MEMBERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable................ $ 6,188,220 $ 5,686,209 $ 730,058 $ (26,979) $ 12,577,508
Accrued sales allowances and
advertising expenses......... 3,025,430 656,216 138,415 -- 3,820,061
Other current liabilities....... 701,324 3,242,659 741,388 -- 4,685,371
Current portion of long-term
debt......................... -- 380,000 -- -- 380,000
------------ ----------- ----------- ------------ ------------
Total current
liabilities........... 9,914,974 9,965,084 1,609,861 (26,979) 21,462,940
------------ ----------- ----------- ------------ ------------
Deferred income tax liability..... -- 752,638 -- -- 752,638
Long-term debt.................... 115,000,000 6,035,000 -- -- 121,035,000
Other liabilities................. 333,297 40,523 -- -- 373,820
------------ ----------- ----------- ------------ ------------
Total long-term
liabilities........... 115,333,297 6,828,161 -- -- 122,161,458
------------ ----------- ----------- ------------ ------------
Redeemable cumulative preferred
interests....................... 19,377,849 -- -- -- 19,377,849
Members' equity (deficit)......... (25,537,649) 62,850,859 17,536,845 (74,983,205) (20,133,150)
------------ ----------- ----------- ------------ ------------
Total liabilities and
members' equity
(deficit)............. $119,088,471 $79,644,104 $19,146,706 $(75,010,184) $142,869,097
============ =========== =========== ============ ============
</TABLE>
F-24
<PAGE> 148
SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMBINED
GUARANTOR
SLEEPMASTER SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 40,666 $ 152,846 $ (31,817) $ 161,695
Accounts receivable................. 8,200,142 4,371,373 (1,200) 12,570,315
Accounts receivable -- other........ 737,292 461,710 -- 1,199,002
Intercompany receivable (payable)... (4,996,492) 4,964,262 32,230 --
Inventories......................... 2,507,895 2,238,679 -- 4,746,574
Other current assets................ 228,088 118,549 -- 346,637
Deferred tax assets................. 1,468,505 137,472 -- 1,605,977
------------ ----------- ------------ ------------
Total current assets........ 8,186,096 12,444,891 (787) 20,630,200
Property, plant and equipment, net.... 2,046,379 8,383,132 -- 10,429,511
Intangible assets..................... 17,762,443 27,540,062 -- 45,302,505
Investment in subsidiaries............ 32,810,750 -- (32,810,750) --
Other assets.......................... 1,601,561 178,182 -- 1,779,743
Deferred tax assets................... 12,027,794 (630,047) -- 11,397,747
------------ ----------- ------------ ------------
Total assets................ $ 74,435,023 $47,916,220 $(32,811,537) $ 89,539,706
============ =========== ============ ============
LIABILITIES AND MEMBERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable.................... $ 6,263,995 $ 3,667,574 $ (787) $ 9,930,782
Accrued sales allowances and
advertising expenses............. 4,306,180 400,070 -- 4,706,250
Other current liabilities........... 1,158,900 1,923,413 -- 3,082,313
Current portion of long-term debt... 6,750,000 380,000 -- 7,130,000
------------ ----------- ------------ ------------
Total current liabilities... 18,479,075 6,371,057 (787) 24,849,345
------------ ----------- ------------ ------------
Long-term debt........................ 57,245,544 6,320,000 -- 63,565,544
Other liabilities..................... 345,805 29,491 -- 375,296
------------ ----------- ------------ ------------
Total long-term
liabilities............... 57,591,349 6,349,491 -- 63,940,840
------------ ----------- ------------ ------------
Redeemable cumulative preferred
interests........................... 18,266,940 -- -- 18,266,940
Members' equity (deficit)............. (19,902,341) 35,195,672 (32,810,750) (17,517,419)
------------ ----------- ------------ ------------
Liabilities and members'
equity (deficit).......... $ 74,435,023 $47,916,220 $(32,811,537) $ 89,539,706
============ =========== ============ ============
</TABLE>
F-25
<PAGE> 149
SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
COMBINED
GUARANTOR NON-GUARANTOR
SLEEPMASTER SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
----------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net sales............................. $19,060,241 $18,486,218 $2,300,763 $(87,586) $39,759,636
Cost of sales......................... 12,555,528 10,923,939 1,414,930 (87,586) 24,806,811
----------- ----------- ---------- -------- -----------
Gross profit.................... 6,504,713 7,562,279 885,833 -- 14,952,825
----------- ----------- ---------- -------- -----------
Operating expenses
Selling, general and administrative
expenses.......................... 4,513,729 4,804,881 510,526 -- 9,829,136
Amortization of intangibles......... 160,165 298,097 -- -- 458,262
----------- ----------- ---------- -------- -----------
Total operating expenses........ 4,673,894 5,102,978 510,526 -- 10,287,398
----------- ----------- ---------- -------- -----------
Operating income...................... 1,830,819 2,459,301 375,307 -- 4,665,427
Interest expense, net................. 2,780,602 60,460 6,809 -- 2,847,871
Other (income) expense, net........... 36,028 119 7,248 -- 43,395
----------- ----------- ---------- -------- -----------
(Loss) income before income
taxes and extraordinary
items........................ (985,811) 2,398,722 361,250 -- 1,774,161
(Benefit) provision for income
taxes............................... (408,168) 1,111,558 130,050 -- 833,440
----------- ----------- ---------- -------- -----------
(Loss) income before
extraordinary items.......... (577,643) 1,287,164 231,200 -- 940,721
Extraordinary items, net of income
taxes............................... (3,166,968) -- -- -- (3,166,968)
----------- ----------- ---------- -------- -----------
Net (loss) income............... $(3,744,611) $ 1,287,164 $ 231,200 $ -- $(2,226,247)
=========== =========== ========== ======== ===========
</TABLE>
F-26
<PAGE> 150
SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
COMBINED
GUARANTOR
SLEEPMASTER SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales............................... $17,617,090 $9,449,536 $ -- $27,066,626
Cost of sales........................... 11,111,540 5,870,221 -- 16,981,761
----------- ---------- ---------- -----------
Gross profit....................... 6,505,550 3,579,315 -- 10,084,865
----------- ---------- ---------- -----------
Operating expenses
Selling, general and administrative
expenses........................... 3,906,529 2,440,568 -- 6,347,097
Amortization of intangibles........... 161,024 179,170 -- 340,194
----------- ---------- ---------- -----------
Total operating expenses........... 4,067,553 2,619,738 -- 6,687,291
----------- ---------- ---------- -----------
Operating income........................ 2,437,997 959,577 -- 3,397,574
Interest expense, net................... 1,879,337 66,785 -- 1,946,122
Other (income) expense, net............. (9,257) 481 -- (8,776)
----------- ---------- ---------- -----------
Income before income taxes......... 567,917 892,311 -- 1,460,228
Provision for income taxes.............. 238,405 374,867 -- 613,272
----------- ---------- ---------- -----------
Net income......................... $ 329,512 $ 517,444 $ -- $ 846,956
=========== ========== ========== ===========
</TABLE>
F-27
<PAGE> 151
SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
COMBINED
GUARANTOR NON-GUARANTOR
SLEEPMASTER SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
----------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net sales................... $37,244,925 $34,570,364 $2,300,763 $(129,304) $73,986,748
Cost of sales............... 24,380,930 20,403,007 1,414,930 (129,304) 46,069,563
----------- ----------- ---------- --------- -----------
Gross profit...... 12,863,995 14,167,357 885,833 -- 27,917,185
----------- ----------- ---------- --------- -----------
Operating expenses
Selling, general and
administrative
expenses............... 8,867,926 8,829,250 510,526 -- 18,207,702
Amortization of
intangibles............ 321,754 514,527 -- -- 836,281
----------- ----------- ---------- --------- -----------
Total operating
expenses............. 9,189,680 9,343,777 510,526 -- 19,043,983
----------- ----------- ---------- --------- -----------
Operating income............ 3,674,315 4,823,580 375,307 -- 8,873,202
Interest expense, net....... 4,761,873 107,248 6,809 -- 4,875,930
Other (income) expense,
net....................... (49,366) 5,867 7,248 -- (36,251)
----------- ----------- ---------- --------- -----------
(Loss) income before
income taxes and
extraordinary items.... (1,038,192) 4,710,465 361,250 -- 4,033,523
(Benefit) provision for
income taxes)............. (428,667) 2,016,199 130,050 -- 1,717,582
----------- ----------- ---------- --------- -----------
(Loss) income before
extraordinary items.... (609,525) 2,694,266 231,200 -- 2,315,941
Extraordinary items, net of
income taxes.............. (3,166,968) -- -- -- (3,166,968)
----------- ----------- ---------- --------- -----------
Net (loss) income......... $(3,776,493) $ 2,694,266 $ 231,200 $ -- $ (851,027)
=========== =========== ========== ========= ===========
</TABLE>
F-28
<PAGE> 152
SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
COMBINED
GUARANTOR
SLEEPMASTER SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales.............................. $34,885,757 $12,617,556 $(660) $47,502,653
Cost of sales.......................... 22,354,689 7,653,256 (660) 30,007,285
----------- ----------- ----- -----------
Gross profit...................... 12,531,068 4,964,300 -- 17,495,368
----------- ----------- ----- -----------
Operating expenses
Selling, general and administrative
expenses.......................... 7,864,416 3,244,259 -- 11,108,675
Amortization of intangibles.......... 322,048 237,043 -- 559,091
----------- ----------- ----- -----------
Total operating expenses.......... 8,186,464 3,481,302 -- 11,667,766
----------- ----------- ----- -----------
Operating income....................... 4,344,604 1,482,998 -- 5,827,602
Interest expense, net.................. 3,347,835 75,839 -- 3,423,674
Other (income) expense, net............ (3,177) (4,685) -- (7,862)
----------- ----------- ----- -----------
Income before income taxes........ 999,946 1,411,844 -- 2,411,790
Provision for income taxes............. 427,270 594,802 -- 1,022,072
----------- ----------- ----- -----------
Net income........................ $ 572,676 $ 817,042 $ -- $ 1,389,718
=========== =========== ===== ===========
</TABLE>
F-29
<PAGE> 153
SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
COMBINED
GUARANTOR NON-GUARANTOR
SLEEPMASTER SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
----------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income................................. $(3,776,493) $2,694,266 $231,200 $ -- $ (851,027)
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization................... 661,076 808,102 23,117 -- 1,492,295
Loss on sale of asset........................... -- 3,411 -- -- 3,411
Extraordinary items............................. 3,166,968 -- -- -- 3,166,968
Deferred income taxes........................... 3,145,747 59,299 -- -- 3,205,046
Other non-cash charges.......................... 291,034 -- -- -- 291,034
Changes in operating assets and liabilities, net
of acquisition:
Accounts receivable........................... (2,246,108) (1,157,075) (895,941) -- (4,299,124)
Accounts receivable -- other.................. 20,113 239,208 -- -- 259,321
Inventories................................... (20,331) (165,570) 59,335 -- (126,566)
Other current assets.......................... (90,885) (57,823) 1,968 -- (146,740)
Other assets.................................. (155,002) -- -- -- (155,002)
Accounts payable.............................. (75,775) 1,299,170 (12,786) -- 1,210,609
Accrued liabilities........................... (1,738,326) 1,437,393 264,222 -- (36,711)
Intercompany payable (receivable)............. 4,804,172 (5,172,786) 336,387 32,227 --
Other liabilities............................. (12,508) 11,032 146,684 -- 145,208
----------- ---------- -------- --------- -----------
Net cash provided by (used in) operating
activities.................................... 3,973,682 (1,373) 154,186 32,227 4,158,722
----------- ---------- -------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.............................. (1,507,278) (455,490) (7,870) -- (1,970,638)
Proceeds from sale of asset....................... -- 10,700 -- -- 10,700
Acquisitions, net of cash acquired................ (42,160,092) -- -- 690,117 (41,469,975)
----------- ---------- -------- --------- -----------
Net cash (used in) provided by investing
activities.................................... (43,667,370) (444,790) (7,870) 690,117 (43,429,913)
----------- ---------- -------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior subordinated
notes........................................... 115,000,000 -- -- -- 115,000,000
Payments on long-term debt........................ (63,995,544) (285,000) -- -- (64,280,544)
Loan origination fees/bond issuance costs......... (5,787,017) -- -- -- (5,787,017)
Penalties paid on early extinguishment of debt.... (3,645,000) -- -- -- (3,645,000)
Distributions..................................... (747,906) -- -- -- (747,906)
----------- ---------- -------- --------- -----------
Net cash provided by (used in) financing
activities.................................... 40,824,533 (285,000) -- -- 40,539,533
----------- ---------- -------- --------- -----------
Effect of exchange rate changes on cash and cash
equivalents....................................... -- -- 1,837 -- 1,837
Net increase (decrease) in cash and cash
equivalents....................................... 1,130,845 (731,163) 148,153 722,344 1,270,179
Cash and cash equivalents at beginning of period.... 40,666 842,963 -- (721,934) 161,695
----------- ---------- -------- --------- -----------
Cash and cash equivalents at end of period.......... $ 1,171,511 $ 111,800 $148,153 $ 410 $ 1,431,874
=========== ========== ======== ========= ===========
</TABLE>
F-30
<PAGE> 154
SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
COMBINED
GUARANTOR
SLEEPMASTER SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................... $ 572,676 $ 817,042 $-- $ 1,389,718
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization... 593,021 353,403 -- 946,424
Deferred income taxes........... 717,900 172,158 -- 890,058
Other non-cash charges.......... 210,980 2,934 -- 213,914
Changes in operating assets and
liabilities, net of
acquisition:
Accounts receivable........... (717,277) (283,488) -- (1,000,765)
Accounts
receivable -- other........ 73,658 71,009 -- 144,667
Inventories................... (221,745) 100,171 -- (121,574)
Other current assets.......... (204,812) (104,130) -- (308,942)
Other assets.................. (182,652) 45,178 -- (137,474)
Accounts payable.............. 1,173,111 878,033 -- 2,051,144
Accrued liabilities........... (1,891,692) 239,325 -- (1,652,367)
Intercompany payable
(receivable)............... 2,025,543 (2,025,543) -- --
Other liabilities............. 55,332 14,746 -- 70,078
----------- ----------- ------- -----------
Net cash provided by operating
activities.................... 2,204,043 280,838 -- 2,484,881
----------- ----------- ------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............... (495,527) (63,607) -- (559,134)
Acquisition, net of cash
acquired........................ (32,808,157) -- 6,129 (32,802,028)
----------- ----------- ------- -----------
Net cash used in investing
activities.................... (33,303,684) (63,607) 6,129 (33,361,162)
----------- ----------- ------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long-term debt....... 37,803,360 -- -- 37,803,360
Payments on long-term debt......... (7,340,614) (95,000) -- (7,435,614)
Borrowings under revolving line of
credit.......................... 7,396,328 -- -- 7,396,328
Payments on revolving line of
credit.......................... (7,397,328) -- -- (7,397,328)
Loan origination fees.............. (701,343) -- -- (701,343)
Distributions...................... (234,240) -- -- (234,240)
Capital contribution............... 1,000,000 -- -- 1,000,000
----------- ----------- ------- -----------
Net cash provided by (used in)
financing activities.......... 30,526,163 (95,000) -- 30,431,163
----------- ----------- ------- -----------
Net (decrease) increase in cash and
cash equivalents................... (573,478) 122,231 6,129 (445,118)
Cash and cash equivalents at
beginning of period................ 591,683 6,129 (6,129) 591,683
----------- ----------- ------- -----------
Cash and cash equivalents at end of
period............................. $ 18,205 $ 128,360 $-- $ 146,565
=========== =========== ======= ===========
</TABLE>
F-31
<PAGE> 155
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Advisors and
Members of Sleepmaster L.L.C.:
In our opinion, the accompanying balance sheet and the related statements of
income, stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of Palm Beach Bedding Company (the "Company")
at December 31, 1997 and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 26, 1999
F-32
<PAGE> 156
PALM BEACH BEDDING COMPANY
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,237,246
Certificates of deposit................................... 4,356,000
Accounts receivable, less allowance for doubtful accounts
of $260,000............................................ 3,114,660
Inventories............................................... 2,254,237
Prepaid expenses and other current assets................. 424,640
-----------
Total current assets.............................. 12,386,783
Property, plant and equipment, net.......................... 8,993,734
Other assets................................................ 450,577
-----------
Total assets...................................... $21,831,094
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,174,964
Accrued compensation...................................... 459,500
Other current liabilities................................. 733,418
Current portion of long-term debt......................... 380,000
-----------
Total current liabilities......................... 4,747,882
Long-term debt.............................................. 6,605,000
-----------
Total liabilities................................. 11,352,882
Commitments and contingencies (Note 10)
Stockholders' Equity:
Common stock, $5.00 par value, 50,000 shares authorized,
26,752 shares issued and outstanding................... 133,760
Additional paid-in capital................................ 33,839
Retained earnings......................................... 10,310,613
-----------
Total stockholders' equity........................ 10,478,212
-----------
Total liabilities and stockholders' equity...... $21,831,094
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 157
PALM BEACH BEDDING COMPANY
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net sales................................................... $35,115,277 $30,376,281
Cost of sales............................................... 21,194,465 20,474,991
----------- -----------
Gross profit........................................... 13,920,812 9,901,290
Selling, general and administrative expenses................ 10,358,469 9,084,466
----------- -----------
Operating income............................................ 3,562,343 816,824
Interest expense, net....................................... 291,217 89,505
Other income, net........................................... (188,623) (349,151)
----------- -----------
Net income................................................ $ 3,459,749 $ 1,076,470
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 158
PALM BEACH BEDDING COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
JANUARY 1, 1996................... 26,752 $133,760 $33,839 $ 8,904,972 $ 9,072,571
Net income........................ -- -- -- 1,076,470 1,076,470
Distributions..................... -- -- -- (1,478,048) (1,478,048)
------ -------- ------- ----------- -----------
DECEMBER 31, 1996................. 26,752 133,760 33,839 8,503,394 8,670,993
Net income........................ -- -- -- 3,459,749 3,459,749
Distributions..................... -- -- -- (1,652,530) (1,652,530)
------ -------- ------- ----------- -----------
DECEMBER 31, 1997................. 26,752 $133,760 $33,839 $10,310,613 $10,478,212
====== ======== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE> 159
PALM BEACH BEDDING COMPANY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 3,459,749 $ 1,076,470
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 474,211 405,090
Loss on sale of property and equipment................. 3,843 6,763
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable........... 756,173 (976,678)
Decrease in other investments........................ -- 225,602
Increase in inventories.............................. (61,069) (613,633)
Increase in prepaid expenses and other current
assets.............................................. (171,719) (131,887)
Decrease (increase) in other assets.................. 114,975 (19,281)
Increase in accounts payable......................... 672,864 1,368,776
Increase in accrued compensation..................... 193,021 266,479
(Decrease) increase in other current liabilities..... (544,942) 595,058
----------- -----------
Net cash provided by operating activities.............. 4,897,106 2,202,759
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................... (781,953) (6,853,680)
Purchase of certificates of deposit....................... (4,554,000) (2,577,000)
Proceeds from sale of property and equipment.............. 7,760 26,707
Proceeds from sales and maturities of certificates of
deposit................................................ 2,321,000 3,238,870
Restricted use of bond proceeds........................... 1,527,855 (1,666,611)
----------- -----------
Net cash used in investing activities.................. (1,479,338) (7,831,714)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan acquisition costs.................................... -- (176,043)
Proceeds from long-term debt.............................. -- 7,650,000
Payments on long-term debt................................ (380,000) (285,000)
Distributions............................................. (1,652,530) (1,478,048)
----------- -----------
Net cash (used in) provided by financing activities.... (2,032,530) 5,710,909
----------- -----------
Net increase in cash and cash equivalents................... 1,385,238 81,954
Cash and cash equivalents at beginning of year.............. 852,008 770,054
----------- -----------
Cash and cash equivalents at end of year.................... $ 2,237,246 $ 852,008
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid, net of amounts capitalized in 1996 of
$165,247............................................... $ 291,217 $ 89,505
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 160
PALM BEACH BEDDING COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Palm Beach Bedding Company (the "Company"), formed in 1926, is a leading
manufacturer and distributor of Serta brand mattresses and box springs
throughout the State of Florida, except the panhandle region.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investment instruments
with an original maturity of three months or less.
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.
Revenue Recognition
The Company recognizes revenue generally at the time of shipment.
Appropriate accruals for returns, discounts, rebates and other allowances are
recorded as reductions in sales. The Company's bedding products offer limited
warranties of up to 10 years against manufacturing defects. The Company's cost
of honoring warranty claims is immaterial.
Inventories
Inventories are stated at the lower of cost or market and include the cost
of materials, labor and manufacturing overhead. Cost is determined on a
first-in, first-out basis. Inventories are produced on a made-to-order basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated
depreciation. Depreciation is calculated on a straight-line basis over the
following estimated useful lives:
<TABLE>
<S> <C>
Land improvements........................................... 10-20 years
Building and improvements................................... 30-40 years
Machinery and equipment..................................... 5-7 years
Office furniture and equipment.............................. 5-10 years
Vehicles.................................................... 5-7 years
</TABLE>
Expenditures for maintenance and routine repairs are expensed as incurred.
Upon the disposition of property, plant and equipment, the accumulated
depreciation is deducted from the original cost and any gain or loss is
reflected in current income.
Advertising Costs
The Company expenses advertising costs, consisting principally of
cooperative advertising with dealers and retailers, when the revenue from sales
to customers is recorded. Advertising costs for the years ended December 31,
1997 and 1996 approximated $2,236,000 and $1,905,000, respectively.
F-37
<PAGE> 161
PALM BEACH BEDDING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company has made an election to be treated as a Small Business
Corporation under Subchapter S of the Internal Revenue Code, whereby profits and
losses are passed directly to the shareholders for inclusion in their personal
income tax returns. Therefore, no provision for income taxes is included in
these financial statements.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Raw materials............................................... $1,840,049
Work-in-process............................................. 127,095
Finished goods.............................................. 287,093
----------
Total inventories......................................... $2,254,237
==========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Land and land improvements.................................. $ 2,038,564
Buildings and improvements.................................. 6,880,495
Machinery and equipment..................................... 2,698,758
Office furniture and equipment.............................. 441,114
Vehicles.................................................... 485,058
-----------
12,543,989
Less: accumulated depreciation.............................. (3,550,255)
-----------
$ 8,993,734
===========
</TABLE>
Depreciation expense was approximately $465,000 and $406,000 for the years
ended December 31, 1997 and 1996, respectively.
5. CONCENTRATION OF CREDIT RISK
The Company manufactures and markets sleep products including mattresses
and box springs to department stores and specialty shops in certain licensed
territories in the State of Florida. Sales to two major customers accounted for
approximately 13% and 12%, respectively, of net sales in 1997 and sales to one
major customer accounted for approximately 12% of net sales in 1996. Amounts
receivable from these two customers represented approximately 27% of the trade
accounts receivable balance at December 31, 1997.
Purchases of raw materials from one vendor represented approximately 38%
and 32% of total raw material purchases for 1997 and 1996, respectively.
6. LICENSE AGREEMENT
Serta, Inc. ("Serta") is a national non-profit organization consisting of
12 domestic licensed operating mattress manufacturing companies. The
organization aids the manufacturers in marketing, merchandising, manufacturing
specifications, trademarks and related activities through license fees paid by
the licensees.
F-38
<PAGE> 162
PALM BEACH BEDDING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Serta owns the rights to the Serta trademark and licenses companies to
manufacture and sell mattresses under the Serta brand name. The Company's
license with Serta is effective until terminated by mutual written agreement of
both parties or if the Company does not comply with the provisions of the
license agreement. In 1997 and 1996, the Company paid approximately $1,212,000
and $1,174,000, respectively, in license fees to Serta.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Industrial Development Revenue Bonds due through 2016 at
variable interest rates (average rate in 1997 -- 3.80%)
collateralized by an irrevocable letter of credit in the
amount of $7,956,000...................................... $6,985,000
Less, current portion....................................... 380,000
----------
$6,605,000
==========
</TABLE>
In April 1996, the Company obtained $7,650,000 Palm Beach County, Florida,
Variable Rate Demand Industrial Development Revenue Bonds (the "Bonds"). At
December 31, 1997, $7,511,244 of the funds had been expended on purchases and
construction of property and equipment. The remaining balance of $138,756 was
spent on property and equipment purchases during 1998. Quarterly principal
payments of $95,000 are required through October 1, 2013. Thereafter, quarterly
principal payments of $100,000 are required until maturity in April 2016,
including interest at a variable rate determined by the issuer based on
prevailing market rates. The letter of credit issued in connection with the
Bonds is collateralized by a first lien against certain land and buildings of
the Company.
Long-term debt at December 31, 1997 is scheduled to mature as follows:
<TABLE>
<S> <C>
1998........................................................ $ 380,000
1999........................................................ 380,000
2000........................................................ 380,000
2001........................................................ 380,000
2002........................................................ 380,000
Thereafter.................................................. 5,085,000
----------
$6,985,000
==========
</TABLE>
8. RELATED PARTY TRANSACTIONS
In 1997, the Company had a receivable of $84,000 from a stockholder
relating to the purchase of his life insurance policy. This amount was repaid
prior to the acquisition of Palm Beach Bedding Company by Sleepmaster L.L.C.
(see Note 11).
9. 401(K) PLAN
The Company established a noncontributory profit sharing plan January 1,
1989, covering substantially all employees. This plan was amended, effective
January 1, 1997, to be a 401(k) Profit Sharing Plan and Trust. The contributions
are determined by the Board of Directors but are limited to an amount deductible
for income tax purposes. The Company made contributions to this plan of $200,000
for each of the two years ended December 31, 1997.
F-39
<PAGE> 163
PALM BEACH BEDDING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS
The Company leases office furniture and equipment, manufacturing equipment
and distribution trucks under noncancelable operating leases with various
expiration dates through November 2002. Rent expense under operating leases was
approximately $420,000 and $300,000 for the year ended December 31, 1997 and
1996, respectively.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $227,309
1999........................................................ 203,984
2000........................................................ 71,542
2001........................................................ 59,907
2002........................................................ 18,187
--------
$580,929
========
</TABLE>
11. SUBSEQUENT EVENTS
The Company's manufacturing facility on Clare Avenue in West Palm Beach,
Florida was sold on February 17, 1998 for cash proceeds of $915,000 and a
mortgage note receivable of $2,135,000. The Company realized a gain of
approximately $2,780,000 in connection with the sale.
On March 3, 1998, Sleepmaster L.L.C. acquired substantially all of the net
assets of the Company for approximately $32,800,000 in cash and the assumption
of the Company's Palm Beach County, Florida Industrial Development Revenue Bonds
in the aggregate principal amount of $6,985,000.
F-40
<PAGE> 164
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Advisors and
Members of Sleepmaster L.L.C.:
In our opinion, the accompanying balance sheet and the related statements of
income stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of Herr Manufacturing Company (the "Company")
at December 31, 1998 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit 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,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
March 26, 1999
F-41
<PAGE> 165
HERR MANUFACTURING COMPANY
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $1,689,949
Accounts receivable, less allowance for doubtful accounts
of $196,000............................................ 1,979,493
Inventories............................................... 463,846
Other current assets...................................... 237,163
Deferred tax assets....................................... 23,576
----------
Total current assets.............................. 4,394,027
Property, plant and equipment, net........................ 3,281,688
Other assets.............................................. 603,099
Deferred tax assets....................................... 45,980
----------
Total assets...................................... $8,324,794
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 591,273
Accrued compensation...................................... 1,413,989
Accrued profit-sharing contribution....................... 313,883
Other accrued liabilities................................. 156,983
Deferred compensation..................................... 1,100,000
Note payable to stockholder............................... 163,252
----------
Total current liabilities......................... 3,739,380
----------
Stockholders' Equity:
Common stock, $100 par value; authorized 2,000 shares;
issued 1,376 shares, including 353 shares in
treasury............................................... 137,598
Retained earnings......................................... 5,047,208
----------
5,184,806
Less: treasury stock, at cost.......................... 599,392
----------
Total stockholders' equity........................ 4,585,414
----------
Total liabilities and stockholders' equity........ $8,324,794
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE> 166
HERR MANUFACTURING COMPANY
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Net sales................................................... $19,384,937
Cost of sales............................................... 11,586,573
-----------
Gross profit.............................................. 7,798,364
Selling, general and administrative expenses.............. 6,561,068
-----------
Operating income............................................ 1,237,296
Interest expense............................................ 27,752
Other income, net........................................... (150,134)
-----------
Income before income taxes........................ 1,359,678
Provision for income taxes.................................. 531,959
-----------
Net income........................................ $ 827,719
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE> 167
HERR MANUFACTURING COMPANY
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------
COMMON STOCK TREASURY STOCK TOTAL
----------------- RETAINED ------------------ STOCKHOLDERS'
SHARES AMOUNT EARNINGS SHARES AMOUNT EQUITY
------ -------- ---------- ------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1998........... 1,376 $137,598 $4,219,489 353 $(599,392) $3,757,695
Net income........................ -- -- 827,719 -- -- 827,719
----- -------- ---------- --- --------- ----------
BALANCE DECEMBER 31, 1998......... 1,376 $137,598 $5,047,208 353 $(599,392) $4,585,414
===== ======== ========== === ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE> 168
HERR MANUFACTURING COMPANY
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 827,719
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of fixed assets........................... (15,121)
Depreciation and amortization.......................... 394,060
Deferred compensation.................................. 13,137
Deferred income taxes.................................. 453,423
Changes in operating assets and liabilities:
Increase in accounts receivable...................... (14,210)
Decrease in inventories.............................. 25,782
Increase in other assets............................. (140,480)
Increase in accounts payable......................... 184,207
Increase in accrued compensation..................... 206,641
Decrease in accrued profit-sharing contribution...... (57,885)
Decrease in other accrued liabilities................ (5,614)
----------
Net cash provided by operating activities............ 1,871,659
----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................... (447,918)
Increase in cash surrender value of life insurance
policies............................................... (83,867)
Proceeds from the sale of fixed assets.................... 16,300
----------
Net cash used in investing activities................ (515,485)
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable................................. (359,762)
----------
Net cash used in financing activities................ (359,762)
----------
Net increase in cash and cash equivalents................... 996,412
Cash and cash equivalents at beginning of year.............. 693,537
----------
Cash and cash equivalents at end of year.................... $1,689,949
----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................. $ 27,752
Income taxes paid......................................... $ 303,604
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE> 169
HERR MANUFACTURING COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Herr Manufacturing Company (the "Company") is a Serta licensee which
manufactures and distributes mattresses and box springs in central and eastern
Pennsylvania and southern New York State. The Company produces products under
the Serta and Herr labels as well as other private labels.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investment instruments
with an original maturity of three months or less.
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.
Revenue Recognition
The Company recognizes revenue at the time of shipment. Appropriate
accruals for returns, discounts, rebates and other allowances are recorded as
reductions in sales. The Company's bedding products offer limited warranties of
up to 10 years against manufacturing defects. The Company's cost of honoring
warranty claims is immaterial.
The Company also recognizes commission income on certain sales transactions
processed by the Company on behalf of other Serta licenses. This income is
included in the other income, net caption in the statement of income and
amounted to $69,660 in 1998.
Inventories
Inventories are stated at the lower of cost or market and include the cost
of materials, labor and manufacturing overhead. Cost is determined on a
first-in, first-out basis. Inventories are produced on a made-to-order basis.
Property, plant and equipment
Property, plant and equipment are stated at cost, less accumulated
depreciation. Depreciation is calculated using the double declining balance and
straight line methods over the estimated useful lives:
<TABLE>
<S> <C>
Buildings................................................... 39 years
Building improvements....................................... 15 years
Machinery and equipment..................................... 5-10 years
Furniture and equipment..................................... 3-7 years
Automobiles................................................. 5 years
</TABLE>
Expenditures for maintenance and routine repairs are expensed as incurred.
Upon the disposition of property, plant and equipment, the accumulated
depreciation is deducted from the original cost and any gain or loss is
reflected in current income.
F-46
<PAGE> 170
HERR MANUFACTURING COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired and is being amortized over 10 years using the straight-line
method. Amortization expense amounted to $16,000 in 1998. As of December 31,
1998, the unamortized balance of goodwill was $65,833 and is included in other
assets. The Company reviews goodwill for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be fully recoverable.
Advertising Costs
The Company expenses advertising costs, consisting principally of
cooperative advertising with dealers and retailers, when the revenue from sales
to customers is recorded. Advertising costs for the year ended December 31, 1998
approximated $1,582,000.
Deferred Income Taxes
Deferred income taxes are recognized for the tax consequences, in future
years, of differences between the tax bases of assets and liabilities as
compared to the corresponding financial reporting amounts at each year end on
the basis of enacted tax rates applicable to the period in which the differences
are expected to affect taxable income.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Raw materials............................................. $439,056
Work-in-process........................................... 15,396
Finished goods............................................ 9,394
--------
Total inventories...................................... $463,846
========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Land...................................................... $ 510,612
Building and improvements................................. 2,215,689
Machinery................................................. 1,627,477
Automobiles and trucks.................................... 673,016
Furniture and equipment................................... 358,569
----------
5,385,363
Less: accumulated depreciation.............................. 2,103,675
----------
$3,281,688
==========
</TABLE>
Depreciation expense was $378,060 for the year ended December 31, 1998.
F-47
<PAGE> 171
HERR MANUFACTURING COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
5. CONCENTRATION OF CREDIT RISK
The Company manufactures and markets sleep products including mattresses
and box springs to department stores and specialty shops in certain licensed
territories in central and eastern Pennsylvania and southern New York state.
Sales to one major customer accounted for approximately 14% of net sales in
1998. Amounts receivable from two customers represented approximately 18% and
15%, respectively, of the trade accounts receivable balance at December 31,
1998.
Purchases of raw materials from one vendor represented approximately 44% of
total raw material purchases for 1998.
6. LICENSE AGREEMENT
Serta, Inc. ("Serta"), is a national non-profit organization consisting of
12 domestic licensed operating mattress manufacturing companies. The
organization aids the manufacturers in marketing, merchandising, manufacturing
specifications, trademarks and related activities through license fees paid by
the licensees. Serta owns the rights to the Serta trademark and licenses
companies to manufacture and sell mattresses under the Serta brand name. The
Company's license with Serta is effective until terminated by mutual written
agreement of both parties or if the Company does not comply with the provisions
of the license agreement. In 1998, the Company paid approximately $571,000 in
license fees to Serta.
7. RELATED PARTY TRANSACTIONS
The Company has agreements with two former stockholders which provide for
the Company to compensate them for past services. As of December 31, 1998, there
was an agreement to satisfy this deferred compensation agreement with an
aggregate payment of $1,100,000. This amount was paid in February 1999. The
charge to expense under these agreements amounted to $125,285 in 1998.
The Company is committed under the terms of agreements with its
stockholders to repurchase shares of stock upon the death of a stockholder, if
the personal representative of the deceased offers in writing to sell such
shares to the Company within one year after the date of death. The purchase
price of any shares of stock bought under an offer made in accordance with the
terms of the agreements will be at the agreed upon formula value of such shares
as of the end of the last complete fiscal year prior to the making of such
offer. The formula value is based on the book value of the Company excluding the
book value of the real estate multiplied by 120% plus the agreed value of the
real estate ($2,375,000 at December 31, 1998). The agreed value of the real
estate will be adjusted annually for purposes of the formula.
At December 31, 1998, the Company has a note payable to a stockholder in
the amount of $163,252. Principal payments on this note during 1998 totaled
$23,321. This note was paid in full in February 1999. Interest expense paid to a
stockholder on the note payable totaled $11,355 for 1998.
8. LINE OF CREDIT
The Company had an unsecured line of credit available in the amount of
$700,000 as of December 31, 1998. Interest is at the bank's prime rate. No
amounts were outstanding against the line at December 31, 1998.
9. NOTE PAYABLE
During 1998, the Company paid $336,441 to settle a mortgage note payable to
a bank. The interest rate related to this note was 6.95% in 1998.
F-48
<PAGE> 172
HERR MANUFACTURING COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
10. INCOME TAXES
The provision for income taxes consists of the following for the year ended
December 31, 1998:
<TABLE>
<S> <C>
CURRENT
Federal................................................... $ 57,427
State..................................................... 21,109
--------
Total current..................................... 78,536
--------
DEFERRED
Federal................................................... 390,209
State..................................................... 63,214
--------
Total deferred.................................... 453,423
--------
Provision for income taxes........................ $531,959
========
</TABLE>
The Company's effective tax rate differs from the appropriate Federal
statutory rate, as shown in the following reconciliation for the year ended
December 31, 1998.
<TABLE>
<S> <C>
Income tax expense at appropriate Federal statutory rate.... 33.5%
State income tax expense, net of appropriate Federal
benefit................................................... 6.36%
Other, net.................................................. (.74)%
-----
39.12%
=====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial-reporting
purposes and the amounts used for income tax-reporting purposes.
Significant components of net deferred tax assets at December 31, 1998 are
as follows:
<TABLE>
<S> <C>
Current deferred income taxes:
Accrued liabilities not currently deductible.............. $ 23,576
Noncurrent deferred income taxes:
Goodwill.................................................. 97,199
Depreciation.............................................. (51,219)
--------
45,980
--------
Net deferred tax asset................................. $ 69,556
========
</TABLE>
11. RETIREMENT PLAN
The Company has a profit-sharing plan that covers substantially all
employees. The Company contributed $313,883 to this plan for the year ended
December 31, 1998.
12. DISABILITY INCOME PLAN
The Company has a disability income plan that covers substantially all
salaried employees. This plan combines a disability insurance program and a
company-sponsored salary continuation program. Under the company-sponsored
salary continuation program, the Company will provide, in the event of
disability, a proportion of salary above the insurance limits for one year. No
amount was paid for salary continuation under this plan in 1998.
13. SUBSEQUENT EVENTS
On February 26, 1999, the Company sold all its issued and outstanding
shares of its common stock to Sleepmaster L.L.C. for $24,700,000 in cash. The
accompanying financial statements do not reflect any adjustments related to the
sale of the Company's stock.
F-49
<PAGE> 173
AUDITORS' REPORT
TO THE DIRECTOR OF STAR BEDDING PRODUCTS (1986) LIMITED
We have audited the consolidated balance sheet of STAR BEDDING PRODUCTS (1986)
LIMITED as at December 31, 1998 and the consolidated statements of income and
retained earnings and cash flows for the year then ended. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 1998
and the results of its operations and its cash flows for the year then ended in
accordance with generally accepted accounting principles in the United States.
The opening balances were reported on by other auditors.
PRICEWATERHOUSECOOPERS LLP
CHARTERED ACCOUNTANTS
North York, Ontario
March 19, 1999
(except as to note 11(b), which is as of April 8, 1999)
F-50
<PAGE> 174
STAR BEDDING PRODUCTS (1986) LIMITED
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Accounts receivable, less allowance for doubtful accounts of
$17,523................................................... $1,993,026
Accounts receivable -- other................................ 17,057
Inventories (note 2)........................................ 382,252
Prepaid expenses............................................ 14,304
----------
2,406,639
INVESTMENT -- 50 shares of Serta Inc. at cost............... 2,500
FIXED ASSETS (note 3)....................................... 923,951
----------
$3,333,090
==========
LIABILITIES
CURRENT LIABILITIES
Accounts payable............................................ $ 666,735
Accrued co-op advertising................................... 158,054
Accrued sales allowances.................................... 210,559
Accrued bonuses............................................. 261,888
Other accrued liabilities................................... 261,881
Short-term borrowings (note 4).............................. 26,581
Income taxes payable........................................ 413,598
----------
1,999,296
ADVANCES FROM RELATED PARTIES (note 8)...................... 317,279
----------
DEFERRED INCOME TAXES (note 5).............................. 16,988
----------
2,333,563
----------
SHAREHOLDER'S EQUITY:
CAPITAL STOCK
Class A common voting shares, no par value; authorized:
unlimited number of shares; issued: -- 6,500.............. 246,466
Class B common voting shares, no par value; authorized
unlimited number of shares; issued: -- 6,500.............. 180,158
Preference shares, issuable in series with rights and
restrictions to be determined by the director; authorized:
unlimited number of shares; issued: nil................... --
Retained earnings........................................... 532,833
ACCUMULATED OTHER COMPREHENSIVE INCOME...................... 40,070
----------
999,527
----------
$3,333,090
==========
COMMITMENTS AND CONTINGENCIES (note 7)
</TABLE>
The notes to the financial statements form an integral part of these
financial statements.
F-51
<PAGE> 175
STAR BEDDING PRODUCTS (1986) LIMITED
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
NET SALES................................................... $15,235,721
COST OF SALES............................................... 9,445,921
-----------
5,789,800
-----------
OPERATING EXPENSES
Delivery.................................................... 391,989
Selling and advertising..................................... 1,845,611
General and administrative.................................. 999,709
-----------
3,237,309
-----------
OPERATING INCOME............................................ 2,552,491
Other income (expenses)
Interest expense............................................ (17,265)
-----------
INCOME BEFORE INCOME TAXES.................................. 2,535,226
-----------
PROVISION FOR INCOME TAXES (note 5)
Current..................................................... 917,947
Deferred.................................................... 17,530
-----------
935,477
-----------
NET INCOME.................................................. 1,599,749
OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustments, net of tax........ 7,794
-----------
COMPREHENSIVE INCOME........................................ 1,607,543
RETAINED EARNINGS -- BEGINNING OF YEAR...................... 374,859
CASH DIVIDENDS PAID......................................... (1,449,569)
-----------
RETAINED EARNINGS -- END OF YEAR............................ $ 532,833
===========
</TABLE>
The notes to the financial statements form an integral part of these financial
statements.
F-52
<PAGE> 176
STAR BEDDING PRODUCTS (1986) LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS
OPERATING ACTIVITIES
Net income for the year..................................... $ 1,607,543
Adjustments to reconcile net income to net cash provided by
operating activities
Deferred income taxes.................................. 16,988
Depreciation........................................... 190,823
Gain on sale of fixed assets........................... (10,727)
Changes in operating assets and liabilities
Increase in accounts receivable -- trade and other..... (285,515)
Increase in inventories................................ (13,681)
Decrease in prepaid expenses........................... 85,835
Increase in accounts payable and accrued liabilities... 219,788
-----------
1,811,054
-----------
INVESTING ACTIVITIES
Purchase of fixed assets.................................... (420,095)
Proceeds from sale of fixed assets.......................... 13,147
-----------
(406,948)
-----------
FINANCING ACTIVITIES
Net borrowings under line of credit agreement............... 26,581
Net increase in advances from related parties............... 15,966
Cash dividends paid......................................... (1,449,569)
-----------
(1,407,022)
-----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (7,794)
-----------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (10,710)
CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR.............. 10,710
-----------
CASH AND CASH EQUIVALENTS -- END OF YEAR.................... $ --
===========
</TABLE>
(Cash and cash equivalents are defined as cash and short-term highly liquid
deposits with maturity dates of less than 90 days.)
The notes to the financial statements form an integral part of these
financial statements.
F-53
<PAGE> 177
STAR BEDDING PRODUCTS (1986) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the company
and its wholly owned subsidiary, Burrell Bedding Limited, for the year ended
December 31, 1998. The subsidiary company also has a December 31 year end.
Significant intercompany balances and transactions are eliminated.
Revenue Recognition
The company recognizes revenue upon the passage of title which is generally
at the time of shipment.
Inventories
Finished goods and work-in-process are valued at the lower of cost,
determined on the first-in, first-out basis, and market. Raw materials are
valued at the lower of cost, determined on a first-in, first-out basis, and
replacement cost.
Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation.
Depreciation is calculated over the following estimated useful lives:
<TABLE>
<S> <C>
DECLINING BALANCE
Plant equipment............................................. 20%
Automotive equipment........................................ 30%
Computer equipment.......................................... 30%
Office equipment............................................ 20%
Sign........................................................ 20%
STRAIGHT-LINE
Leasehold improvements...................................... 5 years
</TABLE>
Expenditures for maintenance and routine repairs are expensed as incurred.
Advertising Costs
The company expenses all advertising costs as incurred. Advertising
expenses for the year ended December 31, 1998 were $1,009,964.
Income Taxes
Income taxes are accounted for under the liability method whereby deferred
tax assets and liabilities are recognized for the expected future tax
consequences of events that have been recognized in the financial statements,
based on enacted tax rates.
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.
F-54
<PAGE> 178
STAR BEDDING PRODUCTS (1986) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
Foreign Currency Translation
The Company's functional currency is the Canadian dollar. Assets and
liabilities are translated into U.S. dollars using the current exchange rates in
effect at the balance sheet date, while revenues and expenses are translated at
the average exchange rate during the period. The resulting translation
adjustments are recorded as a component of accumulated other comprehensive
income within the retained earnings section of shareholder's equity. Foreign
currency transaction gains and losses are charged or credited to income as
incurred.
2. INVENTORIES
<TABLE>
<S> <C>
Raw materials............................................... $335,000
Work-in-process............................................. 17,389
Finished goods.............................................. 29,863
--------
$382,252
========
</TABLE>
3. FIXED ASSETS
<TABLE>
<CAPTION>
ACCUMULATED NET
COST DEPRECIATION BOOK VALUE
---------- ------------ ----------
<S> <C> <C> <C>
Plant equipment......................... $1,407,827 $706,005 $701,822
Automotive equipment.................... 174,070 87,294 86,776
Computer equipment...................... 129,558 64,971 64,587
Office equipment........................ 102,358 51,331 51,027
Sign.................................... 2,319 1,163 1,156
Leasehold improvements.................. 37,275 18,692 18,583
---------- -------- --------
$1,853,407 $929,456 $923,951
========== ======== ========
</TABLE>
Depreciation expense was $190,823 for the year ended December 31, 1998.
4. SHORT-TERM BORROWINGS
The company has a (i) $522,705 demand operating facility and (ii) $375,694
demand reducing equipment financing facility. The demand operating facility
bears interest at prime plus 1/2% and the equipment financing facility bears
interest at prime plus 0.90%. The collateral on these facilities is as follows:
i) a general security agreement having a first charge on all assets
of the company (other than real property);
ii) maintenance of fire insurance in an amount acceptable to the
bank, with loss payable to the bank;
iii) a guarantee of all debts and liabilities owing to the company,
limited to $718,719, signed by Burrell Bedding Limited,
supported by a general security agreement having a first charge
on all assets of Burrell Bedding Limited (other than real
property);
iv) hypothecation by the company of all issued and outstanding shares
of Burrell Bedding Limited;
v) postponement and assignment of claim signed by related parties;
and
F-55
<PAGE> 179
STAR BEDDING PRODUCTS (1986) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
vi) collateral agreement with respect to the equipment financed under
the equipment financing facility.
At December 31, 1998, the company had borrowings of $26,581 on the
operating facility and $nil on the equipment financing facility.
5. INCOME TAXES
a) The provision for income taxes consists of the following:
<TABLE>
<S> <C>
CURRENT TAXES
Federal................................................... $572,340
Provincial................................................ 345,607
--------
917,947
--------
DEFERRED TAXES
Federal................................................... 10,930
Provincial................................................ 6,600
--------
17,530
--------
PROVISION FOR INCOME TAXES............................. $935,477
========
</TABLE>
b) Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes. Significant components of the liability as of December 31,
1998 are as follows:
<TABLE>
<S> <C>
Deferred tax liability related to:
Accumulated depreciation.................................. $(41,988)
Accumulated goodwill...................................... 25,000
--------
$(16,988)
========
</TABLE>
6. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<S> <C>
Cash paid during the year for
Interest............................................. $ 17,265
Income taxes......................................... 843,452
--------
$860,717
========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The company is committed to a lease for premises to December 31, 2000 at an
annual rental of approximately $216,000.
Future minimum lease payments as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999...................................................... $216,000
2000...................................................... 216,000
--------
$432,000
========
</TABLE>
F-56
<PAGE> 180
STAR BEDDING PRODUCTS (1986) LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
8. RELATED PARTY TRANSACTIONS
For reporting purposes herein, related parties are the company's director
and companies controlled by the director.
Advances from related parties, as disclosed on the balance sheet, are
collateralized by a general security agreement, are non-interest bearing except
for advances from the director which bear interest at 10% per annum and have no
specific terms of repayment. Demand for repayment is not expected prior to
January 1, 2000. Advances from the director as at December 31, 1998 are
$123,489. The fair value of the non-interest bearing advances cannot be
reasonably determined.
During the year, interest of $12,743 was paid to the company's director.
9. FINANCIAL INSTRUMENTS
The company's financial instruments consist of accounts receivable,
accounts payable, other accrued liabilities, short-term borrowings and advances
from related parties. Unless otherwise noted, it is management's opinion that
the company is not exposed to significant interest rate, currency or credit
risks arising from these financial instruments. The fair value of these
financial instruments approximates their carrying value, unless otherwise noted.
10. ECONOMIC DEPENDENCE
Sales to the company's two largest customers account for approximately 48%
of its annual sales volume. To minimize credit risk related to these and other
customers, the company performs ongoing credit evaluations of its customers'
financial condition and limits the amount of credit extended when deemed
necessary. The company maintains provisions for potential credit losses and any
such losses to date have been within management's expectations.
11. SUBSEQUENT EVENTS
a) On January 1, 1999, Star Bedding Products (1986) Limited amalgamated
with its subsidiary, Burrell Bedding Limited. The amalgamated company will
continue to operate as Star Bedding Products (1986) Limited. The transaction was
accounted for at carrying value.
b) On April 8, 1999, the company entered into an asset purchase agreement
with Sleepmaster L.L.C. to sell substantially all of its assets for
approximately $16,077,000 in cash and a promissory note of approximately
$660,000. The sale is expected to be consummated before June 30, 1999.
F-57
<PAGE> 181
STAR BEDDING PRODUCTS (1986) LIMITED
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Accounts receivable, less allowance for doubtful accounts of
$27,844................................................... $1,598,978
Accounts receivable -- other................................ 19,509
Inventories................................................. 404,422
Other current assets........................................ 20,435
----------
2,043,344
INVESTMENT -- 50 SHARES OF SERTA INC. -- AT COST............ 2,500
FIXED ASSETS................................................ 890,395
----------
$2,936,239
==========
LIABILITIES
CURRENT LIABILITIES
Accounts payable............................................ $ 476,837
Accrued co-op advertising................................... 158,508
Accrued sales allowances.................................... 229,616
Other accrued liabilities................................... 289,550
Short-term borrowings....................................... 3,815
----------
1,158,326
ADVANCES FROM RELATED PARTIES............................... 319,885
DEFERRED INCOME TAXES....................................... 17,228
----------
1,495,439
----------
SHAREHOLDER'S EQUITY
CAPITAL STOCK
Class A common voting shares, no par value; authorized:
unlimited number of shares; issued: 6,500................. 246,466
Class B common voting shares, no par value; authorized:
unlimited number of shares; issued: 6,500................. 180,158
Preference shares, issuable in series with rights and
restrictions to be determined by the director, authorized:
unlimited number of shares; issued: nil................... --
Retained earnings........................................... 973,451
ACCUMULATED OTHER COMPREHENSIVE INCOME...................... 40,725
----------
1,440,800
----------
$2,936,239
==========
</TABLE>
The notes to the financial statements form an integral
part of these financial statements.
F-58
<PAGE> 182
STAR BEDDING PRODUCTS (1986) LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net sales................................................... $3,784,145 $3,324,617
Cost of sales............................................... 2,356,279 2,135,335
---------- ----------
1,427,866 1,189,282
---------- ----------
OPERATING EXPENSES
Delivery.................................................... 89,049 72,185
Selling and advertising..................................... 474,838 400,562
General and administrative.................................. 204,936 203,310
---------- ----------
768,823 676,057
---------- ----------
OPERATING INCOME............................................ 659,043 513,225
Interest expense............................................ 3,231 8,716
---------- ----------
INCOME BEFORE INCOME TAXES.................................. 655,812 504,509
PROVISION FOR INCOME TAXES
Current..................................................... 215,849 159,670
Deferred.................................................... -- --
---------- ----------
215,849 159,670
---------- ----------
NET INCOME.................................................. 439,963 344,839
OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustments, net of tax........ 655 --
---------- ----------
COMPREHENSIVE INCOME........................................ 440,618 344,839
RETAINED EARNINGS -- BEGINNING OF PERIOD.................... 532,833 374,859
---------- ----------
RETAINED EARNINGS -- END OF PERIOD.......................... $ 973,451 $ 719,698
========== ==========
</TABLE>
The notes to the financial statements form an integral
part of these financial statements.
F-59
<PAGE> 183
STAR BEDDING PRODUCTS (1986) LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS
OPERATING ACTIVITIES
Net income.................................................. $ 439,963 $ 344,839
Adjustments to reconcile net income to net cash provided by
operating activities
Deferred income taxes..................................... 240 --
Depreciation.............................................. 48,344 46,876
Changes in operating assets and liabilities
Decrease in accounts receivable -- trade and other........ 391,596 290,683
Increase in inventories................................... (22,170) (35,253)
(Increase) decrease in other current assets............... (6,132) 83,278
Decrease in accounts payable and accrued liabilities...... (447,545) (101,298)
Decrease in income taxes payable.......................... (370,658) (236,333)
--------- ---------
33,638 392,792
--------- ---------
INVESTING ACTIVITIES
Purchase of fixed assets.................................... (14,788) (290,363)
--------- ---------
FINANCING ACTIVITIES
Net repayments under line of credit agreement............... (22,766) 12,325
Net decrease in advances from related parties............... 2,606 (125,560)
--------- ---------
(20,160) (113,235)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 1,310 --
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... -- (10,806)
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD............ -- 10,806
--------- ---------
CASH AND CASH EQUIVALENTS -- END OF PERIOD.................. $ -- $ --
========= =========
</TABLE>
The notes to the financial statements form an integral
part of these financial statements.
F-60
<PAGE> 184
STAR BEDDING PRODUCTS (1986) LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Star Bedding Products (1986) Limited and its wholly owned subsidiary, Burrell
Bedding Limited (the "Company"). All significant intercompany balances and
transactions have been eliminated. In the opinion of management, the
accompanying interim unaudited consolidated financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position at March 31, 1999 and the
results of their operations and of their cash flows for the three months ended
March 31, 1999 and 1998. The results of operations for the periods presented
should not necessarily be taken as indicative of the results of operations that
may be expected for the entire year. In accordance with the rules of the
Securities and Exchange Commission, these financial statements do not include
all disclosures required by generally accepted accounting principles.
The accompanying financial information should be read in conjunction with
the financial statements contained in the Company's Offering Memorandum
effective May 12, 1999.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
1999
---------
<S> <C>
Raw materials............................................... $357,922
Work-in-process............................................. 13,651
Finished goods.............................................. 32,849
--------
Total inventories................................. $404,422
========
</TABLE>
3. SUBSEQUENT EVENT
On May 18, 1999, the Company sold substantially all of its assets to
Sleepmaster L.L.C. for CAN $24,500,000 (approximately US $16,700,000) in cash
and a promissory note of CAN $1,000,000 (approximately US $680,000) to
Sleepmaster Holdings L.L.C. The accompanying financial statements do not reflect
any adjustments related to the sale of the Company's assets.
F-61
<PAGE> 185
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$115,000,000
[SERTA LOGO]
SLEEPMASTER
11% SENIOR SUBORDINATED NOTES DUE 2009
-------------------------------------
PROSPECTUS
-------------------------------------
[ ], 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 186
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sleepmaster L.L.C. is a limited liability company organized under the laws
of the State of New Jersey. Section 42:2B-10 of the New Jersey Limited Liability
Company Act provides that, subject to such standards and restrictions, if any,
as are in its operating agreement, a limited liability company may, and shall
have the power to indemnify and hold harmless any member or manager or other
person from and against any and all claims and demands whatsoever.
Section 8.1 of Sleepmaster's Amended and Restated Limited Liability Company
Operating Agreement provides, among other things, that:
No Member (including the Managing Member), Advisor or officer of the
Company shall be liable to the Company or to any Member for any loss or damage
sustained by the Company or to any Member, unless the loss or damage shall have
been the result of gross negligence, fraud or intentional misconduct by the
Member (including the Managing Member), Advisor or officer in question. In
performing such Person's duties, each such Person shall be entitled to rely in
good faith on the provisions of this Agreement and on information, opinions,
reports or statements (including financial statements and information, opinions,
reports or statements as to the value or amount of the assets, liabilities,
profits or losses of the Company or any facts pertinent to the existence and
amount of assets from which distributions to Members might properly be paid) of
the following other Persons or groups: one or more officers or employees of the
Company; any attorney, independent accountant, appraiser or other expert or
professional employed or engaged by or on behalf of the Company, the Managing
Member, the Board or any committee of the Board; or any other Person who has
been selected with reasonable care by or on behalf of the Company, the Managing
Member, the Board or any committee of the Board in each case as to matters which
such relying Person reasonably believes to be within such other Person's
competence. The preceding sentence shall in no way limit any Person's right to
rely on information to the extent provided in Section 42:2B-31 of the Act. No
Member (including the Managing Member), Advisor or officer of the Company shall
be personally liable under any judgment of a court, or in any other manner, for
any debt, obligation or liability of the Company, whether that liability or
obligation arises in contract, tort or otherwise, solely by reason of being a
Member, Advisor or officer of the Company or any combination of the foregoing.
Section 8.3 of Sleepmaster's Amended and Restated Limited Liability Company
Operating Agreement provides further that subject to the limitations and
conditions as provided in this Article 8, each Person who was or is made a party
or is threatened to be made a party to or is involved in any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or arbitrative (hereinafter a "Proceeding"), or any appeal in such a Proceeding
or any inquiry or investigation that could lead to such a Proceeding, by reason
of the fact that such Person, or a Person of which such Person is the legal
representative, is or was a Member, Advisor or officer shall be indemnified by
the Company to the fullest extent permitted by applicable law, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment) against judgments, penalties (including excise and similar taxes
and punitive damages), fines, settlements and reasonable expenses (including,
without limitation, reasonable attorneys' fees and expenses) actually incurred
by such Person in connection with such Proceeding, appeal, inquiry or
investigation, and indemnification under this Article 8 shall continue as to a
Person who has ceased to serve in the capacity which initially entitled such
Person to indemnity hereunder; provided, that such Person shall be entitled to
indemnification hereunder only if such Person acted in good faith and in a
manner such Person reasonably believed to be in or not opposed to the best
interest of the Company.
Section 8.4 of Sleepmaster's Amended and Restated Limited Liability Company
Operating Agreement provides further that the right to indemnification conferred
in this Article 8 shall include the
II-1
<PAGE> 187
right to be paid or reimbursed by the Company the reasonable expenses incurred
by a Person of the type entitled to be indemnified under Section 8.3 who was, is
or is threatened to be, made a named defendant or respondent in a Proceeding in
advance of the final disposition of the Proceeding and without any determination
as to the Person's ultimate entitlement to indemnification; provided, however,
that the payment of such expenses incurred by any such Person in advance of the
final disposition of a Proceeding shall be made only upon delivery to the
Company of a written affirmation by such Person of his or her good faith belief
that he has met the standard of conduct necessary for indemnification under
Article 8 and a written undertaking (acceptable to the Board), by or on behalf
of such Person, to repay all amounts so advanced if it shall ultimately be
determined that such indemnified Person is not entitled to be indemnified under
this Article 8 or otherwise.
Sleepmaster Finance Corporation is a Delaware corporation. Section 145 of
the General Corporation Law of the State of Delaware provides that a Delaware
corporation may indemnify any person who were, are or are threatened to be made,
parties to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative of investigative (other than an action
by or in the right of such corporation), by reason of the fact that such person
is or was an officer, director, employee or agent of such corporation, or is or
was serving at the request of such corporation as a director, officer, employee
or agent of another corporation or enterprise. The indemnity may include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding, provided such person acted in good faith and in
a manner he reasonably believed to be in or not opposed to the corporation's
best interests and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was illegal. A Delaware corporation
may indemnify any persons who are, were or are threatened to be made, a party to
any threatened, pending or completed action or suit by or in the right of the
corporation by reasons of the fact that such person was a director, officer,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit, provided such person acted in good faith
and in a manner he reasonably believed to be in or not opposed to the
corporation's best interest, provided that no indemnification is permitted
without judicial approval if the officer, director, employee or agent is
adjusted to be liable to the corporation. Where an officer, director, employee
or agent is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses which
such officer or director has actually and reasonably incurred.
The Certificate of Incorporation of Sleepmaster Finance Corporation
provides that each person who was or is made a party or is threatened to be made
a party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he (or a person of whom he is the legal representative),
is or was a director of officer of Sleepmaster Finance Corporation or is or was
serving at the request of Sleepmaster Finance Corporation as a director,
officer, employee, fiduciary, or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee,
fiduciary or agent or in any other capacity while serving as a director,
officer, employee, fiduciary or agent, shall be indemnified and held harmless by
Sleepmaster Finance Corporation to the fullest extent which it is empowered to
do so by the General Corporation Law of the State of Delaware, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits Sleepmaster Finance Corporation to
provide broader indemnification rights than said law permitted Sleepmaster
Finance Corporation to provide prior to such amendment) against all expense,
liability and loss (including attorneys' fees actually and reasonably incurred
by such person in connection with such proceeding and such indemnification shall
inure to the benefit of his or her heirs, executors and administrators'
provided, however, that, except as provided in Section 2 of this Article Eight,
Sleepmaster Finance Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding initiated by such person only if
such proceeding was authorized by the Board of Directors of
II-2
<PAGE> 188
Sleepmaster Finance Corporation. The right to indemnification conferred in this
Article Eight shall be a contract right and, subject to Sections 2 and 5 of this
Article Eight, shall include the right to payment by Sleepmaster Finance
Corporation of the expenses incurred in defending any such proceeding in advance
of its final disposition. Sleepmaster Finance Corporation may, by action of the
Board of Directors, provide indemnification to employees and agents of
Sleepmaster Finance Corporation with the same scope and effect as the foregoing
indemnification of directors and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
See Exhibit Index.
(b) Financial Statement Schedules.
All schedules have been omitted because they are not applicable or because
the required information is shown in the financial statements or notes thereto.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(A) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(B) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information in the
registration statement;
(C) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at the time shall be deemed to be
the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described under
Item 20 or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE> 189
The undersigned registrant hereby undertakes that:
(4) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11 or 13 of this form, within one business
day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to
the request.
(5) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject
of and included in the registration statement when it became effective.
II-4
<PAGE> 190
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Linden, State of New Jersey, on September 3, 1999.
Sleepmaster L.L.C.
By: *
------------------------------------
Name: Charles Schweitzer
Title: Executive Advisor,
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the following
persons in the capacities indicated on September 3, 1999.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<C> <S>
* Executive Advisor, President, Chief Executive
- --------------------------------------------- Officer and Advisor (principal executive
Charles Schweitzer officer)
/s/ JAMES P. KOSCICA Executive Advisor/Vice President, Chief
- --------------------------------------------- Financial Officer, Secretary and Advisor
James P. Koscica (principal financial officer and accounting
officer)
* Advisor
- ---------------------------------------------
Robert Bartholomew
* Advisor
- ---------------------------------------------
John D. Weber
* Advisor
- ---------------------------------------------
David F. Thomas
* Advisor
- ---------------------------------------------
Michael Bradley
* Advisor
- ---------------------------------------------
Michael Bubis
</TABLE>
- ---------------
* Executed by power of attorney.
II-5
<PAGE> 191
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Linden, State of New Jersey, on September 3, 1999.
Sleepmaster Finance Corporation
By: *
------------------------------------
Name: Charles Schweitzer
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the following
persons in the capacities indicated on September 3, 1999.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<C> <S>
* President, Chief Executive Officer and Director
- --------------------------------------------- (principal executive officer)
Charles Schweitzer
/s/ JAMES P. KOSCICA Executive Vice President, Chief Financial Officer;
- --------------------------------------------- Secretary and Director (principal financial
James P. Koscica officer
and accounting officer)
* Director
- ---------------------------------------------
Robert Bartholomew
* Director
- ---------------------------------------------
John D. Weber
* Director
- ---------------------------------------------
David F. Thomas
* Director
- ---------------------------------------------
Michael Bradley
* Director
- ---------------------------------------------
Michael Bubis
</TABLE>
- ---------------
* Executed by power of attorney.
II-6
<PAGE> 192
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Linden, State of New Jersey, on September 3, 1999.
Palm Beach Bedding Company
By: *
------------------------------------
Name: Michael Bubis
Title: President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the following
persons in the capacities indicated on September 3, 1999.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<C> <S>
* Chief Executive Officer and Chairman of the Board of
- --------------------------------------------- Directors (principal executive officer)
Charles Schweitzer
/s/ JAMES P. KOSCICA Executive Vice President, Chief Financial Officer,
- --------------------------------------------- Secretary and Director (principal financial officer
James P. Koscica and accounting officer)
* Director
- ---------------------------------------------
Robert Bartholomew
* Director
- ---------------------------------------------
John D. Weber
* Director
- ---------------------------------------------
David F. Thomas
* Director
- ---------------------------------------------
Michael Bradley
* Director
- ---------------------------------------------
Michael Bubis
</TABLE>
- ---------------
* Executed by power of attorney
II-7
<PAGE> 193
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Linden, State of New Jersey, on September 3, 1999.
Herr Manufacturing Company
By: *
------------------------------------
Name: Stuart W. Herr
Title: President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the following
persons in the capacities indicated on September 3, 1999.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<C> <S>
* Chief Executive Officer and Chairman of the Board of
- --------------------------------------------- Directors (principal executive officer)
Charles Schweitzer
/s/ JAMES P. KOSCICA Executive Vice President, Chief Executive Officer,
- --------------------------------------------- Secretary and Director (principal financial officer
James P. Koscica and accounting officer)
* Director
- ---------------------------------------------
Robert Bartholomew
* Director
- ---------------------------------------------
John D. Weber
* Director
- ---------------------------------------------
David F. Thomas
* Director
- ---------------------------------------------
Michael Bradley
* Director
- ---------------------------------------------
Michael Bubis
</TABLE>
- ---------------
* Executed by power of attorney
II-8
<PAGE> 194
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Linden, State of New Jersey on September 3, 1999.
Lower Road Associates, LLC
By: *
------------------------------------
Name: Charles Schweitzer
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the following
persons in the capacities indicated on September 3, 1999.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<C> <S>
* President, Chief Executive Officer and Advisor
- --------------------------------------------- (principal executive officer)
Charles Schweitzer
/s/ JAMES P. KOSCICA Executive Vice President, Chief Financial Officer,
- --------------------------------------------- Secretary and Advisor (principal financial officer
James P. Koscica and accounting officer)
* Advisor
- ---------------------------------------------
Robert Bartholomew
* Advisor
- ---------------------------------------------
John D. Weber
* Advisor
- ---------------------------------------------
David F. Thomas
* Advisor
- ---------------------------------------------
Michael Bradley
* Advisor
- ---------------------------------------------
Michael Bubis
</TABLE>
- ---------------
* Executed by power of attorney
II-9
<PAGE> 195
EXHIBIT INDEX
<TABLE>
<C> <S> <C>
2.1 Recapitalization, Redemption and Purchase Agreement dated
October, 1996 by and among Sleepmaster Holdings L.L.C.,
Sleepmaster L.L.C., Brown/Schweitzer Holdings, Inc., the
members of Sleepmaster Holdings, L.L.C., the investors
names therein and Sleep Investor L.L.C.*
3.1 Certificate of Formation of Sleepmaster L.L.C. dated
December 14, 1994.*
3.2 Sleepmaster L.L.C. Amended and Restated Limited Liability
Company Operating Agreement dated November 14, 1996.*
3.3 Certificate of Incorporation of Sleepmaster Finance
Corporation dated April 30, 1999.*
3.4 By-laws of Sleepmaster Finance Corporation.*
3.5 Articles of Incorporation of Palm Beach Bedding Company
dated July 16, 1959.*
3.6 By-laws of Palm Beach Bedding Company.*
3.7 Articles of Incorporation of Herr Manufacturing Company
dated May 5, 1933.*
3.8 By-laws of Herr Manufacturing Company.*
3.9 Certificate of Formation of Lower Road Associates, LLC dated
April 6, 1998.*
3.10 Operating Agreement of Lower Road Associates, LLC.*
4.1 Indenture dated as of May 18, 1999 by and among Sleepmaster
L.L.C., Sleepmaster Finance Corporation, the Guarantors
listed on the signature pages thereto and the United
States Trust Company of New York.*
4.2 Executed Regulation S Note.**
4.3 Executed 144A Note.**
5.1 Opinion of Kirkland & Ellis.*
8.1 Opinion of Kirkland & Ellis with respect to Federal tax
consequences.*
9.1 Amended and Restated Securityholders Agreement by and among
Sleepmaster Holdings L.L.C., Sleep Investor L.L.C., PMI
Mezzanine Fund, L.P., Charles Schweitzer, James P.
Koscica, Michael Reilly, Timothy DuPont, Michael Bubis,
Richard Tauber, Douglas Phillips and any employees of
Sleepmaster Holdings L.L.C. or its subsidiaries which may
thereafter execute a joinder agreement thereto dated March
3, 1998.*
9.2 Joinder to Amended and Restated Securityholders Agreement by
and among Sleepmaster Holdings L.L.C., certain
securityholders of Sleepmaster Holdings L.L.C. party
thereto and Stuart W. Herr dated March 3, 1998.*
9.3 Joinder to Amended and Restated Securityholders Agreement by
and among Sleepmaster Holdings L.L.C., certain
securityholders of Sleepmaster Holdings L.L.C. party
thereto and John K. Herr, III dated March 3, 1998.*
10.1 Registration Rights Agreement dated as of May 18, 1999 by
and among Sleepmaster L.L.C., Sleepmaster Finance
Corporation, the guarantors listed on the signature pages
thereto and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and First Union Capital Markets Corp.*
10.2 Purchase Agreement dated as of May 12, 1999 by and among
Sleepmaster L.L.C., Sleepmaster Finance Corporation and
the guarantors listed on the signature pages thereto and
Merrill Lynch, Pierce, Fenner & Smith Incorporated and
First Union Capital Markets Corp.*
10.3 Second Amended and Restated Limited Liability Company
Operating Agreement of Sleepmaster Holdings L.L.C., dated
November 14, 1996 (including the joinder agreement of
Stuart Herr and John Herr, dated February 26, 1999), as
amended effective May 12, 1999.*
10.4 License Agreement and Memorandum of Agreement, each dated
January 12, 1995, between Sleepmaster L.L.C. and Serta,
Inc., covering certain territories in New Jersey, New York
and Connecticut, as amended.*
10.5 License Agreement and Memorandum of Agreement, each dated
January 12, 1995, between Sleepmaster L.L.C. and Serta,
Inc., covering certain territories in Pennsylvania, New
Jersey, Maryland and Delaware, as amended.*
</TABLE>
<PAGE> 196
<TABLE>
<C> <S> <C>
10.6 License Agreement, dated November 4, 1989, and Memorandum of
Agreement, dated December 1, 1969, between Palm Beach
Bedding Company and Serta, Inc., covering certain
territories in Florida, as amended.*
10.7 License Agreement, dated November 4, 1989, and Memorandum of
Agreement, dated December 1, 1969, between Herr
Manufacturing Company and Serta, Inc., covering certain
territories in Pennsylvania and New York, as amended.*
10.8 Standard Canadian License Agreement and Memorandum of
Agreement -- Form B, dated as of and effective May 18,
1999, between Serta, Inc. and Star Bedding Products (1986)
Ltd., covering certain territories in Ontario, Canada.*
10.9 Masterpiece Sleep Products, Inc. Manufacturing and Servicing
Agreement, dated October 1, 1998, by and between
Masterpiece Sleep Products, Inc. and Sleepmaster L.L.C.
and affiliates.*
10.10 Employment Agreement, dated as of November 15, 1996, between
Sleepmaster Holdings L.L.C., Sleepmaster L.L.C., Sleep
Investor L.L.C. and Charles Schweitzer.*
10.11 Employment Agreement, dated as of November 15, 1996, between
Sleepmaster Holdings L.L.C., Sleepmaster L.L.C., Sleep
Investor L.L.C. and James Koscica.*
10.12 Employment Agreement, dated as of November 15, 1996, between
Sleepmaster Holdings L.L.C., Sleepmaster L.L.C., Sleep
Investor L.L.C. and Timothy Dupont.*
10.13 Employment Agreement, dated as of November 15, 1996, between
Sleepmaster Holdings L.L.C., Sleepmaster L.L.C., Sleep
Investor L.L.C. and Michael Reilly.*
10.14 Option Agreement, dated as of November 15, 1996, between
Sleepmaster Holdings L.L.C., Sleepmaster L.L.C., Sleep
Investor L.L.C. and Charles Schweitzer.*
10.15 Option Agreement, dated as of November 15, 1996, between
Sleepmaster Holdings L.L.C., Sleepmaster L.L.C., Sleep
Investor L.L.C. and James Koscica.*
10.16 Option Agreement, dated as of November 15, 1996, between
Sleepmaster Holdings L.L.C., Sleepmaster L.L.C., Sleep
Investor L.L.C. and Timothy Dupont.*
10.17 Option Agreement, dated as of November 15, 1996, between
Sleepmaster Holdings L.L.C., Sleepmaster L.L.C., Sleep
Investor L.L.C. and Michael Reilly.*
10.18 Employment Agreement, dated March 3, 1998, between Palm
Beach Bedding Company joined by Sleepmaster Holdings
L.L.C. and Sleepmaster L.L.C. and Michael W. Bubis.*
10.19 Employment and Stock Purchase Agreement, dated as of
February 26, 1999, by and among Herr Manufacturing
Company, Sleepmaster Holdings L.L.C., Sleepmaster L.L.C.,
Charles Schweitzer, Sleep Investor L.L.C. and Stuart W.
Herr.*
10.20 Employment and Stock Purchase Agreement, dated as of
February 26, 1999, by and among Herr Manufacturing
Company, Sleepmaster Holdings L.L.C., Sleepmaster L.L.C.,
Charles Schweitzer, Sleep Investor L.L.C. and John K.
Herr, III.*
10.21 Sleepmaster Holdings L.L.C. Amended and Restated Common
Interest Purchase Warrants, dated as of March 3, 1998 and
Sleepmaster Holdings L.L.C. Common Interest Purchase
Warrants, dated as of March 3, 1998, each as amended on
February 26, 1999.*
10.22 Loan Agreement, dated as of April 1, 1996, between Palm
Beach Bedding Company and Palm Beach County, Florida,
relating to $7,650,000 Palm Beach County, Florida Variable
Rate Demand Industrial Development Revenue Bonds (Palm
Beach Bedding Company Project, Series 1996) originally
outstanding in the original principal amount of
$7,650,000.*
10.23 Trust Indenture, dated as of April 1, 1996, by and among
Palm Beach County, the Trustee and the Credit Facility
Trustee.*
10.24 Lease by and between Hartz Mountain Industries, Inc. and
Sleepmaster Products Company, L.P., dated October 13,
1993.*
10.25 Letter of Credit and Reimbursement Agreement, dated as of
April 1, 1996, between Palm Beach Bedding Company and
First Union National Bank of Florida.*
10.26 Amendment to Reimbursement Agreement, dated March 3, 1998,
between Palm Beach Bedding Company and First Union
National Bank of Florida.**
</TABLE>
<PAGE> 197
<TABLE>
<C> <S> <C>
10.27 Lease Agreement by and between N.H.D. Developments Limited
and Star Bedding Products (1986) Ltd. dated August 15,
1995.**
10.28 Assignment of lease agreement by and between Star Bedding
Products (1986) Ltd., Star Bedding Products Limited and
N.H.D. Developments Limited dated as of May 18, 1999.*
10.29 Intentionally left blank.*
10.30 Form of Junior Subordinated Note, dated November 14, 1996,
of Sleep Investor L.L.C. issued to each of Charles
Schweitzer, James Koscica, Timothy DuPont, Michael Reilly,
Douglas A. Brown, Douglas A. Brown VIP Plus Profit Sharing
Plan, Donald S. Brown, John S. Coates, Harold M. Wit,
Allen Investments II, L.L.C., Karl Dillon, Jessand Corp.
Profit Sharing Plan and Trust, Alan Gelband, Panorama
Holdings, L.L.C., Arnold Gussoff Holding Capital
Management Corp., Steven Leischner, William Colaianni, Jo
Levinson 1989 Trust, John M. McMahon, Kaplan, Coate
Special Situations L.P., Robert W. Plaster, Bennett
Rosenthal, Dhiren Shah, and WKM Partners.*
10.31 Amended and Restated Registration Rights Agreement, dated as
of March 3, 1998, by and among Sleepmaster Holdings
L.L.C., Sleep Investor L.L.C., PMI Mezzanine Fund, L.P.,
Charles Schweitzer, James P. Koscica, Michael Reilly,
Timothy Dupont, Michael Bubis, Richard Tauber, Douglas
Phillips (including the joinder agreements of each of
Stuart W. Herr and John K. Herr, III, dated March 3,
1998).*
10.32 Limited Liability Company Operating Agreement of Sleep
Investor L.L.C. dated November 14, 1996.*
10.33 Stock Purchase Agreement, dated as of February 26, 1999, by
and among Sleepmaster L.L.C., Herr Manufacturing Company,
and the stockholders listed on the Seller signature page
attached thereto (including the related Indemnity Escrow
Agreement and Adjustment Escrow Agreement).*
10.34 Asset Purchase Agreement by and among Star Bedding Products
Limited and Sleepmaster L.L.C., as Purchaser and Star
Bedding Products (1986) Limited and Cecil Brauer, as
Seller.*
10.35 Credit Agreement, dated as of May 18, 1999, by and among
Sleepmaster L.L.C., the guarantors thereunder and First
Union National Bank, as agent.*
10.36 1997-1999 Collective Agreement between Star Bedding Products
(1986) Limited and United Steelworkers of America Local
400.*
10.37 Collective Bargaining Agreement by and between Sleepmaster
L.L.C., its plant located in Linden, New Jersey, and the
United Steelworkers of America (ABG Division), AFL-CIO,
CLC, and its Local Union #396 dated May, 1997.*
10.38 Agreement and Plan of Merger by and among Sleepmaster
L.L.C., Sleepmaster Acquisition Corp. and Palm Beach
Bedding Company dated February, 1998.*
12.1 Statement of Ratio of Earnings to Fixed Charges.*
21.1 Subsidiaries of the Registrant.*
23.1 Consent of PricewaterhouseCoopers LLP.**
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).*
24.1 Powers of Attorney (included in signature pages).*
25.1 Statement of Eligibility of Trustee on Form T-1.*
27.1 Financial Data Schedule.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Letter of Notice of Guaranteed Delivery.*
99.3 Form of Tender Instructions.*
</TABLE>
- ---------------
** Filed herewith.
* Filed previously.
<PAGE> 1
Exhibit 4.2
THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION AS SET FORTH BELOW.
BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT ("RULE
144A")) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN
OFFSHORE TRANSACTION, (2) AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH
SECURITY PRIOR TO THE DATE WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL
ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUERS OR ANY AFFILIATE OF THE
ISSUERS WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY)
ONLY (A) TO THE ISSUERS, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN
DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES
ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A INSIDE THE UNITED STATES, TO A
PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN
RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A, (D) OUTSIDE THE UNITED STATES PURSUANT TO OFFERS AND
SALES TO NON-U.S. PERSONS IN AN OFFSHORE TRANSACTION WITHIN THE MEANING OF
REGULATION S UNDER THE SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO
THE ISSUERS' AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER
(I) PURSUANT TO CLAUSES (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF
COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM,
AND (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF
TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED
AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. AS USED HEREIN, THE TERMS
"UNITED STATES," "OFFSHORE TRANSACTION," AND "U.S. PERSON" HAVE THE RESPECTIVE
MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A
NOMINEE OF A DEPOSITARY OR A SUCCESSOR DEPOSITARY. TRANSFERS OF THIS GLOBAL
SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF
CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS
OF
<PAGE> 2
PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN
ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 306 AND 307 OF THE
INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUERS OR
THEIR AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT AND ANY SUCH
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THIS NOTE IS A REGULATION S GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
REFERRED TO HEREIN. INTERESTS IN THIS REGULATION S GLOBAL SECURITY MAY NOT BE
OFFERED OR SOLD TO A U.S. PERSON OR FOR THE ACCOUNT OR BENEFIT OF A U.S. PERSON
PRIOR TO THE EXPIRATION OF THE RESTRICTED PERIOD (AS DEFINED IN THE INDENTURE),
AND NO TRANSFER OR EXCHANGE OF AN INTEREST IN THIS REGULATION S GLOBAL SECURITY
MAY BE MADE FOR AN INTEREST IN A RULE 144A GLOBAL SECURITY UNTIL AFTER THE
TERMINATION OF THE RESTRICTED PERIOD OR AS OTHERWISE PERMITTED BY LAW AND
CONTEMPLATED BY THE INDENTURE.
-2-
<PAGE> 3
SLEEPMASTER L.L.C.
SLEEPMASTER FINANCE CORPORATION
----------
11% SENIOR SUBORDINATED NOTE DUE 2009, SERIES A
CUSIP NO. U82794AA3
No. 2 $1,300,000
Sleepmaster L.L.C., a New Jersey limited liability company (herein
called the "Company," which term includes any successor Person under the
Indenture hereinafter referred to), and Sleepmaster Finance Corporation, a
Delaware corporation (herein called "Finance Corp.,"which term includes any
successor Person under the Indenture hereinafter referred to, and, together with
the Company, the "Issuers"), for value received, hereby promise to pay to Cede &
Co. or registered assigns, the principal sum of One Million Three Hundred
Thousand United States dollars on May 15, 2009, at the office or agency of the
Issuers referred to below, and to pay interest thereon from May 18, 1999, or
from the most recent Interest Payment Date to which interest has been paid or
duly provided for, semiannually on May 15 and November 15 in each year,
commencing November 15, 1999 at the rate of 11% per annum, subject to
adjustments as described in the second following paragraph, in United States
dollars, until the principal hereof is paid or duly provided for. Interest shall
be computed on the basis of a 360-day year comprised of twelve 30-day months.
The Holder of this Series A Security is entitled to the benefits of
the Registration Rights Agreement among the Issuers, the Guarantors and the
Initial Purchasers, dated May 18, 1999, pursuant to which, subject to the terms
and conditions thereof, the Issuers and the Guarantors are obligated to
consummate the Exchange Offer pursuant to which the Holder of this Security (and
the related Guarantees) shall have the right to exchange this Security (and the
related Guarantees) for 11% Senior Subordinated Notes due 2009, Series B and
related guarantees (herein called the "Series B Securities") in like principal
amount as provided therein. In addition, the Issuers and the Guarantors have
agreed to use their best efforts to register the Securities for resale under the
Securities Act through a Shelf Registration Statement in the event that the
Exchange Offer is not consummated within 175 calendar days after the original
issue of the Securities or under certain other circumstances. The Series A
Securities and the Series B Securities are together (including related
Guarantees) referred to as the "Securities." The Series A Securities rank pari
passu in right of payment with the Series B Securities.
In the event that (a) the Exchange Offer Registration Statement is
not filed with the Commission on or prior to the 45th calendar day following the
date of original issue of the Series A Securities, (b) the Exchange Offer
Registration Statement has not been declared effective on or prior to the 135th
calendar day following the date of original issue of the Series A Securities,
(c) the Exchange Offer is not consummated on or prior to the 175th calendar day
following the date of original issue of the Series A Securities, (d) a Shelf
Registration Statement required to be filed is not declared effective on or
prior to the later of 175 days after the original issue of the Securities or 40
days after the Shelf Registration Statement is requested, if applicable, or (e)
the Shelf Registration
-3-
<PAGE> 4
Statement is declared effective but shall thereafter become unusable for more
than 30 days in the aggregate (each such event referred to in clauses (a)
through (e) above, a "Registration Default"), the interest rate borne by the
Series A Securities shall be increased by one-quarter of one percent per annum
upon the occurrence of any Registration Default, which rate (as increased as
aforesaid) will increase by an additional one-quarter of one percent each 90-day
period that such additional interest continues to accrue under any such
circumstance, with an aggregate maximum increase in the interest rate equal to
one percent (1%) per annum. Immediately following the cure of all Registration
Defaults the accrual of additional interest with respect to the particular
Registration Default will cease.
The interest so payable, and punctually paid or duly provided for,
on any Interest Payment Date will, as provided in such Indenture, be paid to the
Person in whose name this Security (or any Predecessor Securities) is registered
at the close of business on the Regular Record Date for such interest, which
shall be the May 1 or November 1 (whether or not a Business Day), as the case
may be, next preceding such Interest Payment Date. Any such interest not so
punctually paid, or duly provided for, and interest on such defaulted interest
at the interest rate borne by the Series A Securities, to the extent lawful,
shall forthwith cease to be payable to the Holder on such Regular Record Date,
and may either be paid to the Person in whose name this Security (or any
Predecessor Securities) is registered at the close of business on a Special
Record Date for the payment of such defaulted interest to be fixed by the
Trustee, notice whereof shall be given to Holders of Securities not less than 10
days prior to such Special Record Date, or be paid at any time in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which the Securities may be listed, and upon such notice as may be required
by this Indenture not inconsistent with the requirements of such exchange, all
as more fully provided in this Indenture.
Payment of the principal of, premium, if any, and interest on, this
Security, and exchange or transfer of the Security, will be made at the office
or agency of the Issuers in The City of New York maintained for that purpose
(which initially will be a corporate trust office of the Trustee located at 114
West 47th Street, New York, New York 10036), or at such other office or agency
as may be maintained for such purpose, in such coin or currency of the United
States of America as at the time of payment is legal tender for payment of
public and private debts; provided, however, that payment of interest may be
made at the option of the Issuers by check mailed to the address of the Person
entitled thereto as such address shall appear on the Security Register.
Reference is hereby made to the further provisions of this Security
set forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
This Security is entitled to the benefits of the Guarantees by the
Guarantors of the punctual payment when due and performance of the Indenture
Obligations made in favor of the Trustee for the benefit of the Holders.
Reference is made to Article Fourteen of the Indenture for a statement of the
respective right imitations of rights, duties and obligations under the
Guarantees of the Guarantors.
Unless the certificate of authentication hereon has been duly
executed by the Trustee referred to on the reverse hereof or by the
authenticating agent appointed as provided in the
-4-
<PAGE> 5
Indenture by manual signature of an authorized signer, this Security shall not
be entitled to any benefit under the Indenture, or be valid or obligatory for
any purpose.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the Issuers have caused this instrument to be
duly executed by the manual or facsimile signature of their authorized officers.
SLEEPMASTER L.L.C.
By: /s/ James P. Koscica
--------------------------------------
Name: James P. Koscica
Title:Executive Vice President, Chief
Financial Officer and Secretary
Attest:
- ---------------------------
Authorized Officer
SLEEPMASTER FINANCE CORPORATION
By: /s/ James P. Koscica
--------------------------------------
Name: James P. Koscica
Title:Executive Vice President, Chief
Financial Officer and Secretary
Attest:
- ---------------------------
Authorized Officer
-6-
<PAGE> 7
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 11% Senior Subordinated Notes due 2009, Series A
referred to in the within-mentioned Indenture.
UNITED STATES TRUST COMPANY OF NEW YORK, as
Trustee
By: /s/ M. Ciesmelewski
--------------------------------------
Authorized Signatory
Dated: May 18, 1999
-7-
<PAGE> 8
SLEEPMASTER L.L.C.
SLEEPMASTER FINANCE CORPORATION
11% Senior Subordinated Note due 2009, Series A
This Security is one of a duly authorized issue of Securities of the
Issuers designated as their 11% Senior Subordinated Notes due 2009, Series A
(herein called the "Securities"), limited (except as otherwise provided in the
Indenture referred to below) in aggregate principal amount to $165,000,000 (of
which $115.0 million are Initial Securities and up to $50.0 million may be
issued as Additional Securities) issued under and subject to the terms of an
indenture (herein called the "Indenture") dated as of May 18, 1999, among the
Issuers, the Guarantors and United States Trust Company of New York., as trustee
(herein called the "Trustee," which term includes any successor trustee under
the Indenture), to which Indenture and all indentures supplemental thereto
reference is hereby made for a statement of the respective rights, limitations
of rights, duties, obligations and immunities thereunder of the Issuers, the
Guarantors, the Trustee and the Holders of the Securities, and of the terms upon
which the Securities are, and are to be, authenticated and delivered.
The Securities are subject to redemption at any time on or after May
15, 2004, at the option of the Issuers, in whole or in part, on not less than 30
nor more than 60 days' prior notice, in amounts of $1,000 or an integral
multiple thereof, at the following redemption prices (expressed as percentages
of the principal amount), if redeemed during the 12-month period beginning May
15 of the years indicated below:
<TABLE>
<CAPTION>
Year Redemption Price
---- ----------------
<S> <C>
2004............ 105.500%
2005............ 103.667%
2006............ 101.833%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the Redemption Date (subject to the
rights of Holders of record on relevant record dates to receive interest due on
an Interest Payment Date).
In addition, at any time on or prior to May 15, 2002, the Issuers,
at their option, may use the net proceeds of one or more Public Equity Offerings
to redeem up to an aggregate of 35% of the aggregate principal amount of
Securities issued under the Indenture (including the principal amount of any
Additional Securities) at a redemption price equal to 111% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the Redemption Date; provided that at least 65% of the aggregate principal
amount of Securities remains (including the principal amount of any Additional
Securities) outstanding immediately after the occurrence of such redemption. In
order to effect the foregoing redemption, the Company must mail a notice of
redemption no later than 20 days after the closing of the related Public Equity
Offering and must consummate such redemption within 45 days of the closing of
the Public Equity Offering.
In addition, the Securities may be redeemed upon a Change of Control
at any time prior to May 15, 2004, at the option of the Issuers, in whole and
not in part, within 60 days of such Change of
-8-
<PAGE> 9
Control, at a redemption price equal to (i) 100% of the principal amount of
thereof plus (ii) accrued and unpaid interest, if any, to the Redemption Date)
plus (iii) the Applicable Premium, if any. In no event will the redemption price
of the Securities be less than 105.5% (the Redemption Price for the Securities
on May 15, 2004) of the principal amount of the Securities, plus accrued and
unpaid interest to the applicable Redemption Date.
If less than all of the Securities are to be redeemed, the Trustee
shall select the Securities or portions thereof to be redeemed in compliance
with the requirements of the principal national securities exchange, if any, on
which the Securities are listed, or if the Securities are not so listed, pro
rata, by lot or by any other method the Trustee shall deem fair and reasonable.
Upon the occurrence of a Change of Control, each Holder may require
the Issuers to purchase such Holder's Securities in whole or in part in integral
multiples of $1,000, at a purchase price in cash in an amount equal to 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
date of purchase, pursuant to a Change of Control Offer in accordance with the
procedures set forth in the Indenture.
Under certain circumstances, if all or a portion of the Net Cash
Proceeds received by the Company from any Asset Sale are not required to be
applied to repay permanently any Senior Indebtedness or any Senior Guarantor
Indebtedness, or if the Company determines not to apply such Net Cash Proceeds
to the permanent prepayment of such Senior Indebtedness or Senior Guarantor
Indebtedness, or if no such Senior Indebtedness or Senior Guarantor Indebtedness
is then outstanding, and if the Company has not invested such Net Cash Proceeds
in properties and assets that replace the properties and assets that were the
subject of the Asset Sale or in properties and assets which will be used in the
businesses of the Company or its Restricted Subsidiaries existing on the date of
the Indenture or in businesses reasonably related thereto and such Net Cash
Proceeds not used or invested exceeds a specified amount, the Company will be
required to apply such proceeds to the repayment of the Securities and certain
Indebtedness ranking pari passu in right of payment to the Securities.
In the case of any redemption or repurchase of Securities in
accordance with the Indenture, interest installments whose Stated Maturity is on
or prior to the Redemption Date will be payable to the Holders of such
Securities of record as of the close of business on the relevant Regular Record
Date or Special Record Date referred to on the face hereof. Securities (or
portions thereof) for whose redemption and payment provision is made in
accordance with the Indenture shall cease to bear interest from and after the
Redemption Date.
In the event of redemption or repurchase of this Security in
accordance with the Indenture in part only, a new Security or Securities for the
unredeemed portion hereof shall be issued in the name of the Holder hereof upon
the cancellation hereof.
If an Event of Default shall occur and be continuing, the principal
amount of all the Securities may be declared due and payable in the manner and
with the effect provided in the Indenture.
The Indenture contains provisions for defeasance at any time of (a)
the entire Indebtedness on the Securities and (b) certain restrictive covenants
and related Defaults and Events of Default, in each case upon compliance with
certain conditions set forth therein.
-9-
<PAGE> 10
The Indenture permits, with exceptions (including certain amendments
permitted without the consent of any Holders and certain amendments which
require the consent of all the Holders) as therein provided, the amendment
thereof and the modification of the rights and obligations of the Issuers and
the Guarantors and the rights of the Holders under the Indenture and the
Securities and the Guarantees at any time by the Issuers and the Trustee with
the consent of the Holders of at least a majority in aggregate principal amount
of the Securities at the time Outstanding. The Indenture also contains
provisions permitting the Holders of at least a majority in aggregate principal
amount of the Securities at the time Outstanding, on behalf of the Holders of
all the Securities, to waive compliance by the Issuers and the Guarantors with
certain provisions of the Indenture and the Securities and the Guarantees and
certain past Defaults under the Indenture and the Securities and the Guarantees
and their consequences. Any such consent or waiver by or on behalf of the Holder
of this Security shall be conclusive and binding upon such Holder and upon all
future Holders of this Security and of any Security issued upon the registration
of transfer hereof or in exchange herefor or in lieu hereof whether or not
notation of such consent or waiver is made upon this Security.
The Securities are, to the extent and manner provided in Article
Thirteen of the Indenture, subordinated and subject in right of payment to the
prior payment in full of all Senior Indebtedness.
No reference herein to the Indenture and no provision of this
Security or of the Indenture shall alter or impair the obligation of the
Company, Finance Corp., any Guarantor or any other obligor on the Securities (in
the event such Guarantor or such other obligor is obligated to make payments in
respect of the Securities), which is absolute and unconditional, to pay the
principal of, premium, if any, and interest on, this Security at the times,
place, and rate, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Security is registrable in the Security
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Issuers in the Borough of Manhattan, The City of New
York, duly endorsed by, or accompanied by a written instrument of transfer in
form satisfactory to the Issuers and the Security Registrar duly executed by,
the Holder hereof or its attorney duly authorized in writing, and thereupon one
or more new Securities, of authorized denominations and for the same aggregate
principal amount, will be issued to the designated transferee or transferees.
Certificated securities shall be transferred to all beneficial
holders in exchange for their beneficial interests in the Rule 144A Global
Securities or the Regulation S Global Securities if (i) such Depositary (A) has
notified the Issuers that it is unwilling or unable to continue as Depositary
for such Global Security or (B) has ceased to be a clearing agency registered as
such under the Exchange Act, and in either case the Issuers fail to appoint a
successor Depositary within 90 days, (ii) the Issuers, at their option, notifies
the Trustee in writing that it elects to cause the issuance of the Securities in
certificated form or (iii) there shall have occurred and be continuing an Event
of Default or any event which after notice or lapse of time or both would be an
Event of Default with respect to such Global Security. Upon any such issuance,
the Trustee is required to register such certificated Series A Securities in the
name of, and cause the same to be delivered to, such Person or Persons (or the
nominee of any thereof). All such certificated Series A Securities would be
required to include the Private Placement Legend.
Series A Securities in certificated form are issuable only in
registered form without coupons in denominations of $1,000 and any integral
multiple thereof. As provided in the Indenture and subject to
-10-
<PAGE> 11
certain limitations therein set forth, the Series A Securities are exchangeable
for a like aggregate principal amount of Securities of a differing authorized
denomination, as requested by the Holder surrendering the same.
At any time when the Issuers are not subject to Sections 13 or 15(d)
of the Exchange Act, upon the written request of a Holder of a Series A
Security, the Issuers will promptly furnish or cause to be furnished such
information as is specified pursuant to Rule 144A(d)(4) under the Securities Act
(or any successor provision thereto) to such Holder or to a prospective
purchaser of such Series A Security who such Holder informs the Issuers is
reasonably believed to be a "Qualified Institutional Buyer" within the meaning
of Rule 144A under the Securities Act, as the case may be, in order to permit
compliance by such Holder with Rule 144A under the Securities Act.
No service charge shall be made for any registration of transfer or
exchange of Securities, but the Issuers may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of
transfer, the Company, Finance Corp., any Guarantor, the Trustee and any agent
of the Company, Finance Corp., any Guarantor or the Trustee may treat the Person
in whose name this Security is registered as the owner hereof for all purposes,
whether or not this Security is overdue, and none of the Company, Finance Corp.,
any Guarantor, the Trustee nor any such agent shall be affected by notice to the
contrary.
THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS
PRINCIPLES THEREOF.
All terms used in this Security which are defined in the Indenture
and not otherwise defined herein shall have the meanings assigned to them in the
Indenture.
-11-
<PAGE> 12
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Security purchased by the Issuers pursuant
to Section 1012 or Section 1015, as applicable, of the Indenture, check the Box:
[ ].
If you wish to have a portion of this Security purchased by the
Issuers pursuant to Section 1012 or Section 1015 as applicable, of the
Indenture, state the amount (in original principal amount):
$_____________.
Date: _________________________ Your Signature:_____________________
(Sign exactly as your name appears on the other side of this Security)
Signature Guarantee: _________________________
[Signature must be guaranteed by an eligible Guarantor Institution (banks, stock
brokers, savings and loan associations and credit unions) with membership in an
approved guarantee medallion program pursuant to Securities and Exchange
Commission Rule 17Ad-15]
-12-
<PAGE> 13
TRANSFER NOTICE
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
Insert Taxpayer Identification No.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Please print or typewrite name and address including zip code of assignee)
- -------------------------------------------------------------------------------
the within Security and all rights thereunder, hereby irrevocably constituting
and appointing
- -------------------------------------------------------------------------------
attorney to transfer such Security on the books of the Issuers with full power
of substitution in the premises.
In connection with any transfer of this Security occurring prior to the
date which is the earlier of the date of an effective Registration Statement or
- ---------, 2001, the undersigned confirms that without utilizing any general
solicitation or general advertising that:
[Check One]
[ ] (a) this Security is being transferred in compliance with the exemption from
under the Securities Act of 1933, as amended, provided by Rule 144A
thereunder.
or
[ ] (b) this Security is being transferred other than in accordance with (a)
above and documents are being furnished which comply with the conditions
of transfer set forth in this Security and the Indenture.
-13-
<PAGE> 14
If none of the foregoing boxes is checked, the Trustee or other Security
Registrar shall not be obligated to register this Security in the name of any
Person other than the Holder hereof unless and until the conditions to any such
transfer of registration set forth herein and in Section 307 of the Indenture
shall have been satisfied.
Date: ______________________
____________________________________________
NOTICE: The signature to this assignment
must correspond with the name as written
upon the face of the within-mentioned
instrument in every particular, without
alteration or any change whatsoever.
Signature Guarantee: _________________________
[Signature must be guaranteed by an eligible Guarantor Institution (banks, stock
brokers, savings and loan associations and credit unions) with membership in an
approved guarantee medallion program pursuant to Securities and Exchange
Commission Rule 17Ad-15]
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this
Security for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, as amended, and is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information regarding the
Issuers as the undersigned has requested pursuant to Rule 144A or has determined
not to request such information and that it is aware that the transferor is
relying upon the undersigned's foregoing representations in order to claim the
exemption from registration provided by Rule 144A. Dated:
Dated:
NOTICE: To be executed by an authorized signatory
-14-
<PAGE> 15
GUARANTEE
For value received, each of the undersigned hereby absolutely, fully and
unconditionally and irrevocably guarantees, jointly and severally with each
other Guarantor, to the holder of this Security the payment of principal of,
premium, if any, and interest on this Security upon which these Guarantees are
endorsed in the amounts and at the time when due and payable whether by
declaration thereof, or otherwise, and interest on the overdue principal and
interest, if any, of this Security, if lawful, and the payment or performance of
all other obligations of the Issuers under the Indenture or the Securities, to
the holder of this Security and the Trustee, all in accordance with and subject
to the terms and limitations of this Security and Article Fourteen of the
Indenture. This Guarantee will not become effective until the Trustee duly
executes the certificate of authentication on this Security. These Guarantees
shall be governed by and construed in accordance with the laws of the State of
New York, without regard to conflict of law principles thereof. The Indebtedness
evidenced by these Guarantees is, to the extent and in the manner provided in
the Indenture, subordinate and subject in right of payment to the prior payment
in full of all Senior Guarantor Indebtedness, whether outstanding on the date of
the Indenture or thereafter, and the Guarantees are issued subject to such
Provisions.
Dated- May 18, 1999
HERR MANUFACTURING COMPANY
PALM BEACH BEDDING COMPANY
LOWER ROAD ASSOCIATES, LLC
By: /s/ James P. Koscica
--------------------------------------
Name: James P. Koscica
Title:Executive Vice President, Chief
Financial Officer and Secretary
Attest:
- ------------------
Authorized Officer
-15-
<PAGE> 1
Exhibit 4.3
THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION AS SET FORTH BELOW.
BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT ("RULE
144A")) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN
OFFSHORE TRANSACTION, (2) AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH
SECURITY PRIOR TO THE DATE WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL
ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUERS OR ANY AFFILIATE OF THE
ISSUERS WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY)
ONLY (A) TO THE ISSUERS, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN
DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES
ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A INSIDE THE UNITED STATES, TO A
PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN
RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A, (D) OUTSIDE THE UNITED STATES PURSUANT TO OFFERS AND
SALES TO NON-U.S. PERSONS IN AN OFFSHORE TRANSACTION WITHIN THE MEANING OF
REGULATION S UNDER THE SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO
THE ISSUERS' AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER
(I) PURSUANT TO CLAUSES (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF
COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM,
AND (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF
TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED
AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. AS USED HEREIN, THE TERMS
"UNITED STATES," "OFFSHORE TRANSACTION," AND "U.S. PERSON" HAVE THE RESPECTIVE
MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A
NOMINEE OF A DEPOSITARY OR A SUCCESSOR DEPOSITARY. TRANSFERS OF THIS GLOBAL
SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF
CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS
OF
<PAGE> 2
PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN
ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 306 AND 307 OF THE
INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUERS OR
THEIR AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT AND ANY SUCH
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
-2-
<PAGE> 3
SLEEPMASTER L.L.C.
SLEEPMASTER FINANCE CORPORATION
---------------------
11% SENIOR SUBORDINATED NOTE DUE 2009, SERIES A
CUSIP NO. 831258AA6
No. 1 $113,700,000
Sleepmaster L.L.C., a New Jersey limited liability company
(herein called the "Company," which term includes any successor Person under the
Indenture hereinafter referred to), and Sleepmaster Finance Corporation, a
Delaware corporation (herein called "Finance Corp.,"which term includes any
successor Person under the Indenture hereinafter referred to, and, together with
the Company, the "Issuers"), for value received, hereby promise to pay to Cede &
Co. or registered assigns, the principal sum of One Hundred Thirteen Million
Seven Hundred Thousand United States dollars on May 15, 2009, at the office or
agency of the Issuers referred to below, and to pay interest thereon from May
18, 1999, or from the most recent Interest Payment Date to which interest has
been paid or duly provided for, semiannually on May 15 and November 15 in each
year, commencing November 15, 1999 at the rate of 11% per annum, subject to
adjustments as described in the second following paragraph, in United States
dollars, until the principal hereof is paid or duly provided for. Interest shall
be computed on the basis of a 360-day year comprised of twelve 30-day months.
The Holder of this Series A Security is entitled to the
benefits of the Registration Rights Agreement among the Issuers, the Guarantors
and the Initial Purchasers, dated May 18, 1999, pursuant to which, subject to
the terms and conditions thereof, the Issuers and the Guarantors are obligated
to consummate the Exchange Offer pursuant to which the Holder of this Security
(and the related Guarantees) shall have the right to exchange this Security (and
the related Guarantees) for 11% Senior Subordinated Notes due 2009, Series B and
related guarantees (herein called the "Series B Securities") in like principal
amount as provided therein. In addition, the Issuers and the Guarantors have
agreed to use their best efforts to register the Securities for resale under the
Securities Act through a Shelf Registration Statement in the event that the
Exchange Offer is not consummated within 175 calendar days after the original
issue of the Securities or under certain other circumstances. The Series A
Securities and the Series B Securities are together (including related
Guarantees) referred to as the "Securities." The Series A Securities rank pari
passu in right of payment with the Series B Securities.
In the event that (a) the Exchange Offer Registration
Statement is not filed with the Commission on or prior to the 45th calendar day
following the date of original issue of the Series A Securities, (b) the
Exchange Offer Registration Statement has not been declared effective on or
prior to the 135th calendar day following the date of original issue of the
Series A Securities, (c) the Exchange Offer is not consummated on or prior to
the 175th calendar day following the date of original issue of the Series A
Securities, (d) a Shelf Registration Statement required to be filed is not
declared effective on or prior to the later of 175 days after the original issue
of the Securities or 40
-3-
<PAGE> 4
days after the Shelf Registration Statement is requested, if applicable, or (e)
the Shelf Registration Statement is declared effective but shall thereafter
become unusable for more than 30 days in the aggregate (each such event referred
to in clauses (a) through (e) above, a "Registration Default"), the interest
rate borne by the Series A Securities shall be increased by one-quarter of one
percent per annum upon the occurrence of any Registration Default, which rate
(as increased as aforesaid) will increase by an additional one-quarter of one
percent each 90-day period that such additional interest continues to accrue
under any such circumstance, with an aggregate maximum increase in the interest
rate equal to one percent (1%) per annum. Immediately following the cure of all
Registration Defaults the accrual of additional interest with respect to the
particular Registration Default will cease.
The interest so payable, and punctually paid or duly provided
for, on any Interest Payment Date will, as provided in such Indenture, be paid
to the Person in whose name this Security (or any Predecessor Securities) is
registered at the close of business on the Regular Record Date for such
interest, which shall be the May 1 or November 1 (whether or not a Business
Day), as the case may be, next preceding such Interest Payment Date. Any such
interest not so punctually paid, or duly provided for, and interest on such
defaulted interest at the interest rate borne by the Series A Securities, to the
extent lawful, shall forthwith cease to be payable to the Holder on such Regular
Record Date, and may either be paid to the Person in whose name this Security
(or any Predecessor Securities) is registered at the close of business on a
Special Record Date for the payment of such defaulted interest to be fixed by
the Trustee, notice whereof shall be given to Holders of Securities not less
than 10 days prior to such Special Record Date, or be paid at any time in any
other lawful manner not inconsistent with the requirements of any securities
exchange on which the Securities may be listed, and upon such notice as may be
required by this Indenture not inconsistent with the requirements of such
exchange, all as more fully provided in this Indenture.
Payment of the principal of, premium, if any, and interest on,
this Security, and exchange or transfer of the Security, will be made at the
office or agency of the Issuers in The City of New York maintained for that
purpose (which initially will be a corporate trust office of the Trustee located
at 114 West 47th Street, New York, New York 10036), or at such other office or
agency as may be maintained for such purpose, in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts; provided, however, that payment of interest may be
made at the option of the Issuers by check mailed to the address of the Person
entitled thereto as such address shall appear on the Security Register.
Reference is hereby made to the further provisions of this
Security set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
This Security is entitled to the benefits of the Guarantees by
the Guarantors of the punctual payment when due and performance of the Indenture
Obligations made in favor of the Trustee for the benefit of the Holders.
Reference is made to Article Fourteen of the Indenture for a statement of the
respective right imitations of rights, duties and obligations under the
Guarantees of the Guarantors.
-4-
<PAGE> 5
Unless the certificate of authentication hereon has been duly
executed by the Trustee referred to on the reverse hereof or by the
authenticating agent appointed as provided in the Indenture by manual signature
of an authorized signer, this Security shall not be entitled to any benefit
under the Indenture, or be valid or obligatory for any purpose.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the Issuers have caused this instrument to
be duly executed by the manual or facsimile signature of their authorized
officers.
SLEEPMASTER L.L.C.
By: /s/ James P. Koscica
-------------------------------------------
Name: James P. Koscica
Title: Executive Vice President, Chief
Financial Officer and Secretary
Attest:
- -------------------------------
Authorized Officer
SLEEPMASTER FINANCE CORPORATION
By: /s/ James P. Koscica
-------------------------------------------
Name: James P. Koscica
Title: Executive Vice President, Chief
Financial Officer and Secretary
Attest:
- -------------------------------
Authorized Officer
-6-
<PAGE> 7
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 11% Senior Subordinated Notes due 2009,
Series A referred to in the within-mentioned Indenture.
UNITED STATES TRUST COMPANY OF
NEW YORK, as Trustee
By: /s/ M. Ciesmelewski
-----------------------------------------
Authorized Signatory
Dated: May 18, 1999
-7-
<PAGE> 8
SLEEPMASTER L.L.C.
SLEEPMASTER FINANCE CORPORATION
11% Senior Subordinated Note due 2009, Series A
This Security is one of a duly authorized issue of Securities
of the Issuers designated as their 11% Senior Subordinated Notes due 2009,
Series A (herein called the "Securities"), limited (except as otherwise provided
in the Indenture referred to below) in aggregate principal amount to
$165,000,000 (of which $115.0 million are Initial Securities and up to $50.0
million may be issued as Additional Securities) issued under and subject to the
terms of an indenture (herein called the "Indenture") dated as of May 18, 1999,
among the Issuers, the Guarantors and United States Trust Company of New York.,
as trustee (herein called the "Trustee," which term includes any successor
trustee under the Indenture), to which Indenture and all indentures supplemental
thereto reference is hereby made for a statement of the respective rights,
limitations of rights, duties, obligations and immunities thereunder of the
Issuers, the Guarantors, the Trustee and the Holders of the Securities, and of
the terms upon which the Securities are, and are to be, authenticated and
delivered.
The Securities are subject to redemption at any time on or
after May 15, 2004, at the option of the Issuers, in whole or in part, on not
less than 30 nor more than 60 days' prior notice, in amounts of $1,000 or an
integral multiple thereof, at the following redemption prices (expressed as
percentages of the principal amount), if redeemed during the 12-month period
beginning May 15 of the years indicated below:
<TABLE>
<CAPTION>
Year Redemption Price
---- ----------------
<S> <C> <C>
2004 105.500%
2005 103.667%
2006 101.833%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the Redemption Date (subject to the
rights of Holders of record on relevant record dates to receive interest due on
an Interest Payment Date).
In addition, at any time on or prior to May 15, 2002, the
Issuers, at their option, may use the net proceeds of one or more Public Equity
Offerings to redeem up to an aggregate of 35% of the aggregate principal amount
of Securities issued under the Indenture (including the principal amount of any
Additional Securities) at a redemption price equal to 111% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the Redemption Date; provided that at least 65% of the aggregate principal
amount of Securities remains (including the principal amount of any Additional
Securities) outstanding immediately after the occurrence of such redemption. In
order to effect the foregoing redemption, the Company must mail a notice of
redemption no later than 20 days after the closing of the related Public Equity
Offering and must consummate such redemption within 45 days of the closing of
the Public Equity Offering.
-8-
<PAGE> 9
In addition, the Securities may be redeemed upon a Change of
Control at any time prior to May 15, 2004, at the option of the Issuers, in
whole and not in part, within 60 days of such Change of Control, at a redemption
price equal to (i) 100% of the principal amount of thereof plus (ii) accrued and
unpaid interest, if any, to the Redemption Date) plus (iii) the Applicable
Premium, if any. In no event will the redemption price of the Securities be less
than 105.5% (the Redemption Price for the Securities on May 15, 2004) of the
principal amount of the Securities, plus accrued and unpaid interest to the
applicable Redemption Date.
If less than all of the Securities are to be redeemed, the
Trustee shall select the Securities or portions thereof to be redeemed in
compliance with the requirements of the principal national securities exchange,
if any, on which the Securities are listed, or if the Securities are not so
listed, pro rara, by lot or by any other method the Trustee shall deem fair and
reasonable.
Upon the occurrence of a Change of Control, each Holder may
require the Issuers to purchase such Holder's Securities in whole or in part in
integral multiples of $1,000, at a purchase price in cash in an amount equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the date of purchase, pursuant to a Change of Control Offer in accordance
with the procedures set forth in the Indenture.
Under certain circumstances, if all or a portion of the Net
Cash Proceeds received by the Company from any Asset Sale are not required to be
applied to repay permanently any Senior Indebtedness or any Senior Guarantor
Indebtedness, or if the Company determines not to apply such Net Cash Proceeds
to the permanent prepayment of such Senior Indebtedness or Senior Guarantor
Indebtedness, or if no such Senior Indebtedness or Senior Guarantor Indebtedness
is then outstanding, and if the Company has not invested such Net Cash Proceeds
in properties and assets that replace the properties and assets that were the
subject of the Asset Sale or in properties and assets which will be used in the
businesses of the Company or its Restricted Subsidiaries existing on the date of
the Indenture or in businesses reasonably related thereto and such Net Cash
Proceeds not used or invested exceeds a specified amount, the Company will be
required to apply such proceeds to the repayment of the Securities and certain
Indebtedness ranking pari passu in right of payment to the Securities.
In the case of any redemption or repurchase of Securities in
accordance with the Indenture, interest installments whose Stated Maturity is on
or prior to the Redemption Date will be payable to the Holders of such
Securities of record as of the close of business on the relevant Regular Record
Date or Special Record Date referred to on the face hereof. Securities (or
portions thereof) for whose redemption and payment provision is made in
accordance with the Indenture shall cease to bear interest from and after the
Redemption Date.
In the event of redemption or repurchase of this Security in
accordance with the Indenture in part only, a new Security or Securities for the
unredeemed portion hereof shall be issued in the name of the Holder hereof upon
the cancellation hereof.
If an Event of Default shall occur and be continuing, the
principal amount of all the Securities may be declared due and payable in the
manner and with the effect provided in the Indenture.
-9-
<PAGE> 10
The Indenture contains provisions for defeasance at any time
of (a) the entire Indebtedness on the Securities and (b) certain restrictive
covenants and related Defaults and Events of Default, in each case upon
compliance with certain conditions set forth therein.
The Indenture permits, with exceptions (including certain
amendments permitted without the consent of any Holders and certain amendments
which require the consent of all the Holders) as therein provided, the amendment
thereof and the modification of the rights and obligations of the Issuers and
the Guarantors and the rights of the Holders under the Indenture and the
Securities and the Guarantees at any time by the Issuers and the Trustee with
the consent of the Holders of at least a majority in aggregate principal amount
of the Securities at the time Outstanding. The Indenture also contains
provisions permitting the Holders of at least a majority in aggregate principal
amount of the Securities at the time Outstanding, on behalf of the Holders of
all the Securities, to waive compliance by the Issuers and the Guarantors with
certain provisions of the Indenture and the Securities and the Guarantees and
certain past Defaults under the Indenture and the Securities and the Guarantees
and their consequences. Any such consent or waiver by or on behalf of the Holder
of this Security shall be conclusive and binding upon such Holder and upon all
future Holders of this Security and of any Security issued upon the registration
of transfer hereof or in exchange herefor or in lieu hereof whether or not
notation of such consent or waiver is made upon this Security.
The Securities are, to the extent and manner provided in
Article Thirteen of the Indenture, subordinated and subject in right of payment
to the prior payment in full of all Senior Indebtedness.
No reference herein to the Indenture and no provision of this
Security or of the Indenture shall alter or impair the obligation of the
Company, Finance Corp., any Guarantor or any other obligor on the Securities (in
the event such Guarantor or such other obligor is obligated to make payments in
respect of the Securities), which is absolute and unconditional, to pay the
principal of, premium, if any, and interest on, this Security at the times,
place, and rate, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Security is registrable in
the Security Register, upon surrender of this Security for registration of
transfer at the office or agency of the Issuers in the Borough of Manhattan, The
City of New York, duly endorsed by, or accompanied by a written instrument of
transfer in form satisfactory to the Issuers and the Security Registrar duly
executed by, the Holder hereof or its attorney duly authorized in writing, and
thereupon one or more new Securities, of authorized denominations and for the
same aggregate principal amount, will be issued to the designated transferee or
transferees.
Certificated securities shall be transferred to all beneficial
holders in exchange for their beneficial interests in the Rule 144A Global
Securities or the Regulation S Global Securities if (i) such Depositary (A) has
notified the Issuers that it is unwilling or unable to continue as Depositary
for such Global Security or (B) has ceased to be a clearing agency registered as
such under the Exchange Act, and in either case the Issuers fail to appoint a
successor Depositary within 90 days, (ii) the Issuers, at their option, notifies
the Trustee in writing that it elects to cause the
-10-
<PAGE> 11
issuance of the Securities in certificated form or (iii) there shall have
occurred and be continuing an Event of Default or any event which after notice
or lapse of time or both would be an Event of Default with respect to such
Global Security. Upon any such issuance, the Trustee is required to register
such certificated Series A Securities in the name of, and cause the same to be
delivered to, such Person or Persons (or the nominee of any thereof). All such
certificated Series A Securities would be required to include the Private
Placement Legend.
Series A Securities in certificated form are issuable only in
registered form without coupons in denominations of $1,000 and any integral
multiple thereof. As provided in the Indenture and subject to certain
limitations therein set forth, the Series A Securities are exchangeable for a
like aggregate principal amount of Securities of a differing authorized
denomination, as requested by the Holder surrendering the same.
At any time when the Issuers are not subject to Sections 13 or
15(d) of the Exchange Act, upon the written request of a Holder of a Series A
Security, the Issuers will promptly furnish or cause to be furnished such
information as is specified pursuant to Rule 144A(d)(4) under the Securities Act
(or any successor provision thereto) to such Holder or to a prospective
purchaser of such Series A Security who such Holder informs the Issuers is
reasonably believed to be a "Qualified Institutional Buyer" within the meaning
of Rule 144A under the Securities Act, as the case may be, in order to permit
compliance by such Holder with Rule 144A under the Securities Act.
No service charge shall be made for any registration of
transfer or exchange of Securities, but the Issuers may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.
Prior to due presentment of this Security for registration of
transfer, the Company, Finance Corp., any Guarantor, the Trustee and any agent
of the Company, Finance Corp., any Guarantor or the Trustee may treat the Person
in whose name this Security is registered as the owner hereof for all purposes,
whether or not this Security is overdue, and none of the Company, Finance Corp.,
any Guarantor, the Trustee nor any such agent shall be affected by notice to the
contrary.
THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS
PRINCIPLES THEREOF.
All terms used in this Security which are defined in the
Indenture and not otherwise defined herein shall have the meanings assigned to
them in the Indenture.
-11-
<PAGE> 12
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Security purchased by the Issuers
pursuant to Section 1012 or Section 1015, as applicable, of the Indenture, check
the Box: [ ].
If you wish to have a portion of this Security purchased by
the Issuers pursuant to Section 1012 or Section 1015 as applicable, of the
Indenture, state the amount (in original principal amount):
$_____________.
Date: _________________________ Your Signature:_________________________
(Sign exactly as your name appears on the other side of this Security)
Signature Guarantee: _________________________
[Signature must be guaranteed by an eligible Guarantor Institution (banks, stock
brokers, savings and loan associations and credit unions) with membership in an
approved guarantee medallion program pursuant to Securities and Exchange
Commission Rule 17Ad-15]
-12-
<PAGE> 13
TRANSFER NOTICE
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
Insert Taxpayer Identification No.
- ----------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(Please print or typewrite name and address including zip code of assignee)
- ------------------------------------------------------------------------------
the within Security and all rights thereunder, hereby irrevocably constituting
and appointing
- ------------------------------------------------------------------------------
attorney to transfer such Security on the books of the Issuers with full power
of substitution in the premises.
In connection with any transfer of this Security occurring prior to the
date which is the earlier of the date of an effective Registration Statement or
- ----------, 2001, the undersigned confirms that without utilizing any general
solicitation or general advertising that:
[Check One]
[ ] (a) this Security is being transferred in compliance with the exemption
from under the Securities Act of 1933, as amended, provided by Rule
144A thereunder.
or
[ ] (b) this Security is being transferred other than in accordance with (a)
above and documents are being furnished which comply with the
conditions of transfer set forth in this Security and the Indenture.
-13-
<PAGE> 14
If none of the foregoing boxes is checked, the Trustee or other Security
Registrar shall not be obligated to register this Security in the name of any
Person other than the Holder hereof unless and until the conditions to any such
transfer of registration set forth herein and in Section 307 of the Indenture
shall have been satisfied.
Date:
-------------------------
---------------------------------------------
NOTICE: The signature to this assignment must
correspond with the name as upon the face of
the within-mentioned instrument in every
particular, alteration or any change
whatsoever.
Signature Guarantee: _________________________
[Signature must be guaranteed by an eligible Guarantor Institution (banks, stock
brokers, savings and loan associations and credit unions) with membership in an
approved guarantee medallion program pursuant to Securities and Exchange
Commission Rule 17Ad-15]
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this
Security for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, as amended, and is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information regarding the
Issuers as the undersigned has requested pursuant to Rule 144A or has determined
not to request such information and that it is aware that the transferor is
relying upon the undersigned's foregoing representations in order to claim the
exemption from registration provided by Rule 144A.
Dated:
Dated:
NOTICE: To be executed by an authorized signatory
-14-
<PAGE> 15
GUARANTEE
For value received, each of the undersigned hereby absolutely, fully
and unconditionally and irrevocably guarantees, jointly and severally with each
other Guarantor, to the holder of this Security the payment of principal of,
premium, if any, and interest on this Security upon which these Guarantees are
endorsed in the amounts and at the time when due and payable whether by
declaration thereof, or otherwise, and interest on the overdue principal and
interest, if any, of this Security, if lawful, and the payment or performance of
all other obligations of the Issuers under the Indenture or the Securities, to
the holder of this Security and the Trustee, all in accordance with and subject
to the terms and limitations of this Security and Article Fourteen of the
Indenture. This Guarantee will not become effective until the Trustee duly
executes the certificate of authentication on this Security. These Guarantees
shall be governed by and construed in accordance with the laws of the State of
New York, without regard to conflict of law principles thereof. The Indebtedness
evidenced by these Guarantees is, to the extent and in the manner provided in
the Indenture, subordinate and subject in right of payment to the prior payment
in full of all Senior Guarantor Indebtedness, whether outstanding on the date of
the Indenture or thereafter, and the Guarantees are issued subject to such
Provisions.
Dated- May 18, 1999
HERR MANUFACTURING COMPANY
PALM BEACH BEDDING COMPANY
LOWER ROAD ASSOCIATES, LLC
By: /s/ James P. Koscica
----------------------------------------------
Name: James P. Koscica
Title: Executive Vice President, Chief
Financial Officer and Secretary
Attest:
- -----------------------------
Authorized Officer
-15-
<PAGE> 1
Exhibit 10.26
AMENDMENT TO REIMBURSEMENT AGREEMENT
This Amendment to Reimbursement Agreement, dated March 3, 1998 is between
Palm Beach Bedding Company, a Florida corporation, (the "Borrower") and First
Union National Bank, a national banking association, (the "Lender").
RECITALS
Palm Beach County, Florida (the "Issuer") has caused to be issued its
$7,650,000 Variable Rate Demand Industrial Development Revenue Bonds (Palm Beach
Bedding Company Project), Series 1996 (the "Bonds"). The Bonds were issued under
that certain Indenture of Trust (the "Indenture") dated as of April 1, 1996
between the Issuer, Branch Bank and Trust Company as Credit Facility Trustee and
First Union National Bank as Trustee. The Issuer lent the proceeds of the Bonds
to the Borrower pursuant to that certain loan agreement between the Issuer and
the Borrower dated April 1, 1996 (the "Loan Agreement"). As a condition to
making the loan to the Borrower, the Issuer required the Borrower to deliver a
Letter of Credit in the form required under the Indenture. The Borrower
requested the Lender to issue a letter of credit in satisfaction of this
requirement which the Lender did pursuant to the terms of that certain Letter of
Credit and Reimbursement Agreement dated as of April 1, 1996 between the Lender
and the Borrower (the "Reimbursement Agreement"). The Reimbursement Agreement
contains a number of terms and conditions relevant, among other items, to the
operations of the Borrower.
The Borrower has notified the Lender that the Borrower contemplates
entering into the Merger (as defined herein). The Merger would violate various
conditions of the Reimbursement Agreement, and the Borrower has requested the
Lender to consent to the terms thereof. The Lender is willing to do so in
accordance with the terms hereof.
NOW THEREFORE, in consideration of the foregoing recitals and other good
and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. The provisions of Sections 2 and 3 hereof will become the agreements of
the parties hereto at the Effective Time (as defined in Section 4 hereof). In
the event the Effective Time does not occur, then the provisions of Sections 2
and 3 will not become effective or binding upon the parties hereto.
2. (a) Section 3.4(a) of the Reimbursement Agreement shall be amended to
provide in its entirety as follows:
<PAGE> 2
"The Borrower shall pay to the Bank a commission at the rate of three
tenths of one percent per annum on the undrawn amount available (or which would
be available but for any outstanding Tender Advances) to be drawn under the
Letter of Credit (computed on the date that such commission is payable) from and
including April 30, 1998 until the Expiration Date. The first payment is due on
April 30, 1998, and succeeding payments are due and payable on the last day of
each July, October, January and April thereafter. Such fees represent payment in
advance for the next succeeding quarter. All such fees shall be fully earned on
the date when due."
(b) Sections 5.12 and 6.1 of the Reimbursement Agreement shall be deemed
amended by deleting the headings and the text thereof, and there shall be
inserted immediately after the Section numbers in the Reimbursement Agreement
the words "This Section Intentionally Left Blank."
3. The Lender agrees that the Merger and the granting of the Second
Mortgage (as defined herein) does not constitute an Event of Default under the
Reimbursement Agreement, including in particular Sections 6.2, 6.3 and 6.11
thereof. This waiver is expressly limited to the events described in the
preceding sentence and is not intended to be an amendment of the Reimbursement
Agreement or evidence of a course of conduct upon which the Borrower may rely or
assert reliance in its future actions.
4. The Effective Time shall be deemed to have occurred upon the occurrence
of the following, as evidenced by the Lender's instructions to the Borrower's
counsel to release this Amendment form escrow:
(a) the Borrower shall have paid to the Lender a Transaction Fee in the
amount of $5,000.00;
(b) the Borrower shall have paid the Lender's fees and expenses of
Lender's counsel relating to the review of the actions described in the first
sentence of Section 3 hereof, the preparation and negotiation of this Amendment,
and the preparation of the Bond Counsel Opinion being delivered by such counsel
regarding these matters;
(c) the Borrower shall have complied with the conditions set forth in
Section 7.12 of the Loan Agreement; and
(d) the Borrower shall have caused to be delivered to the Lender a letter
of credit (the "Security Letter of Credit") in a form and amount and issued by
an institution acceptable to the Lender in its sole discretion. The Security
Letter of Credit will provide a source for guaranteeing payment of amounts due
by the Borrower under the Reimbursement Agreement. The Borrower
-2-
<PAGE> 3
acknowledges that the provision for the Security Letter of Credit and its
continued maintenance are the reasons Lender has entered into this Amendment and
granted the waivers set forth herein. Consequently, the Borrower agrees that it
will cause the Security Letter of Credit hereof to be continuously in effect in
favor of the Lender. The termination of the Security Letter of Credit prior to
the termination of the Letter of Credit provided under the Reimbursement
Agreement will constitute an Event of Default under the Reimbursement Agreement.
Notwithstanding the foregoing, the Borrower may request that the Lender accept a
replacement for the Security Letter of Credit, provided, however, that the
Lender may reject such request in Lender's sole discretion.
5. Reaffirmation and No Default. Borrower hereby reaffirms that the
representations and warranties set forth in the Reimbursement Agreements are
true and correct as of the date hereof, and that there exists no Event of
Default under the Reimbursement Agreement nor any event which, with the giving
of notice or passage of time or both, would constitute an Event of Default.
6. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Florida.
7. Counterparts. This instrument may be executed in counterparts.
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be
executed by its duly authorized representatives as of the date and year first
above written.
FIRST UNION NATIONAL BANK,
/s/ Bruce Roland
-----------------------------------------
By: Bruce Roland
Its: Senior Vice President
PALM BEACH BEDDING COMPANY
/s/ Charles Schweitzer
-----------------------------------------
By: Charles Schweitzer
Its: Chairman & CEO
-3-
<PAGE> 1
EXHIBIT 10.27
LANDLORD: N.H.D. DEVELOPMENTS LIMITED
TENANT: STAR BEDDING PRODUCTS (1986) LTD.
INDEMNIFIER: N/A
* See Schedule "D" for SPECIAL PROVISIONS
INDEX
PART 1 - DEMISE AND INTERPRETATION
1.2 Demise
1.2 Schedules
1.3 Basic Principles
1.4 Interpretation
PART 2 - PREMISES
2.1 Zoning
PART 3 - NET RENT
3.1 Net Rent
3.2 Tenant to Pay Rent Tenant's Covenants
3.3 Allocations
3.4 Deposits
PART 4 - TENANT'S COVENANT TO PAY OPERATING COSTS, TAXES AND UTILITIES
4.1.1 Business Taxes
4.1.2 Realty Taxes
4.1.3 Sales Taxes
4.1.4 Water Rates
4.1.5 Utilities
4.1.6 Management Fee
PART 5 - TENANT'S OTHER COVENANTS
5.1.1 Rules
5.1.2 Use of Premises
5.1.3 Damage
5.1.4 Nuisance
5.1.5 Exhibiting Premises
5.1.6 Overholding
5.1.7 Heat
5.1.8 Invoices and Receipts
5.1.9 Compliance with Laws
PART 6 - TRANSFERS
6.1.1 Consent Required
6.1.2 Conditions
6.1.3 No Release
6.1.4 Processing Fee
PART 7 - LANDLORD'S COVENANTS
7.1.1 Quiet Enjoyment
7.1.2 Taxes
PART 8 - INSURANCE
8.1 Landlord's Insurance
8.2 Tenant's Insurance
8.3 Increase in Insurance Premiums
8.4 Cancellation of Insurance
8.5 Mutual Release
<PAGE> 2
LANDLORD: N.H.D. DEVELOPMENTS LIMITED
TENANT: STAR BEDDING PRODUCTS (1986) LTD.
INDEMNIFIER: N/A
* See Schedule "D" for SPECIAL PROVISIONS
8.6 Mutual Indemnity
PART 9 - REPAIRS AND MAINTENANCE
9.1 Landlord's Repairs
9.2 Tenant's Repairs
9.3 Repair Where the Tenant is at Fault
9.4 Tenant Not to Overload Facilities
9.5 Entry by the Landlord
PART 10 - DAMAGE AND DESTRUCTION
10.1 Destruction of Premises
PART 11 - TENANT'S ALTERATIONS
11.1 Alterations to Premises
11.2 Removal of Fixtures
11.3 Surrender of Premises
11.4 Signs
PART 12 - DEFAULTS
12.1 Landlord May Perform
12.2 Default
12.3 Re-Entry
12.4 Remedies Generally
12.5 Distress
12.6 Default by Landlord
12.7 Effect of Termination
12.6 Accord and Satisfaction
PART 13 - LANDLORD'S TITLE
13.1 Condemnation
13.2 Expropriation
13.3 Assignment of Landlord's Interest
13.4 Priority of Lease
13.5 Liens
13.6 Registration
PART 14 - GENERAL
14.1 Non-Waiver
14.2 Force Majeure
14.3 Entire Agreement
14.4 Public Policies
14.5 Planning Act
14.6 Notice
14.7 Severability
14.8 Counterparts
14.9 Certificates
14.10 Amendments
14.11 No offer
14.12 Joint and Several
14.13 Enurement
14.14 Authorization
14.15 Construction
PART 15 - INDEMNITY
15.1
-2-
<PAGE> 3
LANDLORD: N.H.D. DEVELOPMENTS LIMITED
TENANT: STAR BEDDING PRODUCTS (1986) LTD.
INDEMNIFIER: N/A
* See Schedule "D" for SPECIAL PROVISIONS
1. BUILDING
53 Courtland Avenue, Concord, Ontario, L4K 3T2
2. TERM
Five (5) years commencing on January 1, 1996 and ending on December
31, 2000.
3. SQUARE FOOTAGE OF THE BUILDING
53,660
4. USE
Manufacturing and distribution of bedding products plus ancillary
offices.
4.1 NET RENT
January 1, 1996 to December 31, 1997: $4.00
January 1, 1998 to December 31, 2000: $4.25
per square foot per annum.
Annual Net Rent based upon square footage in Item 3:
<TABLE>
<CAPTION>
MONTHLY INSTALLMENTS
--------------------
<S> <C>
Lease Years Jan.1/1996 through Dec.31/1997 : $214,720.00 $ 17,893.33
Lease Years Jan.1/1998 through Dec.31/2000 : $228,140.00 $ 19,011.66
</TABLE>
4.2 MAINTENANCE/INSURANCE FEE
<TABLE>
<CAPTION>
ANNUALLY MONTHLY
----------------------- ------------------
<S> <C> <C>
$.60 per square foot per annum. $32,208.00 $2,684
</TABLE>
-3-
<PAGE> 4
4.3 MAINTENANCE FEE ADJUSTMENT DATE
September 30, 1996
5. MANAGER AND MANAGER'S ADDRESS
MANAGER: The Sorbara Group
ADDRESS: 3700 Steeles Avenue
West Suite 800
Woodbridge, Ontario L4L 8M9
6. RENT DEPOSIT
$19,145.86
7. SECURITY DEPOSIT
$17,893.33
8. TENANT'S ADDRESS FOR SERVICE PRIOR TO COMMENCEMENT DATE
37 Bethridge Road, Etobicoke, Ontario, M9W 1MB
9. MONTHLY CHARGES FOR REGULAR ITEMS OF ADDITIONAL RENT FOR 1996
CALENDAR YEAR
TAXES: $4,697.00 (based upon one-twelfth of the estimated Taxes)
MAINTENANCE/INSURANCE FEE: $2,684.00
G.S.T. ELIGIBLE ON NET RENT, MAINTENANCE FEE, INSURANCE AND TAXES:
$1,769.20
SCHEDULES:
"A" - Plan
"B" - Definitions
"C" - Rules
"D" - Special Provisions
"E" - INTENTIONALLY DELETED
"E-I"- INTENTIONALLY DELETED
"F" - INTENTIONALLY DELETED
-4-
<PAGE> 5
(hereinafter called the "Landlord")
OF THE FIRST PART;
- - and -
STAR BEDDING PRODUCTS (1986) LTD.
(hereinafter called the "Tenant")
OF THE SECOND PART:
PART 1 - DEMISE AND INTERPRETATION
In consideration of the rents, covenants and agreements which the Tenant has
agreed to pay, observe and perform, the Landlord hereby leases and demises the
Premises to the Tenant for the Term at the rent and upon the other terms and
conditions of this Lease.
The Key Item Index and all Schedules to this Lease form part of this Lease. In
the event of any conflict between the terms of this Lease and the terms of
Schedule "D", the terms of Schedule "D" shall apply to the extent of the
conflict.
This Lease is a business agreement in respect of the leasing of real property.
Each party agrees to act in good faith and in a commercially reasonable manner
in accordance with this Lease in enjoying and performing its rights and
obligations in this Lease and where the consent or approval by a party is
required regarding any matter, such approval shall not, unless otherwise
specified herein, be unreasonably withheld or delayed. It is agreed that this
Lease shall be an absolutely net lease for the Landlord and that Rent shall be
received by the Landlord free of any cost or obligation concerning the Premises
unless otherwise specified in this Lease. Each provision of this Lease
applicable to each party although not expressed as a covenant, shall be
construed to be a covenant of such party for all purposes and each party
covenants to perform its covenants hereunder.
This Lease shall be construed in accordance with the laws of the Province of
Ontario. The parties attorn to the exclusive jurisdiction of the courts of
Ontario to deal with all actions in respect of this Lease. The section headings
of this Lease and the Table of Contents, if any, have been inserted for
convenience of reference only and shall not be referred to in the interpretation
of this Lease. This Lease shall be read with all changes of gender and number
required by the context. Time shall be of the essence of this Lease and each of
the provisions hereof.
PART 2 - PREMISES
The Tenant has satisfied itself that the use permitted by this Lease conforms to
all existing Laws and agrees that its covenants and obligations herein contained
shall not be affected In the event it is or hereafter becomes disentitled, in
whole or in part, from carrying on the aforesaid use in or upon the Premises.
-5-
<PAGE> 6
PART 3 - NET RENT
From and after the Commencement Date, the Tenant shall pay to the Landlord an
annual net rent (hereinafter referred to as "Net Rent") calculated at the
rate(s) set forth in paragraph 5 of the Key Item Index.
Net Rent so calculated shall be payable in equal monthly instalments in advance
on the first day of each month. If the Commencement Date is not the first day of
a month, or the Term expires an a day which is not the last day of a month, the
first or last instalment of Net Rent as the case may be shall be payable on the
Commencement Date for the broken portion of the month at the beginning of the
Term, or the first day of the month for the broken period at the end of the
Term, calculated at a per them rate of 1/365th of the then annual Net Rent.
The Tenant covenants to pay Rent without any deduction, ????, set off except as
specified in this Lease, without any prior demand therefor. All Rent in arrears
shall bear interest at the Prescribed Interest Rate from the date an which the
same became due until the date of payment. All Rent shall be paid by the Tenant
to the Landlord at the address in Key Item 6 or to such other person or at such
other place in Canada as the Landlord or the Manager may designate in writing
from time to time.
The Landlord shall in determining, apportioning, attributing or allocating any
amount, cost or expense, do so an a reasonable basis.
Upon execution of this Lease, the Tenant shall deposit with the Landlord a
deposit in the amount set forth in Key Item 7 on account of the first Rent to be
due during the Term.
PART 4 - TENANT'S COVENANT TO PAY OPERATING COSTS,
TAXES AND UTILITIES
4.1 The Tenant shall pay:
4.1.1 on a timely basis to the appropriate municipality all
Business Taxes properly owing in respect of each and every
business conducted at, in, upon, through or from the
Premises during the Term by the Tenant or any other person;
4.1.2 to the Landlord all Realty Taxes imposed or assessed
against the Premises or any part thereof, or against the
Landlord on account of the Premises, their use or
occupation.
Prior to the commencement of each calendar year during the
Term, the Landlord will estimate the Realty Taxes for the
next calendar year attributable to the Premises and the
Tenant will pay one-ninth of the estimated amount in nine
consecutive, monthly instalments, payable on the first day
of each of the first nine months of the ensuing calendar
year. Notwithstanding the foregoing, It is hereby
stipulated that:
-6-
<PAGE> 7
(a) if this Lease is not a renewal lease and the Term
commences on a day other than January 1, the
Tenant shall pay, for the period of the Term
commencing on the Commencement Date and ending
upon the last day of December of the year in
which the Term has commenced, one-twelfth of the
estimated amount of the Realty Taxes (prorated to
reflect the portion of the calendar year that the
Tenant is to be in occupation of the Premises) in
equal monthly installments on the first day of
each month during such period; and
(b) if on any payment date the Landlord has not
received from the Tenant sufficient tax
instalments to pay the actual amount of the
Realty Taxes attributable to the Premises then
owing, the Tenant shall forthwith, upon demand,
pay to the Landlord the amount of the deficiency.
Where Realty Taxes are estimated by the Landlord all
necessary adjustments will be made when the final tax bills
for the year in question have been received. Where Realty
Taxes include local improvement taxes, assessments, levies
or charges, the Tenant shall only be required to make the
minimum payments payable during the Term;
4.1.3 any Sales Taxes upon demand. The Landlord shall, upon the
request and at the cost of the Tenant, prepare and execute
such forms as may be necessary to establish the amount that
the Tenant has paid to the Landlord under this section;
4.1.4 directly to the appropriate authorities when due all water
rates that may be levied, rated, charged or assessed
against the Premises;
4.1.5 directly to the appropriate authorities when due all
charges for utilities used upon or in respect of the
Premises and for fittings, machines, apparatus, meters or
other things leased In respect thereof and for all work or
services performed by any person In connection with such
Utilities or equipment; and
4.1.6 pay to the Landlord, on a monthly basis, the Landlord's
cost Of maintaining the insurance provided for in Section
6.1 hereof and managing the Building and conducting
exterior maintenance to the Premises including, without
limitation, the cost of painting every three years, snow
removal, landscaping, fencing, exterior maintenance to the
Premises including, without limitation, the cost of
painting every three years, snow removal, landscaping,
fencing, exterior lighting, non-structural roof repairs,
paving repairs and any work required to be carried out by
any duly constituted government authority not required as a
result of the Tenant's use and occupancy of the Premises.
The Tenant agrees that it shall pay to the Landlord, on a
monthly basis on the first day of the month, a
maintenance/management fee at the rate set out in paragraph
5.2 of the Key Item Index in respect of such costs;
-7-
<PAGE> 8
PART 5 - TENANT'S OTHER COVENANTS
5.1 The Tenant covenants with the Landlord that it shall:
5.1.1 observe, and ensure that all of its Invitees observe, the
Rules;
5.1.2 Use the Premises only for the purpose set out in paragraph
4 of the Key Item Index and for no other purpose. The
Tenant shall not use or permit or suffer the use of the
Premises or any part thereof to generate, manufacture,
refine, treat, transport, store, handle, dispose of,
transfer, produce or process any Hazardous Substances
except in strict compliance with all applicable federal,
provincial or municipal laws or regulations, including,
without limitation, environmental, land use, occupational,
health and safety laws, regulations, requirements or
permits, and only if the use of such Hazardous Substances
are incidental and necessary for the conduct of the
Tenant's business in compliance with the use permitted in
this section and do not form a main activity of the
Tenant's business. Without limiting the generality of the
foregoing, the Tenant shall not use the Premises as a waste
disposal site or accept waste from outside of the Premises
for transfer, temporary storage or any other reason
whatsoever. The Tenant shall indemnify and save harmless
the Landlord from any liability arising from the existence
of Hazardous Substances brought in, or upon, the Premises
after the Commencement Date by the Tenant or its Invitees;
5.1.3 not do or allow any act of waste, damage or injury to the
Premises or any fixtures, improvements, alterations,
additions or equipment in or upon the Premises and that the
Tenant shall not bring into the Premises any item that by
reason of its weight, size or operation might damage any
part of the Premises;
5.1.4 not do anything on the Premises that may be dangerous,
offensive or may be a nuisance to the Landlord. The use
permitted by this Lease shall not constitute a nuisance
provided the Tenant complies with all Laws and the rules
and regulations of all utility authorities in force from
time to time in respect of the environment, the Tenant's
business and operations, the condition, equipment,
maintenance, use, environment or occupation of the Premises
and the Tenant hereby covenants to comply with all such
Laws;
5.1.5 permit the Landlord or its agents or servants to enter the
Premises from time to time during the last six (6) months
of the Term at reasonable hour to exhibit the Premises to
prospective tenants;
5.1.6 if it continues to occupy the Premises beyond the date on
which the Term expires, with or without the consent of the
Landlord, and without a further written agreement, become a
monthly tenant and shall be subject to the same terms and
conditions of this Lease, except as to the length of the
Term, any inducements and the Net Rent. The Tenant agrees
to pay Net Rent in an amount double the amount
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payable under this Lease for the last month of the Term,
but the acceptance of Rent by the Landlord shall not in any
way renew this Lease as a yearly tenancy; and
5.1.7 heat the Premises in a reasonable manner and at its own
expense to a sufficient temperature at all times so that
the Premises and the installations therein shall not be
damaged by frost or cold;
5.1.8 deliver promptly to the Landlord If the Landlord makes a
written request therefor, copies of all invoices respecting
any item which it is the Tenant's obligation to pay
pursuant to this Lease and evidence of payment of same;
5.1.9 at its sole cost and expense, comply with all Laws which
relate to the Premises or to the making of any repairs,
replacements, alterations, additions, changes,
substitutions or improvements of or to the Premises caused
by the Tenant's use or occupancy of the Premises. The
Tenant agrees that all such repairs, replacements,
alterations, additions, changes, substitutions or
improvements shall forthwith become the property of the
Landlord and the Tenant will comply with all police, fire
and sanitary regulations imposed by any governmental,
provincial and municipal authorities or made by any
insurance underwriters and shall observe and obey all
governmental and municipal regulations and any other
requirements governing the conduct of any business in or
upon the Premises.
PART 6- TRANSFERS
6.1 [TEXT CUT OFF]
6.1.1 The Tenant acknowledges that the Landlord agreed to enter
into this Lease as a result of the business and personal
characteristics of the original Tenant and its
acceptability to the Landlord. It is agreed by the Tenant
that if a Transfer is proposed, the Landlord is entitled to
determine if the proposed transferee and its use is
reasonably acceptable to the Landlord and the Tenant
covenants that no Transfer affecting the Tenant, this
Lease, the Premises or the business of the Tenant on the
Premises shall be permitted or effective until the
Landlord's written consent to the Transfer is delivered to
the Tenant. The Tenant shall deliver to the Landlord its
written request for consent to a Transfer together with
copies of the proposed Transfer documents and shall provide
the Landlord with full particulars of the proposed Transfer
and the business and financial responsibility and standing
of the proposed transferee;
6.1.2 It shall be deemed reasonable for the Landlord to require
as a condition of its consent to a Transfer that the
proposed transferee agree with the Landlord to assume and
perform each of the covenants, obligations and agreements
of the Tenant in this Lease by executing a written
agreement to do so in the form required by the Landlord.
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The Landlord shall have a reasonable time to consider any
request for its approval of a Transfer, which in no event
shall be more than ten (10) days from the date upon which
the Landlord has received the last of the Tenant's request,
all of the information it requires to make its decision,
and the processing fee referred to in section 6.1.4;
6.1.3 No Transfer or other disposition by the Tenant of this
Lease or of any interest under this Lease, shall release
the Tenant from the performance of any of its covenants
under this Lease and the Tenant shall continue to be bound
by this Lease. If this Lease is disclaimed or terminated by
any trustee in bankruptcy of any transferee of this Lease
or repudiated by any transferee or its trustee pursuant to
the Bankruptcy and Insolvency Act (Canada) or any successor
legislation thereto, the original Tenant named in this
Lease, upon notice from the Landlord shall enter into a
lease with the Landlord upon the same terms and conditions
as contained herein except for the duration of the term
which shall commence on the date of such disclaimer or
termination and which shall expire on the date this Lease
would have expired if such disclaimer or termination had
not occurred. The liability of the Tenant in this Section
6.1.3 shall continue during the Term and during any period
during which It is extended pursuant to any right to extend
granted to the Tenant pursuant to this Lease;
6.1.4 Prior to the Landlord delivering any requested consent, the
Tenant shall pay to the Landlord by certified cheque a
processing fee of Five Hundred ($500.00) Dollars for each
request by the Tenant for consent to Transfer; and
6.1.5 Notwithstanding the foregoing, the Tenant shall have the
right to sublet up to 20% of the premises to one or more
subtenants without requirement for the Landlord's consent
or approval.
PART 7 - LANDLORD'S COVENANTS
7.1 The Landlord covenants with the Tenant as follows;
7.1.1 the Landlord covenants with the Tenant for quiet enjoyment,
and that the Landlord shall perform and observe all
covenants in this Lease required to be performed and
observed by it; and
7.1.2 that the Landlord will pay promptly when due all taxes,
rates, duties, levies and assessments properly charged
against the Premises or against the Landlord in respect of
the Premises subject to the Landlord's right to postpone,
contest or appeal payment of any such taxes, rates, duties,
levies or assessments. This provision shall in no way be
interpreted so as to relieve the Tenant from its
obligations to pay Realty Taxes or any other taxes
chargeable to the Tenant under this Lease.
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<PAGE> 11
PART 8 - INSURANCE
8.1 The Landlord shall take out and maintain with respect to the
Premises:
8.1.1 commercial general liability insurance;
8.1.2 building insurance for those risks covered by the standard
commercial building broad form which insurance shall only
cover items in the Premises to the extent same constitute part
of the Base ______________________________________ the
Landlord at its own expense pursuant to its obligations in
this Lease;
8.1.3 boiler and machinery insurance on the standard comprehensive
form on its equipment, including roof-top equipment and
electrical installations; and
8.1.4 loss of rental income insurance including amounts payable by
the Tenant to the Landlord as Additional Rent.
The Landlord, acting reasonably, shall determine all policy
terms including deductibles and shall be entitled to maintain
such other insurance as it considers advisable. Nothing
contained herein shall require the Landlord to maintain any
insurance with respect to any loss, injury or damage required
to be insured against by the Tenant or with respect to Tenant
Property. The proceeds of the Landlord's insurance shall
belong to the Landlord.
8.2 The Tenant shall, at all times, maintain:
8.2.1 commercial general liability insurance against personal and
bodily injury, including death, and property damage, with
respect to the Tenant's business and the Premises and the use
and occupancy thereof, on an occurrence basis to such limits
as the Landlord, acting reasonably, requires from time to
time, but in any event not less than Two Million
($2,000,000.00) Dollars for any one occurrence;
8.2.2 insurance with coverage for those risks covered by the
standard commercial property broad form fully covering the
Premises and Leasehold improvements (to the extent not covered
by the Landlord's insurance) and the Tenant Property. The
insurance required by this section 8.2 shall be for 100% of
the current replacement cost and shall be subject only to
deductibles and exclusions as the Landlord, acting reasonably,
may approve;
8.2.3 business interruption insurance including loss of profits in
an amount sufficient to prevent co-insurance penalties for
under-insurance; and
8.2.4 such other forms of insurance, including boiler and machinery
insurance (in respect of such equipment installed or brought
upon the Premises or the Lands appurtenant thereto by the
Tenant) and pollution liability insurance, as the Tenant
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or the Landlord or any mortgagee of the Premises, acting
reasonably, requires from time to time in form, in amounts and
for insurable risks against which a prudent tenant would
insure.
All insurance to be effected by the Tenant shall be in amounts
and upon terms which the Landlord shall from time to time,
acting reasonably, determine to be sufficient and shall be
with an insurer reasonably acceptable to the Landlord. Such
insurance shall provide that the Landlord is to be given at
least thirty (30) days' written notice of any cancellation or
change in the terms of coverage and shall include the Landlord
as an additional named insured and contain cross-liability and
severability of interest provisions, as applicable. The Tenant
shall, from time to time upon demand by the Landlord, provide
to the Landlord certificates or other proof reasonably
required by it to establish that the Tenant has insurance in
effect which complies with the terms of this section 8.2. If
the Tenant fails to insure, to file proof thereof, or if the
Landlord receives notice of any cancellation of the Tenant's
insurance, the Landlord may, but in no event shall it be
obligated to, effect such insurance. In the event that the
Landlord does effect any such insurance, the Tenant shall pay
to the Landlord on demand the amount of any premiums paid
therefor. If this Lease expires or is terminated at a time
when the Premises or Leasehold Improvements are damaged or
destroyed as a result of a peril required to be insured
against by the Tenant, the Tenant shall pay to the Landlord
free of any encumbrance, an amount equal to the proceeds of
insurance which it would have received if it had maintained
the insurance required hereunder with respect to such damage
or destruction.
8.3 The Tenant shall not, by act or omission, permit anything to
be done, in or upon the Premises which could impair or
invalidate any policy of insurance on the Premises or any part
thereof or which could result in the premium for any such
policy being increased. In the event of a breach of this
section 8.3 by the Tenant, it shall promptly after the receipt
of notice from the Landlord specifying the nature of Its
default, at the option of the Landlord, take such steps as are
necessary to remedy the breach, pay the full amount of any
such increase, or both. In the event of the non-renewal, or
any part thereof and take reasonable steps to remedy the
breach and recover the cost of doing so from the Tenant.
8.4 If the cause of any threatened cancellation of insurance
referred to in section B.3 cannot be remedied in time to
prevent the non-renewal or cancellation of insurance the
Landlord shall be entitled to terminate this Lease effective
upon written notice to the Tenant.
8.5.1 The Landlord and the Tenant each hereby remiss, release, and
forever discharge the other from all actions, manner of
actions, causes of actions, claims, suits and obligations
which it has, or may hereafter have against the other for or
concerning, or by reason of, or in any way connected with or
arising out of, or in consequence of, an occurrence in respect
of which the releasing party has
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<PAGE> 13
insurance. For greater certainty, it is hereby stipulated that
the within release shall apply whether or not the claim being
released was a result of the negligence of the released party
or of any person for whom it is responsible in law.
8.5.2 Notwithstanding anything else herein contained, the benefit of
the release contained in section 8.5.1 cannot be claimed by
any party which has not maintained the insurance that it is
required to maintain in force pursuant to this Lease, and the
release shall not, in any circumstance, apply to the excess of
any claim above and beyond the limits of insurance that the
party seeking the benefit of the release maintained in force.
For greater certainty, it is hereby stipulated that the
release referred to in section 8.5.1 shall apply to the
deductible paid by the releasing party pursuant to any policy
of insurance held pursuant to the terms of this Lease.
8.5.3 For the purposes of this section 8.5 only, the Landlord shall
include the Manager.
8.6 To the extent not released under section 8.5, each party shall
indemnify and save harmless the other from all claims,
demands, causes of action, liabilities, damages, losses or
expenses (hereinafter in this section 8.6 to be collectively
referred to as the "Liabilities") arising out of or occasioned
by:
8.6.1 any breach by an Indemnifying party of any covenant or
condition, or term of this Lease;
8.6.2 any lien on the Premises; and
8.6.3 an act, default or the negligence of an indemnifying party,
its officers, agents, servants, employees, contractors,
customers, invitees or licensees.
For greater certainty, it is agreed by each of the parties
that, notwithstanding anything else contained in this Lease,
the obligations contained in this section 8.6 shall survive
the expiration or earlier termination of this Lease.
PART 9 - REPAIRS AND MAINTENANCE
9.1 The Landlord shall at its sole cost and expense, subject to
section 9.2 and Part 10, at its sole cost and expense,
maintain and repair, or cause to be maintained and repaired,
as would a prudent owner of a reasonably similar industrial
premises, the structure of the Premises, including, without
limitation, the foundations, exterior wall assemblies
including weather walls, sub-floor, roof structure, bearing
walls, and structural columns and beams of the building on the
Premises, and at the cost of the Tenant to carry out the
maintenance in respect of the items referred to in Section
4.1.8 herein.
9.2 The Tenant shall, subject to Section 4.1.8 herein:
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(a) be responsible for all routine and periodic maintenance and
replacement necessary to keep the Premises and their
installations in a good state of repair, reasonable wear and
tear excerpted as would a prudent owner including, any work
required to be carried out by any duly constituted government
authority as a result of the use or occupancy of the Tenant;
(b) replace any glass broken In the Premises including outside
windows and doors on the perimeter of the Premises;
(c) keep in force at times during the Term servicing contracts
with licensed contractors for the service and maintenance of
heating units, air-conditioning units, furnaces (hereinafter
referred to [TEXT CUT OFF] thereof upon demand. In the event
that, during the Term any of the HVAC Units require
replacement, the Tenant shall install a new unit at its own
expense. Upon the expiration or other termination of this
Lease and prior to the return of the Security Deposit, the
Tenant shall deliver to the Landlord a certificate issued by a
licensed service contractor indicating that all HVAC Units are
in a good state of maintenance and repair and are suitable for
operation in accordance with all Laws and the rules and
regulations of all applicable utility authorities;
(d) notify the Landlord, in writing, of any defect or deficiency
in, malfunction of, or damage to, the Premises or any
equipment or Utilities therein or thereon immediately after
same comes to the attention of the Tenant;
9.3 Notwithstanding anything else contained herein, if the
Premises or any part therein or thereof, or any equipment,
machinery, facilities or improvements contained therein or
made thereto, or the roof structure or outside walls of the
Premises or any other structural portions thereof require
repair or replacement or become damaged or destroyed through
the particular use of the Premises by the Tenant, or the
negligence, carelessness or misuse of the Tenant or its
Invitees, or by such persons in any way stopping up or
damaging the HVAC Units, water pipes, drainage pipes or other
equipment or facilities or parts of the Premises, the cost of
repair shall be paid by the Tenant to the Landlord as
Additional Rent within five (5) days after presentation of an
account of such costs incurred by the Landlord.
9.4 The Tenant will not install any equipment which will exceed or
overload the capacity of any utility, electrical or mechanical
facilities in the Premises and the Tenant will not bring onto
the Premises or install any utility, electrical or mechanical
facility or service which the Landlord does not approve. The
Tenant agrees that if any equipment installed by the Tenant
requires additional utility, electrical or mechanical
facilities, the Landlord may, in its sole discretion, if they
are available, elect to install them at Tenant's expense and
in accordance with plans and specifications to be approved in
advance in writing by the Landlord.
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<PAGE> 15
9.5 The Landlord, its employees, contractors and agents shall be
entitled to enter the Premises for any purpose permitted or
contemplated by this Lease including, without limitation, to
effect any repair required or permitted to be made by the
Landlord, to effect any repair which is the responsibility of
the Tenant and which it fails to make when required to view
the state of repair and maintenance of the Premises or any
part thereof, to confirm that the Tenant is complying with its
obligations hereunder (including, without limitation, the
Tenant's obligations respecting Hazardous Substances and
compliance with environmental laws and regulations in respect
to which the Landlord shall be entitled to conduct an
environmental audit or any further testing required to ensure
such compliance) or to obtain information for plans, provided
that such entry is made upon reasonable notice to the Tenant.
In exercising its rights under this section 9.5, the Landlord
shall take reasonable efforts to minimize the interference
with the conduct of the Tenant's business.
9.6 The Landlord shall have the right to do such work in or upon
the Premises as may be necessary to preserve or protect the
Premises.
PART 10 - DAMAGE AND DESTRUCTION
10.1 (a) If the Premises are destroyed or damaged (including,
without limitation, smoke and water damage) as a result of
fire, the elements, accident or other casualty required to be
insured against by the Landlord pursuant to this Lease
pursuant to Section 8.1 herein or otherwise insured against by
the Landlord and not caused by the Tenant, and if as a result
of such occurrence:
(i) the Premises are rendered wholly or partially
untenantable, this Lease will continue in full force
and effect and the Landlord shall, subject to
subsections 10.1(b) and 10.2(a), commence diligently
to restore the Premises to the Base Standard
(hereinafter in this Part 10 to be referred to as the
"Landlord's Restoration Work"), Rent will abate
entirely or proportionately, as the case may be, in
proportion to the area of the Premises rendered
untenantable from the date of the destruction or
damage until the Landlord has completed the
Landlord's Restoration Work. Notwithstanding the
foregoing, Rent will not abate to the extent that the
Landlord's proceeds [TEXT CUT OFF]
(ii) the Premises are not rendered untenantable in whole
or in part, the Lease will continue in full force and
effect, the Rent will not abate and the Landlord
shall, subject to subsection 10.1(b), commence
diligently to carry out the Landlord's Restoration
Work.
(b) Notwithstanding subsection 10.1(a), if the Premises are
damaged or destroyed by any cause whatsoever, and if, in the
opinion of the Landlord's architect, acting reasonably, the
Premises cannot be rebuilt or made fit for the use provided
for in
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<PAGE> 16
this Lease within ninety (90) days of the damage or
destruction, the Landlord instead of carrying out the
Landlord's Restoration work may, at its option, elect to
terminate this Lease by notice in writing to the Tenant. In
the case of such election, the Term and the tenancy hereby
created will expire upon the thirtieth (30th) day after such
notice is given, without indemnity or penalty payable by, or
any other recourse against, the Landlord, and the Tenant
shall, within such thirty (30) day period, vacate and
surrender the Premises to the Landlord. Rent will be due and
payable until the date of termination in accordance with the
provisions of section 10.1 of this Lease.
(c) Upon the Tenant being notified in writing by the Landlord that
the Landlord's Restoration Work has been substantially
completed, the Rent shall re-commence and the Tenant will
forthwith complete the work necessary to restore the Premises
to the condition existing prior to the damage or destruction
(the "Tenant's Restoration Work") and all other work required
to fully restore the Premises for business.
(d) Notwithstanding the foregoing, the Landlord shall be entitled
to change the specifications of the Base Standard as same
existed prior to such damage or destruction and restore
according to plans, specifications, and working drawings other
than those used in the original construction of the Premises,
provided that the Premises, as re-built, will have reasonably
similar facilities and services to those in the Premises prior
to the damage or destruction having regard, however, to the
age of the Premises at such time.
(e) For the purposes of this Part 10, when used in respect of the
Premises or any part thereof, "untenantable" shall mean that
the Premises in question are not reasonably fit for the
Tenant's usual use of same.
PART 11 - TENANT'S ALTERATIONS
11.1 The Tenant may, at any time, and from time to time, at its
expense, paint or decorate the Premises and appurtenances, and
make such changes, alterations, additions and improvements as
will in the judgment of the Tenant better adapt the Premises
for the purpose of its business provided that;
(a) no structural changes, alterations, additions or
improvements shall be made without the written
consent of the Landlord;
(b) all changes, alterations, additions and improvements
shall comply with all Laws;
(c) the Tenant shall pay to the Landlord, upon demand,
the amount of any increase in Realty Taxes or the
cost of the insurance maintained by the
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Landlord over the Premises, to the extent that such
increases are directly and solely attributable to an
action by the Tenant under this paragraph;
(d) nothing herein shall entitle the Tenant to make any
changes to, or installations upon, the roof of the
Premises;
The Landlord shall be entitled, at any time and without notice
to the Tenant, to remove or to rectify, at the expense of the
Tenant, any item which was not erected in compliance with this
section.
11.2 Leasehold Improvements shall become the property of the
Landlord upon installation. The Tenant shall not remove any
Leasehold improvements whether at the expiration or sooner
termination of the Term, unless requested to do so by the
Landlord in which case the Tenant shall remove such Leasehold
Improvements as are designated by the Landlord (provided in no
event shall the Tenant be required to remove any Leasehold
Improvements which form part of the Base Standard) and, if so
requested by the Landlord, restore the Premises to the Base
standard not later than the expiration or sooner termination
of the Tenant's [TEXT CUT OFF] the Premises which may be
caused by installation or removal of the Tenant Property and
leaves the Premises in a neat and tidy condition which the
Tenant hereby covenants to do. The Tenant shall lose its right
(but not the obligation) to remove and retain all Tenant
Property, and all fixtures, furnishings or equipment affixed
in any manner to the Premises not removed on the expiry or
sooner termination of the Term.
11.3 The Tenant shall surrender to the Landlord at the end of the
Term (whether the Term ends by expiry or other termination)
the Premises and all Leasehold Improvements not permitted and
not required to be removed, all in good and substantial repair
and condition in accordance with this Lease. The Tenant shall,
prior to the end of the Term, at its cost, remove from the
Premises any Hazardous substances which are or have been
located, stored or incorporated in or on any part of the
Premises by the Tenant. This provision shall survive the
expiration or earlier termination of this Lease.
11.4 The Tenant shall have the right to erect signs on the Premises
denoting its tenancy therein, provided that such signs conform
with all municipal by-laws governing such signs, and the
Tenant has, prior to erecting the signs, received the written
approval of the Landlord as to the type and placement of the
signs to be erected.
PART 12 - DEFAULTS
12.1 If the Landlord provides to the Tenant written notice of a
default in its obligations contained in this Lease (other than
a default respecting the payment of Rent) and the Tenant does
not rectify such default within ten (10) days thereafter or
during such longer period as may be reasonably required in the
circumstances to cure
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<PAGE> 18
such default, the Landlord shall be entitled to remedy such
default and the coat to the Landlord of doing so (including an
administrative fee of 15% of such costs which shall be deemed
to constitute part of the Landlord's costs) together with
interest thereon at the Prescribed Interest Rate from the date
of default, shall be paid by the Tenant to the Landlord
forthwith upon demand therefor by the Landlord. Nothing in
this section 12.1 shall replace or abrogate the Landlord's
right to exercise any of its other rights hereunder which
rights are in addition to those contained in this section. In
the event of an emergency, the Landlord shall be entitled to
proceed to remedy a default without first providing notice to
the Tenant.
12.2 A default of this Lease shall have occurred if:
12.2.1 the tenant defaults in the payment of any Rent (including
without limitation, any regularly scheduled payment on account
of Additional Rent);
12.2.2 the Tenant defaults in the payment of any Additional Rent
which is not a regularly scheduled payment of Additional Rent,
and the default continues for a period of five (5) days
following notice from the Landlord;
12.2.3 the Tenant fails to cure a default under this Lease (other
than a default respecting the payment of Rent) within ten (10)
days or such longer period as may be reasonably required in
the circumstances to cure such default after receiving notice
from the Landlord to do so;
12.2.4 any property of the Tenant becomes subject to an execution in
an amount in excess of $10,000.00 which remains outstanding
for more than ten (10) days; a receiver of any property of the
Tenant is appointed; the Tenant or any guarantor or
indemnifier of this Lease makes an assignment for the benefit
of creditors or makes any assignment or has a receiving order
made against it under the Bankruptcy Act and Insolvency Act,
or becoming bankrupt or insolvent makes application for relief
under the provisions of any statute now or hereafter in force
concerning bankrupt or insolvent debtors, or any action
whatever, legislative or otherwise, is taken with a view to
the winding up, dissolution or liquidation of the Tenant or
any guarantor or indemnifier of this Lease;
12.2.5 any insurance policy of the Tenant or the Landlord is
cancelled or not renewed by an insurer by reason of the use or
occupation of the Premises;
12.2.6 the Tenant makes any bulk sale or removes any substantial part
of the Tenant Property from the Premises other than pursuant
to a permitted Transfer or by reason of same no longer being
required for the conduct of the Tenant's business provided
that other Tenant [TEXT CUT OFF]
12.2.7 re-entry is permitted under any other provision of this Lease
or in law.
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12.3 In the event of the occurrence of a default as defined in
section 12.2, the then current month's Rent together with the
Rent for the three (3) months next ensuing shall immediately
become due and payable, and at the option of the Landlord the
Term shall become forfeited and void, and the Landlord may
without notice or any form of legal process whatsoever
forthwith re-enter the Premises, anything contained in any
statute or law to the contrary notwithstanding, and may expel
all persons and remove all property from the Premises and such
property may be removed and sold or disposed of by the
Landlord as it deems advisable or may be stored in a public
warehouse or elsewhere at the cost and for the account of the
Tenant without the Landlord being considered guilty of
trespass or conversion or becoming liable for any loss or
damage which may be occasioned thereby, provided, however,
that such forfeiture shall be wholly without prejudice to the
right of the Landlord to recover arrears of Rent and damages
for any antecedent default by the Tenant of its covenants
under this Lease. Should the Landlord at any time terminate
this Lease by reason of any such event, then, in addition to
any other remedies it may have, it may recover from the Tenant
all damages it may incur as a result of such termination.
12.4 The rights of the Landlord in this Lease are cumulative and
not alternatives and reference to any particular right, remedy
or remedies of the Landlord in respect of any default by the
Tenant shall not preclude the Landlord from exercising any and
all of its other rights and remedies in respect thereof,
whether available at law, In equity, by statute, or expressly
provided for herein. No right or remedy shall be exclusive or
dependent upon any other right or remedy, and the Landlord may
from time to time exercise any one or more of such rights and
remedies generally or in combination. The Landlord shall have
the same rights and remedies for collection of Additional Rent
in arrears as it has for the collection of Net Rent whether
such rights exist by virtue of this Lease, statute, common law
or equity.
12.5 The Tenant waives the benefit of any law or statute limiting
the Landlord's right to distress and agrees that none of the
Tenant's goods, fixtures, chattels or other property shall be
exempt from distress for arrears of Rent.
12.6 The Tenant shall not have or exercise any right or remedy with
respect to a default by the Landlord unless it provides to the
Landlord written notice of the default and the Landlord fails
to cure the default within ten (10) days or such longer period
as may be reasonably required in the circumstances to cure
such default.
12.7 The right of the Landlord to recover arrears of Rent and the
right of each party to recover damages for an antecedent
default by the other shall not be affected by the expiry or
termination of this Lease whether by elapse of time or by the
exercise of any right of either the Landlord or the Tenant
pursuant to this Lease.
12.8 No payment by the Tenant or receipt by the Landlord of a
lesser amount than the Rent herein stipulated shall be deemed
to be other than on account of the earlier
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stipulated Rent, nor shall any endorsement or statement on any
cheque or any letter accompanying any cheque or payment of
Rent be deemed an accord and satisfaction, and the Landlord
may accept such cheque or payment without prejudice to the
Landlord's rights to recover the balance of such Rent or
pursue any other remedy provided in this Lease.
PART 13 - LANDLORD'S TITLE
13.1 If the Premises or any part thereof is condemned or declared
unfit for public use by any competent body, the Landlord shall
be entitled to terminate this Lease by notice in writing to
the Tenant.
13.2 The Landlord and the Tenant agree to co-operate with the other
in respect of any expropriation of all or any part of the
Premises, so that each may receive the maximum award in the
case of any expropriation to which they are respectively
entitled at law.
13.3 The Landlord, at any time and from time to time, may sell,
transfer, lease, assign or otherwise dispose of the whole or
any part of its interest in the Premises or any part thereof
or enter into a mortgage of the whole or any part of its
interest In the Premises and upon any party acquiring the
interest of the Landlord to the [TEXT CUT OFF] be released
from all of its [TEXT CUT OFF]
13.4 This Lease and all rights of the Tenant under this Lease are
subject and subordinate to all mortgages now or hereafter made
by the Landlord, except that the holder of any such mortgage
may subordinate and postpone such mortgage to this Lease at
any time by an instrument in writing to such effect registered
against the title to the Premises without any further consent
or agreement of the Tenant. The Tenant, if so requested, shall
attorn to such mortgagee when such mortgagee takes possession
of the Premises and to any purchaser of the Premises and shall
recognize such mortgagee or purchaser as the Landlord under
this Lease.
13.5 The Tenant shall, at its own expense, immediately discharge or
vacate all construction, mechanics' or other liens or
executions that may be filed during the Term against this
Lease, the Premises or any part thereof with respect to any
work or services performed or goods or material furnished at
the request of, for, or on behalf of, the Tenant.
13.6 The Tenant shall not register this Lease or any part thereof
but may register, with the prior approval of the Landlord, a
notice or caveat in respect thereof, which notice or caveat
shall disclose only the existence and Term of this Lease and
such other non-financial terms as the Landlord may approve.
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<PAGE> 21
PART 14 - GENERAL
14.1 A waiver by either party of any breach or non-compliance by the other
party under any provision of this Lease and a waiver by either party of
any term or condition of this Lease shall not be a waiver of any
continuing or subsequent breach or failure of any other provision, term
or condition, and any forbearance or failure to seek a remedy for any
breach or failure shall not be a waiver of any rights and remedies with
respect to such or any subsequent breach or failure.
14.2 In the event that either party shall, by reason of Force Majeure, be
unable to fulfil, or shall be delayed or restricted in the fulfilment
of, any obligation (other than the payment of any money) under any
provision of this Lease, such party shall, so long and to the extent
that any such impediment exists, be relieved from the fulfilment of
such obligation and shall be granted a reasonable period of time to
fulfil the obligation once the Force Majeure ceases to exist and the
other party shall not be entitled to compensation for any resulting
loss, damage, inconvenience, nuisance or discomfort.
14.3 This Lease contains the whole agreement between the parties with
respect to the subject matter of this Lease. There is no promise,
inducement, representation, warranty, collateral agreement or condition
affecting the Premises or any part thereof, the business to be
conducted by the Tenant, or this Lease other than as expressed in this
Lease. All representations and inducements made by either party or
their representatives which are relied upon by the other party are
contained herein and each party disclaims reliance on any other
representation or inducements. The parties agree that nothing contained
in this Lease shall release the Tenant from any of Its obligations
contained in any earlier lease of the Promises, and to the extent that
such obligations remain outstanding as of the commencement of the Term,
such obligations shall become obligations of the Tenant under this
Lease which it hereby covenants to perform.
14.4 The terms and conditions of this Lease including those related to the
provisions of Utilities shall be automatically amended from time to
time to the extent necessary for the Landlord to comply with an
directive, policy or request of a governmental or quasi-governmental
authority acting in the fields of energy, conservation, waste
management and disposal, security or other area of public interest.
14.5 Any notice provided for in this Lease shall be addressed to the
Landlord at the address at which Rent is to be paid pursuant to section
3.2 or in default of such address having been determined a 3700 Steeles
Avenue West, Suite 800, Woodbridge, Ontario, L4L 8ML and to the Tenant
or the Indemnifier at the Premises after the commencement Date and at
the address set forth in paragraph 9 of the Key Item Index prior to
such date. Notices shall be in writing and signed by the party giving
the notice and shall be effectively give by registered mail or by
delivery to the said address. Any written notice so given shall be
deemed to
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have been given three (3) postal delivery days after the day it was so
mailed by registered mail or upon the day it was so delivered. Any
party may, from time to time by notice to the other party [TEXT CUT
OFF]
14.6 To the extent that any provision of this Lease or the application
thereof to any person or circumstance is held to be invalid or
unenforceable by a court of competent jurisdiction, the remainder of
this Lease or the application of such provision to persons or
circumstances other than those to which it is held invalid or
unenforceable shall not be affected thereby and each provision of this
Lease shall be separately valid and enforceable to the fullest extent
permitted by law.
14.7 The Tenant hereby expressly waives the benefits of Section 35 of the
Landlord and Tenant Act and any amendments thereto and of any present
or future act of the Legislature of the Province of Ontario permitting
the Tenant to claim a Set-Off against the Rent to be paid hereunder for
any cause whatsoever.
14.8 Each party at any time and from time to time within ten (10) days after
notice from the other shall execute and deliver to the other a written
statement addressed to such persons as the party requesting the
certificate may require, certifying that this Lease is unmodified and
in full force and effect (or, if modified, stating the modifications
and that the same is in full force and effect as modified), the amount
of the Rent then being paid under this Lease, the dates to which the
same, and the other sums provided in this Lease to be paid by the
Tenant, have been paid, the Commencement Date and duration of the Term
and stating whether or not there is any existing default of which it
has notice, and the particulars and amount of insurance policies on the
Premises.
14.9 Each party agrees that the following certificates shall, in the absence
of proof by the Tenant of a material error therein, be conclusive and
binding in respect of any question of fact or opinion with respect to
the following matters:
14.9.1 a certificate procured by the Landlord from an architect,
professional engineer, land surveyor or other qualified
individual as to: any question of fact concerning the
completion of any construction or other work, either by the
Landlord or the Tenant; the extent to which the completion of
any work or obligation has been delayed by Force Majeure; the
cause of any destruction or damage and the extent and duration
for which the Premises or any part thereof will be incapable
of being used for its intended purposes by reason of any
destruction or damage; and
14.9.2 a certificate procured by the Landlord from a licensed public
accountant including, without limitation, the Landlord's
auditor, respecting any question of fact or opinion concerning
the computation, determination or allocation of Additional
Rent or the proper amount of any payment to the Landlord or
the Tenant under this Lease.
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<PAGE> 23
Any certificate procured by the Landlord shall be prepared
using generally accepted practices and procedures appropriate
to such certificate.
14.10 This Lease may not be amended or altered except by an
instrument in writing signed by the Landlord and the Tenant
and such alteration shall be binding upon the Indemnifier
whether or not it is executed by the Indemnifier.
14.11 The submission by the Landlord to the Tenant of this Lease
shall have no binding force or effect, shall not constitute an
option for leasing the Premises, or confer any rights or
impose any obligations upon either party until the execution
and delivery of this Lease by the Tenant and the Landlord.
14.12 If two or more persons comprise the Tenant, the liability of
each is joint and several. If the Tenant is a partnership or
other business association, the members of which are subject
to personal liability, the liability of each member is joint
and several.
14.13 This Lease shall enure to the benefit of and be binding upon
the parties hereto, and their permitted heirs, executors,
administrators, successors and assigns. No successor or assign
of the Tenant shall be entitled to claim any benefit or to
enforce this Lease unless the Transfer to it was made in full
compliance with the requirements of this Lease, or was
subsequently ratified by the Landlord in writing.
14.14 The Tenant covenants that it has all requisite power and
possesses all licenses, franchises, permits, consents,
approvals and other rights necessary to enable it to enter
into this Lease and carry out its obligations herein.
14.15 Notwithstanding any rule or maxim of construction to the
contrary, any ambiguity or uncertainty shall not be construed
against any [TEXT CUTS OFF AT BOTTOM OF PAGE]
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<PAGE> 24
IN WITNESS WHEREOF the parties hereto have executed this Lease.
SIGNED, SEALED AND DELIVERED ) Landlord:
in the presence of )
) N.H.D. DEVELOPMENTS LIMITED
)
)
) PER:
---------------------------------------------
) Name:
) Title:
)
) I/We have authority to bind the Corporation.
)
) Tenant:
)
) STAR BEDDING PRODUCTS (1986)
) LTD.
)
)
) PER:
---------------------------------------------
) Name:
) Title:
)
) PER:
---------------------------------------------
) Name:
) Title:
)
) I/We have authority to bind the Corporation.
)
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<PAGE> 25
SCHEDULE "B"
In this Lease the following expressions shall have the following meanings:
"ADDITIONAL RENT" shall mean all amounts payable by the Tenant to the Landlord
or to any other person pursuant to this Lease (other than Net Rent);
"BASE STANDARD" means the state of the Premises when first obtained by the
Tenant before the addition of any modifications by the Tenant or by the Landlord
in accordance with this Lease on behalf of the Tenant. Notwithstanding the
foregoing, for the purpose of Part 10 of this Lease "Base Standard" shall mean
in respect of the building premises which are finished with the standard
building base systems in respect of electricity and plumbing and which have
installed herein all perimeter windows, and bare concrete floors and walls, in
compliance with the then applicable building standards.
"BUSINESS TAXES" means business taxes or assessments or any other taxes,
assessments, rates and levies in respect of the existence of, or any use,
enjoyment, possession or occupancy of, or business carried on in or upon the
whole or any portion of the Premises imposed by any governmental authority
having jurisdiction, but does not include Realty Taxes.
"CHANGE IN CONTROL" means, in the case of any corporation or partnership, the
transfer, by sale, assignment, operation of law (transmission on death),
cancellation or redemption, or mortgage, trust, issuance from treasury,
cancellation or redemption, or otherwise, of any shares, voting rights or
interest, which will result in a change of the identity of the person
exercising, or who might exercise, effective control of such corporation or
partnership whether directly or indirectly, unless such change occurs as the
result of trading in shares listed upon a recognized stock exchange.
"COMMENCEMENT DATE" means the first day of the Term.
"DESIGN SPECIFICATIONS" has the meaning provided in the Fixturing Schedule, if
such a schedule is attached to this Lease.
"FIXTURING SCHEDULE" means the provisions set forth in Schedule "E" to this
Lease, if such a schedule is attached to this Lease.
"FORCE MAJEURE" means a fire, inclement weather, strike, lock-out or other
casualty or contingency beyond the reasonable control and not the fault of the
party thereby affected (including, without limitation, any delays caused by any
failure of a utility or other authority to approve any application of the
Landlord or take any action required by the Landlord to carry out its
obligations hereunder), where the effects of such casualty or contingency are
not avoidable by the exercise of reasonable effort or foresight by such party
(but does not include insolvency, lack of funds, or other financial casualty or
contingency).
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<PAGE> 26
"HAZARDOUS SUBSTANCES" means any contaminant, pollutant, dangerous substance,
potentially dangerous substance, noxious substance, toxic substance, hazardous
waste, flammable, explosive, radioactive material, urea formaldehyde foam
insulation, asbestos, PCBs and substances or any other materials now or
hereafter declared or defined to be hazardous, toxic, contaminants or pollutants
in or pursuant to any Laws.
"INVITEES" when used in respect of the Tenant shall include its officers,
directors, employees, customers, suppliers, clients, contractors, agents,
invitees and other persons on the Premises for the benefit of the Tenant or for
whom it is responsible at law.
"KEY ITEM INDEX" shall mean the index identified as such and attached to the
front of this Lease.
"LAWS" shall mean the laws, by-laws, ordinances, orders, rules and regulations
of all county, municipal, regional, provincial or federal government or
governmental authority having jurisdiction over the Tenant or the Premises in
force during the Term;
"LEASEHOLD IMPROVEMENTS" means all fixtures, improvements, installations,
alterations and additions from time to time made, constructed, erected or
installed In or to the Premises with the exception of the Tenant Property;
"MANAGER" means the party set forth in paragraph 6 of the Key Item Index being
the Landlord's authorized agent and manager for the Premises or such replacement
as the Landlord may appoint from time to time.
"MORTGAGE" includes a mortgage, pledge, charge, hypothec, privilege, encumbrance
or any other financing arrangement and "Mortgagee" means the holder of any of
the foregoing.
"PERSON" means any individual, corporation, partnership, trust, other legal
entity or other business association and includes a government or departmental
subdivision thereof.
"PREMISES" means the building described municipally in paragraph 1 of the Key
Item Index which contains approximately the number of square feet set out in
paragraph 3 of the Key Item Index.
"PRESCRIBED INTEREST RATE" means, with respect to any period, a rate of interest
which is five (5) percentage points per annum above the rate of Interest per
annum established by the Landlord's bank, as a reference rate of interest to
determine the interest rates such bank will charge for Canadian dollar
commercial loans to its customers in Canada and which such bank quotes or
publishes as its "prime rate".
"REALTY TAXES" means all real property, municipal, school or local improvement
taxes, assessments or charges or any other taxes, assessments or charges imposed
)on or in respect of any real property from time to time by any governmental
authority, including any costs incurred by the Landlord in determining or
verifying the propriety or reasonableness of or contesting the
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same in good faith, excluding Business Taxes and any income or profits taxes
upon the income of the Landlord, to the extent any such tax is not imposed in
lieu of any tax, assessment or charge upon or in respect of the Premises or upon
the Landlord in respect thereof. If any other taxes, assessments or charges are
imposed by any governmental or regulatory authority upon or in respect of all or
any portion of the Premises, the revenues therefrom or the Landlord, in
substitution for or in addition to any Realty Taxes from time to time imposed,
then any such other tax, assessment or charge shall be deemed to be a Realty
Tax.
"RENT" means Net Rent and Additional Rent.
"RULES" means the rules, procedures and requirements as amended and supplemented
from time to time (initially as set forth in Schedule "C" to this Lease),
governing the manner in which the Tenant shall operate and conduct its business.
"SALES TAXES" shall mean any goods and services, sales, business transfer,
multi-stage sales, use, consumption, value-added or other similar taxes imposed
by the ) government of Canada, or by any provincial or local government, upon
the Landlord or the Tenant on or in respect of this Lease, the payments made by
the Tenant hereunder or the goods and services provided by the Landlord,
including but not limited to, the rental of the Premises and provision of
administrative services to the Tenant or to others.
"TENANT PROPERTY" means the trade fixtures, chattels, merchandise, personal
effects and signs of the Tenant in or upon the Premises.
"TERM" shall mean the period set forth in paragraph 2 of the Key Item Index and
any further period during which the Tenant is in possession of the Premises
pursuant to a validly exercised right to extend the Term granted pursuant to
this lease;
"TRANSFER" means any assignment, sublease, Change in Control, or parting with
possession, or any other transaction or occurrence (including an expropriation,
expropriation, amalgamation, receivership, seizure by execution or other legal
process or the granting by the Tenant of a pledge, Mortgage or other security
interest) which as or might have the effect of changing the identity of the
Tenant or the person controlling the Tenant, or, changing the identity of the
person having use, occupancy or possession of the whole or any part of the
Premises, whether such change is or might be immediate, deferred, conditional,
exclusive, non-exclusive, permanent or temporary.
"UTILITIES" means water, sewer, gas, fuel, electricity, telephone, waste
disposal and other utilities or services or any combination thereof.
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SCHEDULE "C"
RULES
1. The skylights and windows that reflect or admit light into passageways
or into any place in the Premises shall not be covered or obstructed by
the Tenants, and no awnings shall be put up without the prior written
consent of the Landlord.
2. If any sign, advertisement or notice shall be inscribed, painted or
affixed by the Tenant on or to any part of the Premises or the Premises
whatsoever, except with the written consent of the Landlord, then the
Landlord shall be at liberty to enter in or on the Premises or any part
thereof and pull down and take away and remove any such sign,
advertisement or notice, and the expense thereof shall be payable by
the Tenant.
3. The Tenant shall not bring in or take out, position, construct, install
or move any safe, business machine or other heavy office equipment
without first obtaining the consent in writing of the Landlord. In
giving such consent, the Landlord shall have the right to seek
appropriate professional advice at the Tenant's expense and to
prescribe, in its sole discretion the weight permitted and the position
thereof, and the use and design of planks, skids or platforms to
distribute the weight thereof. All damage done to the Premises by
moving or using any such heavy equipment or other office equipment or
furniture shall be repaired at the expense of the Tenant.
4. No public or private auction or other similar type of sale of any
goods, wares or merchandise Shall be conducted in or from the Premises
without the written permission of the Landlord.
5. The toilets, urinals, sinks and other water apparatus shall not be used
for any purposes other than those for which they were constructed, and
no sweepings, rubbish, rags, ashes or other substances shall be thrown
therein. Any damage resulting by misuse shall be borne by the Tenant.
6. No showcases or other articles shall be put in front of or affixed to
any part of the exterior of the Premises.
7. No space In the Premises shall be used for any immoral or illegal
purpose, lodging, sleeping, or the storage of personal effects or
articles other than those required for business purposes.
8. If the Tenant desires telephone or other connections, the Landlord will
direct the installers/electricians as to where and how the wires are to
be introduced, and without such directions no boring or cutting for
wires will be permitted. No pipes or wires or conduits will be
permitted which have not been ordered or authorized in writing by the
Landlord, and no outside radio or television aerials shall be allowed
on the Premises
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without authorization in writing by the Landlord. The Tenant shall not
mark, drill into, bore or cut or in any way damage the walls, ceilings
or floors of the Premises without the Landlord's prior written
approval. No broadloom or carpeting shall be affixed to the Premises by
means of a non-soluble adhesive or similar product.
9. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by the Tenant, nor shall any changes whatsoever be
made to existing locks or the mechanisms thereof except by the
Landlord, at its option. The Tenant shall not permit any duplicate keys
to be made. Additional keys as are reasonably required shall be
supplied by the Landlord when requested by the Tenant In writing and
such keys shall be paid for by the Tenant, and upon termination of the
Tenant's Lease, the Tenant shall surrender to the Landlord all keys to
the Premises and the Premises.
10. Nothing shall be placed on the outside of window Bills or projections
of the Premises.
11. The Tenant shall not permit any commercial cooking in the Premises
without the written consent of the Landlord.
12. All garbage and refuse shall be kept in the kind of containers
specified by the Landlord and shall not be burned in or about the
Premises.
13. The Landlord shall have the right to make Such other and further
reasonable rules as in its judgment may from time to time be helpful
for the safety, care, cleanliness and appearance of the Premises and
the Premises, and for the preservation of good order therein, and the
same shall be kept and observed by the Tenant and its Invitees.
14. The Tenant shall not Install, store, or otherwise place anything on the
roof of the Building without the written permission of the Landlord,
which [TEXT IS CUT OFF AT END OF PAGE]
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SPECIAL PROVISIONS
[PARAGRAPH NUMBERING NOT VISIBLE ON THIS PAGE BUT INFERRED FROM NUMBERING ON
FOLLOWING PAGES.]
1. Inconsistencies
In the event of any inconsistency between the terms of this Schedule "D" and the
terms of the Lease, the terms of this Schedule "D" shall apply to the extent of
the inconsistency.
2. Courtesy of Occupancy
It is agreed by the parties hereto that the Tenant shall, upon execution of this
Lease, be entitled to occupy the Building during the period from December 1,
1995 until the commencement date. During such period, the Tenant shall not be
required to pay the amounts which would otherwise have been payable by the
Tenant in respect of Net Rent, Operating Costs and Realty Taxes. However, the
Tenant will be required to pay for utilities during such period. The Tenant
shall comply with all of the other terms of this Lease which shall apply,
mutatis mutandis, to the Tenant's occupation of the Building.
3. Rent Free Period
Notwithstanding anything else contained in this Lease, during the period
commencing on January 1, 1996 and ending upon February 28, 1996 the Tenant shall
be relieved from its obligation to pay Net Rent provided that the Tenant
complies with all of its obligations contained in this Lease during such period
and the Lease is not repudiated by the Tenant pursuant to the Bankruptcy and
Insolvency Act (Canada) during such period or prior to its commencement.
4. Management Fee
Notwithstanding what is written in the Lease, the Landlord acknowledges that no
management fee shall be charged to the Tenant during the Lease term. Such fee
has been excluded from the maintenance charge listed on the Key Item Index.
5. Building Area
it is understood and agreed that the rental of the Building is based upon
approximately 53,680 square feet of net rentable area. Prior to the commencement
of the Term, the Landlord shall provide an architect's or a land surveyor's
certificate determining the exact net rentable area, and that any adjustments in
the actual area of the Building shall result in a corresponding adjustment in
rent payable. Calculation of net rental area shall be made in accordance with
the applicable standards of T.R.E.B..
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6. Signage
The Landlord will, at the Tenant's expense, add the Tenant's corporate name
(Serta Mattress Company or Serta with the official logo), or other additional
names, to all present and planned, internal and external directory boards and
panels used for displaying the Building's Tenant roster and unit numbers.
7. Structural Repairs
The Landlord shall be responsible for structural repairs to the Building
including roof, walls, and floors and its services to the Building not resulting
from the Tenant's negligence or default. The Landlord shall undertake any such
repairs promptly upon receipt of notice from the Tenant, in accordance with the
provisions of the Lease to be entered Into for the Premises.
8. Mechanical Installations
The Landlord shall, at its expense, ensure that the Premises and all mechanical,
heating, ventilating, air-conditioning (if applicable), plumbing (including
sprinklers) and the electrical equipment in the Leased Premises are in good
repair and working order as at the date of possession of the Premises. Provided
that the Tenant complies with its obligations to maintain the same, the Landlord
shall, at Its sole cost and expense, repair or replace any heat exchanger or
compressor in an H.V.A.C. Unit requiring repair or replacement during the first
year of the Term.
9. Option to Extend
9.1 The Tenant may extend this Lease for one period of five (5) years
(which period is called the commencing on the day following the date of
expiration of the initial term of this Lease, provided that the Tenant
shall only be entitled to extend this Lease in the event that it:
(a) has duly and regularly paid the Rent and has observed and
performed each and every one of the covenants and agreements
herein to be performed by the Tenant, on a timely basis, until
the time that the option is exercised and thereafter until the
Extension takes effect;
(b) is the original tenant under this Lease and is itself in
possession of the whole of the Premises;
(c) advises the Landlord in writing (the "Notice") that it wishes
to extend this Lease not more than 12 months and not less than
6 months prior to commencement of the Extension, failing which
this right of Extension shall be rendered null and void.
9.2 if the Tenant exercises its right to extend in accordance with the
foregoing, this Lease shall be extended upon the same terms and
conditions herein contained, save and except as follows:
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(a) the Tenant shall only be entitled to one Extension for the
period referred to above so that there will be no further
right to extend following the expiry of the right to extend
granted herein. For greater certainty, it is hereby stipulated
that if the Tenant exercises the within right of Extension in
accordance with this Lease, the Tenant shall be entitled to
lease the Premises for a total of five (5) years following the
expiration of the initial term of this Lease, unless this
Lease is sooner terminated;
(b) the Landlord will not be required to perform the Landlord's
Work, if any, and the Tenant will not be required to perform
the Tenant's Work, if any, and the Tenant will riot be
entitled to any leasehold improvement allowance, tenant
inducement or Rent free period;
(c) the Net Rent payable during the Extension shall be the current
fair market rental value of the Premises as of the date that
the Notice is given to the Landlord, provided that, in no
event shall the Net Rent during any year of the Extension be
less than the Net Rent which was payable by the Tenant during
the last year of the initial term. In the event that the Net
Rent which shall be applicable during the Extension has not
been mutually agreed upon by the Landlord and the Tenant, by
reason of the parties' inability to agree upon the current
fair market rental of the Premises within one month after the
Notice is received by the Landlord, the Tenant shall be
entitled to revoke the Notice by writing to the Landlord with
such one month period (in which case the Notice shall be
deemed to have never been sent), failing which the said fair
market rental shall be determined by arbitration by a single
arbitrator chosen by the Landlord and the Tenant, and if they
cannot agree upon the arbitrator within 5 days after a written
request for arbitration by either party to the other, either
party may apply to a judge for the appointment of an
arbitrator in accordance with the provisions of the
Arbitrations Act (Ontario). The provisions of the Arbitrations
Act shall govern the arbitration and the decision of the
arbitrator shall be final and binding upon the parties and
there shall be no appeal therefrom. The arbitrator shall be
Instructed to render its decision no later than 15 days prior
to the commencement of the Extension. All documents and
proceedings with respect to the arbitration are to be kept
confidential by each of the parties.
(d) the maintenance fee which shall apply during the Extension
shall increase by an amount equal to the amount determined by
multiplying the maintenance fee payable during the original
term of the Lease by the cumulative C.P.I. from the
commencement of the Term to the date of the commencement of
the Extension;
(e) the Landlord may require the Tenant to execute and deliver to
the Landlord prior to the commencement of the Extension, the
Landlord's then standard form of extension agreement.
9.3 The exercise of the within right of Extension is solely within the
control of the Tenant and nothing contained in this Lease, including,
without limitation, this Schedule, obligates or requires the Landlord
to remind the Tenant to exercise the within right of Extension.
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<PAGE> 33
9.4 "C.P.I." means (a) the Consumer Price Index (All items for Regional
cities, base year 1986=100) for the city Toronto published by
Statistics Canada (or by a successor or other governmental agency,
including a provincial agency), or (b) if the Consumer Price index is
no longer published, an index published in substitution for the
Consumer Price Index or any replacement index designated by the
Landlord. If a substitution is required, the Landlord will make the
necessary conversions. If the base year for the Consumer Price Index
(or the substituted or replacement index) is changed by Statistics
Canada (or by its successors or the [ILLEGIBLE]
10. Landlord's Work
The Landlord shall complete, at Its own cost, and in good and workmanlike manner
and in accordance with all federal, provincial, municipal and other laws,
by-laws, building codes, rules and regulations relating to the same, using first
class materials, on or before December 1, 1995, the following work on the Leased
Premises. Before commencement of Landlord's Work both Tenant and Landlord shall
meet at 53 Courtland Avenue to discuss the following work:
(a) Office Space
(i) All existing lighting (fluorescent and track lights)
shall remain;
(ii) Install window where indicated in Schedule "A".
(b) Warehouse Space
(i) Installation of 2 truck - level doors with levellers
and seals (consistent with existing doors) in
location to be agreed;
(ii) Remove block walls where indicated in Schedule "A"
and ensure floor is In good shape, repair, properly
sealed and consistent with the entire warehouse
floor;
(iii) Demolish and remove finished showroom as indicated in
Schedule"A" Demolished area shall be free and clear
of any obstructions and shall be consistent with
existing warehouse space. All walls shall be patched,
repaired and painted and all doors entering the
warehouse shall be in proper working order and in
good repair;
(iv) Clean and repair washroom facilities located on west
side of the Building (adjacent to truck-level
shipping doors).
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<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
Sleepmaster L.L.C. of our reports dated:
- - April 2, 1999 relating to the consolidated financial statements of
Sleepmaster L.L.C. and Subsidiary;
- - March 26, 1999 relating to the financial statements of Palm Beach Bedding
Company; and
- - March 26, 1999 relating to the financial statements of Herr Manufacturing
Company;
which appear in such Registration Statement. We also consent to the reference
to us under the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
New York, New York
September 2, 1999
<PAGE> 2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Registration Statement on Form S-4 of
Sleepmaster L.L.C. of our report dated March 19, 1999 (except as to note 11(b),
which is as of April 8, 1999) relating to the consolidated financial statements
of Star Bedding Products (1986) Limited, which appear in such Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
PricewaterhouseCoopers LLP
Chartered Accountants
North York, Ontario
June 29, 1999
