<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1999
REGISTRATION NO. 333-81987
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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.
TRADING FORMAT:
- - There is no public market for the old notes or the exchange notes.
- - The old notes and the exchange notes may be traded in The Portal Market or
directly with qualified buyers.
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 10.
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>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 10
Use of Proceeds............................................. 18
Capitalization.............................................. 19
Unaudited Pro Forma Consolidated Financial Data............. 20
Selected Historical Financial and Other Data................ 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 27
Business.................................................... 36
Management.................................................. 49
Security Ownership.......................................... 53
Relationships and Related Transactions...................... 55
Description of Indebtedness................................. 60
Description of the Notes.................................... 64
Exchange Offer.............................................. 112
United States Federal Income Tax Considerations............. 119
Plan of Distribution........................................ 120
Legal Matters............................................... 121
Experts..................................................... 121
Available Information....................................... 121
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
total debt, all of which must be senior debt,
that any of we and/or the guarantors may incur
on a consolidated basis 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
SENIOR SUBORDINATED NOTE OFFERING
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.
POTENTIAL ACQUISITION
On September 10, 1999, Sleepmaster entered into a nonbinding letter of
intent to acquire another mattress manufacturer.
While negotiations regarding the potential acquisition are continuing, we
cannot assure you that Sleepmaster will be able to complete the acquisition
because it is contingent upon:
- the satisfactory completion of Sleepmaster's and its advisor's legal,
business, environmental and accounting due diligence investigations of
this acquisition candidate;
- the negotiation and execution of a purchase agreement and other
transaction documents;
6
<PAGE> 11
- obtaining the financing, which is expected to be primarily debt
financing, necessary to complete the acquisition; and
- the receipt of third party approvals.
If consummated, the purchase price for the mattress manufacturer will be
approximately $58.4 million.
------------------------
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.
7
<PAGE> 12
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 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)
8
<PAGE> 13
(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.
9
<PAGE> 14
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.
10
<PAGE> 15
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.
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
11
<PAGE> 16
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. On September
10, 1999 we entered into a nonbinding letter of intent with respect to a
material acquisition of another mattress manufacturer.
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<PAGE> 17
Although this candidate and other potential acquisition candidates fit our
acquisition criteria, we may not be able to complete this acquisition or any
other 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
this acquisition or any future acquisitions at acceptable prices and terms.
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 this acquisition and any other 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 this acquisition or 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
for this acquisition or any future acquisition, 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
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<PAGE> 18
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.
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> 19
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 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 or upon the
occurrence of bankruptcy events. A change of control includes the
consummation of a public equity offering which results in a sale of more
than 50% of our equity.
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> 20
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> 21
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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<PAGE> 22
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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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> 24
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 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.
20
<PAGE> 25
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>
21
<PAGE> 26
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>
22
<PAGE> 27
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>
23
<PAGE> 28
<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).
24
<PAGE> 29
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
25
<PAGE> 30
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.
26
<PAGE> 31
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.
27
<PAGE> 32
RESULTS OF OPERATIONS
The following table sets forth 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 half of 1999 from $30.0
million in the first half of 1998. Cost of sales as a percentage of net sales
28
<PAGE> 33
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 contractual employment arrangements with Buddy Bubis and Howard
Bubis 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> 34
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, Palm Beach's
contractual employment arrangements with Buddy Bubis and Howard Bubis, which are
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> 35
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> 36
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> 37
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
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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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> 39
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 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> 40
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> 41
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> 43
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> 44
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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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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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> 51
renew. We own our other facilities. The following table sets forth 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........................ 40 Executive Vice President and Chief Financial
Officer and Advisor
Michael Reilly....................... 50 Senior Vice President of Sales and Marketing
Timothy Dupont....................... 51 Vice President of Manufacturing
Michael Bubis........................ 44 President of Palm Beach and Advisor
David Thomas......................... 49 Advisor
John Weber........................... 35 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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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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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> 57
SECURITY OWNERSHIP
The following table sets forth ownership 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> 58
(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> 59
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),
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(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.
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.
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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.
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, Charles
Schweitzer, James Koscica, Michael Reilly, Timothy DuPont, Michael Bubis,
Richard Tauber and Douglas Phillips entered into an amended and restated
securityholders agreement dated as of March 3, 1998. On February 26, 1999, John
Herr and Stuart Herr executed a joinder to the amended and restated
securityholders agreement. 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.
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SLEEPMASTER HOLDINGS L.L.C. REGISTRATION RIGHTS AGREEMENT
In 1998, Sleepmaster Holdings L.L.C., Sleep Investor, PMI, Charles
Schweitzer, James Koscica, Michael Reilly, Timothy DuPont, Michael Bubis,
Richard Tauber and Douglas Phillips entered into an amended and restated
registration rights agreement dated as of March 3, 1998. On February 26, 1999,
John Herr and Stuart Herr executed a joinder to the amended and restated
registration rights agreement. 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.
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.
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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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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 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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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 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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- 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 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
(1) payment, other than payments previously made pursuant to the provisions
described under "-- Defeasance or Covenant Defeasance of Indenture", or
(2) 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
(x) such default shall have been cured or waived or shall have ceased to
exist or
(y) 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
(1) payment, other than payments previously made pursuant to the provisions
described under "-- Defeasance or Covenant Defeasance of Indenture", or
(2) distribution of any assets of Sleepmaster of any kind or character
may be made by Sleepmaster on account of the principal of, premium, if any, or
interest on, the exchange notes. This restriction excludes distributions of
permitted equity interests of subordinated securities. 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.
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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 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
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. Distributions of permitted
equity interests or subordinated securities as well as payments previously made
pursuant to the provision described under the heading entitled "Defeasance or
Covenant Defeasance of Indenture" below are excluded from this restriction.
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.
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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.
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, except as provided below, the principal of,
premium, if any, and interest on any Indebtedness of Sleepmaster, whether
outstanding on the date of the indenture or thereafter created, incurred or
assumed, and whether at any time owing, actually or contingent. However, any
particular Indebtedness will not be considered Senior 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 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,
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(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
(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.
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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)
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
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(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
(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
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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
(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,
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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 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:
(x) Sleepmaster's Capital Stock,
(y) 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,
(z) 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, are collectively referred to as "Restricted Payments." The amount
of any Restricted Payment, if made other than in cash, shall be the Fair
Market Value of the assets proposed to be transferred. The board of
directors of Sleepmaster shall determine the Fair Market Value of the
assets and the board's 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
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(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 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
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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 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
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(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,
(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; provided, that any unused
amounts in any one calendar year may be 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
(1) 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
(2) 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;
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(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;
(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.
However, if a transaction described above 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
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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;
then the above restriction shall not apply.
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
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,
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(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
(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 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.
In calculating the amount of any liabilities pursuant to (x) above,
contingent liabilities, liabilities that are subordinated to or rank equally
with the exchange notes or any guarantee of the exchange notes and liabilities
that are incurred in connection with or in contemplation of the related Asset
Sale should be excluded.
(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
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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 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.
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(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
(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
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(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 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
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(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 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;
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(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.
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)
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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 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.
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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, no Default or Event of Default will
have occurred and be continuing; provided, that 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 is treated as
having been incurred at the time of such transaction;
(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 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;
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(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;
(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. In this
case, Sleepmaster, Sleepmaster Finance Corporation or any guarantor, as the case
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may be, would be discharged 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. However, Sleepmaster, Sleepmaster Finance
Corporation or a guarantor, as the case may be, will not be discharged from
obligations and covenants under the indenture and the exchange notes or its
guarantee, as the case may be, and the registration rights agreement if a
transaction 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. (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
(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
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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,
(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)
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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.
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
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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,
(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
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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 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;
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(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;
(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, including consents obtained
in connection with a tender offer or exchange offer for exchange notes, 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
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in aggregate principal amount of the exchange notes then outstanding. However,
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)
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;
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(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
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;
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(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,"
(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
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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), 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
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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.
"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,
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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 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.
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"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),
(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
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(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 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),
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(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,
(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.
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"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 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.
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"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;
(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
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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.
"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.
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"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.
"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
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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.
"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
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(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 (1) credited to its The
Depository Trust Company account at any time and (2) 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 setting forth
the name and address of the holder, the certificate number(s) of such
notes and the principal amount of notes tendered. The notice of
guaranteed delivery may be made by facsimile transmission, mail or hand
delivery. The notice of guaranteed delivery should also state that the
tender is being made and guarantee 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, or
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,
including any required signature guarantees, on the letter of
transmittal by which such notes were tendered 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> 121
(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
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<PAGE> 122
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.
118
<PAGE> 123
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 may be subject to special rules not discussed below. Holders who
may be subject to special rules not discussed below include insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United States.
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.
119
<PAGE> 124
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
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<PAGE> 125
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
121
<PAGE> 126
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.
122
<PAGE> 127
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> 128
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
Note 18, which is as of May 18, 1999
F-2
<PAGE> 129
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> 130
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> 131
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> 132
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> 133
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> 134
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> 135
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 tangible and
intangible net assets acquired, aggregating $4,472,000, has been recorded as
goodwill and is being amortized over 40 years.
F-9
<PAGE> 136
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.................................................... 4,472,000
Serta license agreement..................................... 23,647,110
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> 137
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> 138
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> 139
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> 140
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> 141
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> 142
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> 143
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
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.
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> 144
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> 145
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> 146
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> 147
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> 148
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> 149
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 is not included among the Guarantor
Subsidiaries and such subsidiary will not be obligated with respect to the
Notes. As a consequence, the claims of creditors of the Non-Guarantor Subsidiary
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> 150
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> 151
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> 152
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
(Income) loss from equity investees,
net of tax........................... (1,518,364) -- -- 1,518,364 --
----------- ----------- ---------- ------------ -----------
Income (loss) before
extraordinary items........... 940,721 1,287,164 231,200 (1,518,364) 940,721
Extraordinary items, net of income
taxes................................ (3,166,968) -- -- -- (3,166,968)
----------- ----------- ---------- ------------ -----------
Net (loss) income................ $(2,226,247) $ 1,287,164 $ 231,200 $ (1,518,364) $(2,226,247)
=========== =========== ========== ============ ===========
</TABLE>
F-26
<PAGE> 153
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
(Income) loss from equity investees, net
of tax................................ (517,444) -- 517,444 --
----------- ---------- ---------- -----------
Net income (loss).................. $ 846,956 $ 517,444 $ (517,444) $ 846,956
=========== ========== ========== ===========
</TABLE>
F-27
<PAGE> 154
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
(Income) loss from equity
investees, net of tax.... (2,925,466) -- -- 2,925,466 --
----------- ----------- ---------- ----------- -----------
Income (loss) before
extraordinary items... 2,315,941 2,694,266 231,200 (2,925,466) 2,315,941
Extraordinary items, net of
income taxes............. (3,166,968) -- -- -- (3,166,968)
----------- ----------- ---------- ----------- -----------
Net (loss) income........ $ (851,027) $ 2,694,266 $ 231,200 $(2,925,466) $ (851,027)
=========== =========== ========== =========== ===========
</TABLE>
F-28
<PAGE> 155
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
(Income) loss from equity investees,
net of tax........................... (817,042) -- 817,042 --
----------- ----------- --------- -----------
Net income (loss)................. $ 1,389,718 $ 817,042 $(817,042) $ 1,389,718
=========== =========== ========= ===========
</TABLE>
F-29
<PAGE> 156
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.............................. $ (851,027) $ 2,694,266 $ 231,200 $(2,925,466) $ (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................................. 6,899,148 (1,373) 154,186 (2,893,239) 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 activity in investment in subsidiaries..... (2,925,466) -- -- 2,925,466 --
------------ ----------- --------- ----------- ------------
Net cash (used in) provided by investing
activities................................. (46,592,836) (444,790) (7,870) 3,615,583 (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> 157
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......................... $ 1,389,718 $ 817,042 $(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.................... 3,021,085 280,838 (817,042) 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 activity in investment in
subsidiaries.................... (817,042) -- 817,042 --
----------- ----------- --------- -----------
Net cash used in investing
activities.................... (34,120,726) (63,607) 823,171 (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> 158
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> 159
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> 160
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> 161
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> 162
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> 163
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> 164
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> 165
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> 166
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> 167
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> 168
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> 169
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> 170
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> 171
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> 172
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> 173
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> 174
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> 175
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> 176
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> 177
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> 178
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> 179
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> 180
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> 181
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> 182
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> 183
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> 184
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> 185
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> 186
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> 187
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> 188
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$115,000,000
[SERTA LOGO]
SLEEPMASTER
11% SENIOR SUBORDINATED NOTES DUE 2009
-------------------------------------
PROSPECTUS
-------------------------------------
[ ], 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 189
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> 190
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> 191
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> 192
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> 193
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 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 24, 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. 2 to the Registration Statement on Form S-4 has been signed by the following
persons in the capacities indicated on September 23, 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> 194
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 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 24, 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. 2 to the Registration Statement on Form S-4 has been signed by the following
persons in the capacities indicated on September 23, 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> 195
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 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 24, 1999.
Palm Beach Bedding Company
By: *
------------------------------------
Name: Michael Bubis
Title: President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement on Form S-4 has been signed by the following
persons in the capacities indicated on September 23, 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> 196
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 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 24, 1999.
Herr Manufacturing Company
By: *
------------------------------------
Name: Stuart W. Herr
Title: President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement on Form S-4 has been signed by the following
persons in the capacities indicated on September 23, 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> 197
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 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 24, 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. 2 to the Registration Statement on Form S-4 has been signed by the following
persons in the capacities indicated on September 23, 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> 198
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> 199
<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> 200
<TABLE>
.2710 Lease Agreement by and between N.H.D. Developments Limited and Star Bedding Products
(1986) Ltd. dated August 15, 1995.*
<C> <S> <C>
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>
- ---------------
** Resubmitted herewith.
* Filed previously.
<PAGE> 1
EXHIBIT 10.11
EXECUTION COPY
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is dated as of November __, 1996, by
and among Sleepmaster Holdings L.L.C., a New Jersey limited liability company
(the "Company"), Sleepmaster L.L.C., a New Jersey limited liability company
("Sleepmaster"), James Koscica (the "Executive") and Sleep Investor L.L.C., a
Delaware limited liability company (the "Investor").
The Company, Sleepmaster and the Executive desire to enter
into an agreement regarding (i) the employment of the Executive as President and
Chief Executive Officer of Sleepmaster, and (ii) certain restrictions regarding
the Company's Class A Common Interests (the "Class A Common") acquired by the
Executive pursuant to the Recapitalization, Redemption and Repurchase Agreement
by and among the Executive, the Company and certain other parties thereto dated
as of October 31, 1996 (the "Recapitalization Agreement").
Certain provisions of this Agreement are intended for the
benefit of, and will be enforceable by, the Investor.
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. As used herein, the following terms shall have
the following meanings.
"Affiliate" means, as to any Person, any other Person which
directly or indirectly controls, or is under common control with, or is
controlled by, such Person. As used in this definition, "control" (including
with its correlative meanings, "controlled by" and "under common control with")
shall mean possession, directly or indirectly, of power to direct or cause the
direction of management or policies (whether through ownership of securities or
partnership or other ownership interests, by contract or otherwise).
"Board" means the Company's board of advisors.
"Business Day" means any day other than a Saturday or Sunday
or a day on which commercial banks are required or authorized to close in New
York, New York.
"Cause" means (i) a breach of the Executive's covenants under
this Agreement or any other agreements with the Company or its Subsidiaries and
such breach shall not have been cured within 30 days after written notice to the
Executive, (ii) the commission by the Executive of a felony, a crime involving
moral turpitude or other act causing material harm to the standing and
reputation of the Company or any of its Subsidiaries, or (iii) the Executive's
repeated wilful failure to comply with the reasonable and lawful written
directives of the Board.
"Common Interests" means the Class A Common and the Company's
Class B Common Interests, as adjusted for any unit split, unit dividend, or
other combination, exchange. conversion, recapitalization, merger, consolidation
or reorganization, or if such Common Interests are exchanged for different
interests or securities of the Company, such other interests or securities and
any other Common Interests of the Company hereinafter issued.
<PAGE> 2
"Disability" means the inability, due to illness, accident,
injury, physical or mental incapacity or other disability, of the Executive to
carry out effectively his duties and obligations to the Company or to
participate effectively and actively in the management of the Company or a
Subsidiary of the Company for a period of at least 90 consecutive days or for
shorter periods aggregating at least 120 days (whether or not consecutive)
during any twelve-month period, as determined in the reasonable judgment of the
Board.
"Executive Securities" means the Class A Common acquired by
the Executive and will include units of the Company's Common Interests issued
with respect to Executive Securities by way of a split, dividend, combination,
exchange, conversion, or other recapitalization, merger, consolidation or
reorganization. Executive Securities will cease to be Executive Securities when
transferred pursuant to a Qualified Public Offering or Sale of the Company.
Executive Securities will continue to be Executive Securities in the hands of
any holder other than the Executive, including all transferees of the Executive
(except for the Company and the Investor (or its designee)), and except as
otherwise provided herein, each such other holder of Executive Securities will
succeed to all rights and obligations attributable to the Executive as a holder
of Executive Securities hereunder.
"Fair Value" of each unit of Class A Common means the average
of the closing prices of the sales of the Company's membership interests on all
securities exchanges on which the membership interests may at the time be
listed, or, if there have been no sales on any such exchange on any day, the
average of the highest bid and lowest asked prices on all such exchanges at the
end of such day, or, if on any day the membership interests are not so listed,
the average of the representative bid and asked prices quoted on the Nasdaq
National Market System ("Nasdaq NMS") as of 4:00 P.M., New York time, or, if on
any day the membership interests are not quoted in the Nasdaq NMS, the average
of the highest bid and lowest asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau
Incorporated, or any similar successor organization, in each such case averaged
over a period of 21 days consisting of the day as of which the Fair Value is
being determined and the 20 consecutive business days prior to such day. If at
any time the Class A Common is not listed on any securities exchange or quoted
in the NMS or the over-the-counter market, the Fair Value of each unit of Class
A Common shall be the fair market value of such unit as determined by the Board
in its good faith judgment.
"GAAP" means U.S. generally accepted accounting principles, as
in effect from time to time and as adopted by the Company with the consent of
its independent public accountants, consistently applied.
"Good Reason Event" means (i) the failure of the Company or
Sleepmaster to make the payments described herein within 5 Business Days of the
applicable payment due date, (ii) the written request by the Board of Advisors
of either the Company or Sleepmaster that the Executive relocate his primary
residence or (iii) a written directive from the Board of Advisors of the Company
or Sleepmaster that results in a substantial reduction of the Executive's job
responsibilities.
"Original Cost" of the Vesting Executive Securities purchased
on the date hereof will be equal to $100.00 per unit.
-2-
<PAGE> 3
"Person" means an individual, a partnership, a corporation, an
association, a limited liability company, a joint stock company, a trust, a
joint venture, an unincorporated organization or a governmental entity or any
department, agency or political subdivision thereof.
"Preferred Interests" means the Company's Series A Preferred
Interests, as adjusted for any unit split, unit dividend or other combination,
exchange, conversion, recapitalization, merger, consolidation or reorganization,
or if the Series A Preferred Interests are hereafter changed into or exchanged
for different interests or securities of the Company, such other interests or
securities, and any other preferred interests of the Company hereinafter issued,
"Public Offering" means any sale of securities of the Company
in an underwritten public offering.
"Qualified Public Offering" means any sale, in an underwritten
public offering registered under the Securities Act, of equity securities of the
Company having an aggregate value of at least $20 million.
"Sale of the Company" means the sale of the Company, in a
single transaction or a series of related transactions, to a third party (which
is not an Affiliate of the Investor) pursuant to which such third party proposes
to acquire all or substantially all of the outstanding Common Interests (whether
by merger, consolidation, recapitalization, reorganization, purchase of the
outstanding Common Interests or otherwise) or all or substantially all of the
consolidated assets of the Company or Sleepmaster.
"Securities Act" means the Securities Act of 1933, as amended
from time to time.
"Securityholders Agreement" means the Securityholders
Agreement dated as of the date hereof by and among the Company, the Executive,
the Investor and certain other parties thereto.
"Subsidiary" means, with respect to any Person, any
corporation, partnership, limited liability company, association or other
business entity of which (i) if a corporation or a limited liability company, a
majority of the total voting power of securities entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
that Person or one or more of the other Subsidiaries of that Person or a
combination thereof, or (ii) if a partnership, association or other business
entity, a majority of the partnership or other similar ownership interest
thereof is at the time owned or controlled, directly or indirectly, by any
Person or one or more Subsidiaries of that Person or a combination thereof. For
purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a partnership, association or other business entity if
such Person or Persons shall be allocated a majority of partnership, association
or other business entity gains or losses or shall be or control the managing
director or general partner of such partnership, association or other business
entity.
"Termination Year" means that fiscal year of the Company
during which the Employment Period ends pursuant to the terms of Section 2(d)
hereof.
-3-
<PAGE> 4
"Vesting Executive Securities" means the 200 units of Class A
Common subject to vesting and any securities issued in connection therewith, as
adjusted for any unit split, unit dividend, or other combination, exchange,
recapitalization, merger, consolidation or reorganization. Vesting Executive
Securities will cease to be Vesting Executive Securities when transferred
pursuant to a Qualified Public Offering or Sale of the Company. Vesting
Executive Securities will continue to be Vesting Executive Securities in the
hands of any holder other than the Executive, including all transferees of the
Executive (except for the Company and the Investor (or its designees)), and
except as otherwise provided herein, each such other holder of Vesting Executive
Securities will succeed to all rights and obligations attributable to the
Executive as a holder of Executive Securities hereunder.
2. Employment.
(a) Employment. Sleepmaster agrees to employ the
Executive, and the Executive hereby accepts employment with Sleepmaster, upon
the terms and conditions set forth in this Agreement for the period beginning on
the date hereof and ending as provided in Section 2(d) (the "Employment
Period").
(b) Position and Duties.
(i) Commencing on the date hereof and continuing
during the Employment Period, the Executive shall serve as President and Chief
Executive Officer of Sleepmaster under the supervision and direction of the
Company's and Sleepmaster's respective hoards of advisors.
(ii) The Executive shall devote his best efforts
and his full business time and attention (except for permitted vacation periods
and reasonable periods of illness other than Disability) to the business and
affairs of the Company, Sleepmaster and their Subsidiaries. The Executive shall
perform his duties and responsibilities to the best of his abilities in a
diligent, trustworthy, businesslike and efficient manner.
(c) Base Salary and Benefits.
(i) Base Salary. During the Employment Period,
Executive's base salary shall be $200,000 per annum through fiscal year 1996 and
will increase as of January 1, 1997 to $210,000 per annum (the "Base Salary"),
which salary shall be paid by Sleepmaster in regular installments in accordance
with Sleepmaster's general payroll practices and shall be subject to customary
withholding.
(ii) Executive Bonus Plan. For each fiscal year
during the Employment Period, the Executive will be eligible to receive a bonus
based on the Company's achievement of the Target EBITDA for such fiscal year as
set forth on the Company's EBITDA Plan attached as Schedule
-4-
<PAGE> 5
A hereto (the "EBITDA Plan"). In the event the Company or Sleepmaster
consummates an acquisition of another Person prior to December 31, 2001, the
EBITDA Plan will be adjusted in good faith by senior management and approved by
the Board, and such adjusted and approved plan shall, once approved, be deemed
the EBITDA Plan for all purposes hereunder.
(A) Once the Board has determined
(which determination shall be made within thirty (30) days from the issuance of
the Company's audited financial statements) the percentage of EBITDA achieved
for such fiscal year as compared to the Target EBITDA for such fiscal year (the
"Achieved EBITDA Percentage"), so long as the Achieved EBITDA Percentage for
such fiscal year equals or exceeds 80%, the Executive shall be entitled to
receive a bonus payment in an amount equal to the product of (x) the Bonus
Multiple (as set forth opposite the Achieved EBITDA Percentage below), (y) 22%
and (z) the Executive's Base Salary for such fiscal year. The bonus payment
shall be made within five (5) days of the Board's determination.
<TABLE>
<CAPTION>
Achieved EBITDA Percentage Bonus Multiple
<S> <C>
80% 50%
100% 100%
110% 125%
120% 150%
</TABLE>
(B) Each Bonus Multiple set forth above
shall increase linearly as the Achieved EBITDA Percentage increases; therefore,
so long as the Achieved EBITDA Percentage equals or exceeds 80%, in the event
the actual Achieved EBITDA Percentage falls between any of the target Achieved
EBITDA Percentages set forth above, the applicable Bonus Multiple shall be
adjusted accordingly, provided, that in no event shall the Bonus Multiple exceed
150%. For example, (1) in the event the actual Achieved EBITDA Percentage is
90%, the Bonus Multiple shall be 75% or (2) in the event the actual Achieved
EBITDA Percentage is 115%, the Bonus Multiple shall be 137.5%.
(C) With respect to fiscal year 1996,
the Executive shall be entitled to receive a bonus as follows: (1) the Executive
will be entitled to receive a portion of the bonus earned by the Executive under
that certain Employment Agreement dated January 2, 1995 between Sleepmaster and
the Executive (the "Previous Agreement") determined based on the portion of
fiscal year 1996 prior to the date hereof and (2) the Executive will be entitled
to receive a portion of the bonus earned by the Executive under this Agreement
determined based on the portion of the fiscal year after the date hereof.
(iii) Benefits. In addition to the Base Salary and
any bonuses payable to the Executive pursuant to Section 2(c)(i), the Executive
shall be entitled, during the Employment Period, to all benefits set forth on
Schedule B hereto (the "Benefits").
(iv) Expenses. The Company shall reimburse the
Executive for all reasonable expenses incurred by him in the course of
performing his duties under this Agreement which are consistent with the
Company's and its Subsidiaries' policies in effect from time to time with
respect to travel, entertainment and other business expenses, subject to the
requirements of the Company and its Subsidiaries with respect to reporting and
documentation of such expenses.
-5-
<PAGE> 6
(d) Term. The Employment Period shall end on November 1,
2001, subject to earlier termination (x) by reason of the Executive's death or
Disability, (y) by resolution of the Board, with or without Cause or (z) upon
the Executive's voluntary resignation with or without a Good Reason Event.
(i) If the Employment Period is terminated on or
before November 1, 2001:
(A) pursuant to Section 2(d)(y) above,
by the Company other than for Cause, the Executive shall be entitled to receive
(1) the stated Base Salary through the period ending on the earlier of November
1, 2001 and the later of (x) January 2, 2000 and (y) the second anniversary of
the date of termination, and (2) a portion of the bonus payment earned by the
Executive during the Termination Year pro rated based on the number of days of
the Termination Year prior to the date of termination, which such payment will
be made when the bonus payments for such Termination Year are otherwise due.
(B) as a result of the Executive's
death or Disability, the Executive or the Executive's estate, as applicable,
shall be entitled to all previously earned and accrued but unpaid Base Salary up
to the date of such termination but shall not be entitled to any further Base
Salary, bonus payments or Benefits for that year or any future year, or to any
other severance compensation of any kind, nature or amount.
(C) as a result of the Executive's
voluntary resignation other than after a Good Reason Event, or by the Company
for Cause, the Executive shall be entitled to all previously earned and accrued
but unpaid Base Salary up to the date of such termination but shall not be
entitled to any further Base Salary, bonus payments or Benefits for that year or
any future year, or to any other severance compensation of any kind, nature or
amount.
(D) as a result of the Executive's
voluntary resignation within 5 days of a Good Reason Event, the Executive shall
be entitled to receive (1) the stated Base Salary through the period ending on
the earlier of November 1, 2001 and the later of (x) January 2, 2000 and (y) the
second anniversary of the date of termination, and (2) a portion of the bonus
payment earned by the Executive during the Termination Year pro rated based on
the number of days of the Termination Year prior to the date of determination,
which such payment will be made when the bonus payments for such Termination
Year are otherwise due.
(ii) Following the termination of the Employment
Period:
(A) the Executive agrees that: (1) the
Executive shall be entitled to the payments provided for in Sections 2(d)(i)(A)
or (D), if any, if and only if Executive has not breached as of the date of
termination of the Employment Period the provisions of Sections 3, 4 and 5
hereof and does not breach such sections at any time during the period for which
such payments are to be made and (2) the Company's obligation to make such
payments will terminate upon the occurrence of any such breach during any such
severance period.
(B) any payments pursuant to Sections
2(d)(i)(A)(1) or 2(d)(i)(D)(1) shall be paid by Sleepmaster in regular
installments in accordance with Sleepmaster's general payroll practices and
shall be subject to customary withholding, and following such payments
-6-
<PAGE> 7
none of the Company, or any of its Subsidiaries shall have any further
obligation to the Executive pursuant to this Section 2(d) except as provided by
law.
(iii) The Executive hereby agrees that except as
expressly provided herein. no severance compensation of any kind, nature or
amount shall be payable to the Executive and except as expressly provided
herein, the Executive hereby irrevocably waives any claim for severance
compensation.
(iv) All of the Executive's rights to Benefits
hereunder (if any) shall cease upon the termination of the Employment Period.
(v) Subject to the restrictive covenant
contained in Section 5, the Executive acknowledges an obligation to seek or
obtain other engagements or employment in a similar position to mitigate any
damages to which the Executive may be entitled by reason of any termination of
this Agreement pursuant to Sections 2(d)(i)(A) or (D). If the Employee does
obtain other engagements or employment of any nature and in any location, the
total compensation actually earned by the Executive from such other employment
or engagements during the period that he is to receive payments, if any,
pursuant to Sections 2(d)(i)(A) or (D) shall reduce any amounts which the
Company would otherwise be required to pay the Executive under this Agreement.
3. Confidential Information. The Executive acknowledges that the
information, observations and data obtained by him while employed by the Company
or any of its Subsidiaries concerning the business or affairs of the Company or
any Subsidiary ("Confidential Information") are the property of the Company or
such Subsidiary. Therefore, the Executive agrees that, except as required by law
or court order, he shall not disclose to any unauthorized person or use for his
own account any Confidential Information without the prior written consent of
the Board, unless and to the extent that the aforementioned matters become
generally known to and available for use by the public other than as a result of
the Executive's acts or omissions to act. The Executive shall deliver to the
Company at the termination of such Executive's employment, or at any other time
the Company may request, all memoranda, notes, plans, records, reports, computer
tapes and software and other documents and data (and copies thereof) relating to
the Confidential Information, Work Product (as defined below) and the business
of the Company or any Subsidiary which he may then possess or have under his
control.
4. Inventions and Patents. The Executive agrees that all
inventions, innovations, improvements, developments, methods, designs, analyses,
drawings, reports, and all similar or related information which relates to the
Company's or any of its Subsidiaries' actual or anticipated business, research
and development or existing or future products or services and which are
conceived, developed or made by the Executive while employed by the Company or
any of its Subsidiaries ("Work Product") belong to the Company or such
Subsidiary. The Executive will promptly disclose such Work Product to the Board
and perform all actions reasonably requested by the Board (whether during or
after the Employment Period) to establish and confirm such ownership (including,
without limitation, assignments, consents, powers of attorney and other
instruments).
-7-
<PAGE> 8
5. Noncompete, Nonsolicitation.
(a) The Executive acknowledges that in the course of his
employment with the Company and its Subsidiaries he has become familiar, and he
will become familiar, with the Company's and its Subsidiaries' trade secrets and
with other Confidential Information and that his services have been and will be
of special, unique and extraordinary value to the Company and its Subsidiaries.
Therefore, the Executive agrees that, during the time he is employed by the
Company and its Subsidiaries and during any applicable Post-Termination Period
(the "Noncompete Period"), he shall not directly or indirectly own, operate,
manage, control, participate in, consult with, advise, provide services for, or
in any manner engage in any business (including by himself or in association
with any person, firm, corporate or other business organization or through any
other entity) in competition with, or potential competition with, the businesses
of the Company or its Subsidiaries as such businesses exist or are in process on
the date of the termination of the Executive's employment, within any
geographical area in which the Company or any of its Subsidiaries engages or
plans to engage in such businesses. Nothing herein shall prohibit the Executive
from being a passive owner of not more than 2% of the outstanding stock of a
corporation which is publicly traded, so long as the Executive has no active
participation in the business of such corporation. For purposes of this Section
5, "Post-Termination Period" means, as applicable: (i) if the Executive is
entitled to receive payments pursuant to Sections 2(d)(i)(A)(1) or
2(d)(i)(D)(1), then for the period through the later of (x) January 2, 2000 and
(y) the second anniversary of the date of termination, (ii) if the Employment
Period ends on November 1, 2001 and not less than 30 days prior to such date
either the Company or Sleepmaster offers the Executive employment on terms
substantially similar to the terms set forth herein and the Executive refuses
such offer, the period of eighteen (18) months (following the Employment Period)
ending on May 1, 2003 or (iii) if the Employment Period is terminated by the
Company for Cause or by the voluntary resignation of the Executive without a
Good Reason Event, the period of eighteen (18) months following the date of
termination.
(b) During the Noncompete Period, the Executive shall not
directly or indirectly through another entity (i) induce or attempt to induce
any employee of the Company or any Subsidiary to leave the employ of the Company
or such Subsidiary, or in any way interfere with the relationship between the
Company or any Subsidiary and any employee thereof, including without
limitation, inducing or attempting to induce any union, employee or group of
employees to interfere with the business or operations of the Company or its
Subsidiaries, (ii) hire any person who was an employee of the Company or any
Subsidiary at any time during the Executive's employment period, or (iii) induce
or attempt to induce any customer, supplier, distributor, franchisee, licensee
or other business relation of the Company or any Subsidiary to cease doing
business with the Company or such Subsidiary, or in any way interfere with the
relationship between any such customer, supplier, distributor, franchisee,
licensee or business relation and the Company or any Subsidiary.
(c) The Executive agrees that: (i) the covenants set
forth in this Section 5 are reasonable in geographical and temporal scope and in
all other respects, (ii) the Company would not have entered into this Agreement
but for the covenants of the Executive contained herein, and (iii) the covenants
contained herein have been made in order to induce the Company to enter into
this Agreement.
(d) If, at the time of enforcement of this Section 5, a
court shall hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing,
-8-
<PAGE> 9
the parties agree that the maximum duration, scope or area reasonable under such
circumstances shall be substituted for the stated duration, scope or area and
that the court shall be allowed to revise the restrictions contained herein to
cover the maximum period, scope and area permitted by law.
(e) The Executive recognizes and affirms that in the
event of his breach of any provision of this Section 5, money damages would be
inadequate and the Company and the Investor would have no adequate remedy at
law. Accordingly, the Executive agrees that in the event of a breach or a
threatened breach by the Executive of any of the provisions of this Section 5,
the Company, in addition and supplementary to other rights and remedies existing
in its favor, may apply to any court of law or equity of competent jurisdiction
for specific performance and/or injunctive or other relief in order to enforce
or prevent any violations of the provisions hereof (without posting a bond or
other security).
6. Executive Securities.
(a) With respect to the Vesting Executive Securities,
within 30 days from the date hereof, the Executive will make an effective
election with the Internal Revenue Service under Section 83(b) of the Internal
Revenue Code and the regulations promulgated thereunder in the form of Exhibit A
attached hereto.
(b) In connection with the acquisition of the Executive
Securities, the Executive represents and warrants to the Company that:
(i) The Executive Securities to be acquired by
the Executive pursuant to this Agreement will be acquired for the Executive's
own account and not with a view to, or intention of, distribution thereof in
violation of the Securities Act, or any applicable state securities laws, and
the Executive Securities will not be disposed of in contravention of the
Securities Act or any applicable state securities laws.
(ii) No commission, fee or other remuneration is
to be paid or given, directly or indirectly, to any Person for soliciting the
Executive to purchase the Executive Securities.
(iii) The Executive is an executive officer of the
Company, is sophisticated in financial matters and is able to evaluate the risks
and benefits of the investment in the Executive Securities and has determined
that such investment in the Executive Securities is suitable for the Executive,
based upon the Executive's financial situation and needs, as well as the
Executive's other securities holdings.
(iv) The Executive qualifies an "accredited
investor" within the meaning of Rule 501 (a) of Regulation D under the
Securities Act.
(v) The Executive is able to bear the economic
risk of the Executive's investment in the Executive Securities for an indefinite
period of time and the Executive understands that the Executive Securities have
not been registered under the Securities Act and cannot be sold unless
subsequently registered under the Securities Act or an exemption from such
registration is available.
-9-
<PAGE> 10
(vi) The Executive has had an opportunity to ask
questions and receive answers concerning the terms and conditions of the
offering of Executive Securities and has had full access to such other
information concerning the Company as the Executive has requested. The Executive
has reviewed, or has had an opportunity to review, the following documents: (A)
the Recapitalization Agreement; (B) the organization documents of the Company
and Sleepmaster; (C) the loan agreements, notes and related documents with the
Company's senior lenders; (D) the loan agreement, notes and related documents
with the Company's senior subordinated lender; and (E) all of the materials
provided by the Company to any Person providing financing to the Company,
including, but not limited to, the Company's pro forma balance sheet, as well as
financial projections, estimates, forecasts, budgets, summaries, reports and
other related documents.
(vii) This Agreement constitutes the legal, valid
and binding obligation of the Executive, enforceable in accordance with its
terms, and the execution, delivery and performance of this Agreement by the
Executive does not and will not conflict with, violate or cause a breach of any
agreement, contract or instrument to which the Executive is a party or any
judgment, order or decree to which the Executive is subject.
(c) As an inducement to the Company to issue the
Executive Securities to the Executive, and as a condition thereto, the Executive
acknowledges and agrees that neither the issuance of the Executive Securities to
the Executive nor any provision contained herein shall entitle the Executive to
remain in the employment of the Company and its Subsidiaries or affect the right
of the Company to terminate the Executive's employment at any time for any
reason.
7. Vesting of Executive Securities. (a) (i) 180 units of the
Class A Common and (ii) 257.14 units of Preferred Interests evidenced by
certificates issued in connection therewith are fully vested as of the date
hereof and are not subject to the terms of Section 4 below. The Vesting
Executive Securities originally acquired by the Executive will become vested in
accordance with the following schedule if, as of each such date, the Executive
is still employed by the Company or its Subsidiaries;
<TABLE>
<CAPTION>
Cumulative Percentage of Units
of Vesting Executive
Date Date Securities Which Will Vest
- ------------------------------------------------------ -------------------------------
<S> <C>
First anniversary of the date hereof ("Year 1") 20%
Second anniversary of the date hereof ("Year 2") 40%
Third anniversary of the date hereof ("Year 3") 60%
Fourth anniversary of the date hereof ("Year 4") 80%
Fifth anniversary of the date hereof ("Year 5") 100%
</TABLE>
provided, that all Vesting Executive Securities shall automatically vest in
connection with a Sale of the Company.
-10-
<PAGE> 11
(b) Units of Vesting Executive Securities which have
become vested are referred to herein as "Vested Interests," and all other units
of Vesting Executive Securities are referred to herein as "Unvested Interests."
8. Repurchase Option on Vesting Executive Interests. In the event
the Executive ceases to be employed by the Company and its Subsidiaries for any
reason (the "Termination"), the Vesting Executive Securities (whether held by
the Executive or one or more of the Executive's transferees) will be subject to
repurchase by the Company and the Investor (or its designees) pursuant to the
terms and conditions set forth in this Section 8 (the "Repurchase Option").
(a) (i) The purchase price for each Unvested Interest of
Vesting Executive Securities will be the Executive's Original Cost for such unit
plus interest thereon calculated at a rate per annum equal to the latest
published rate for United States Treasury Bills with a five year maturity as
published in the "Treasury Bonds, Notes & Bills" column of the Wall Street
Journal; (ii) the purchase price for each Vested interest of Vesting Executive
Securities will be the Fair Value for such unit; and (iii) notwithstanding the
foregoing, if the termination of the Employment Period is by the Company for
Cause or by the voluntary resignation of the Executive without a Good Reason
Event, then the purchase price for each Vested Securities and each Unvested
Securities will be the Executive's Original Cost.
(b) The Board may elect to cause the Company to purchase
(i) all or a portion of the Unvested Interests and/or, (ii) all or a portion of
the Vested Interests by delivering written notice (the "Repurchase Notice") to
the holder or holders of the Vesting Executive Securities within 90 days after
the Termination. The Repurchase Notice will set forth the number of Unvested
Interests and Vested Interests to be acquired from each holder, the aggregate
consideration to be paid for such securities and the time and place for the
closing of the transaction. The number of units of Vesting Executive Securities
to be repurchased by the Company shall first be satisfied to the extent possible
from the Vesting Executive Securities held by the Executive at the time of
delivery of the Repurchase Notice. If the number of Vesting Interests then held
by the Executive is less than the total number of units of Vesting Executive
Securities the Company has elected to purchase the Company shall purchase the
remaining Vesting Executive Securities elected to be purchased from the other
holder(s) of Executive Securities, pro rata according to the amount of such
Vesting Executive Securities held by such other holder(s) at the time of
delivery of such Repurchase Notice (determined as nearly as practicable to the
nearest share). The number of Unvested Interests and Vested Interests to be
repurchased hereunder will be allocated among the Executive and the other
holders of Vesting Executive Securities (if any) pro rata according to the
number of units of Vesting Executive Securities to be purchased from such
Persons.
(c) If for any reason the Company does not elect to
purchase all of the units of Vesting Executive Securities that are subject to
the Repurchase Option, pursuant to such Repurchase Option, the Investor (or its
designees) shall be entitled to exercise the Repurchase Option for the Vesting
Executive Securities the Company has not elected to purchase (the "Available
Securities"). Of the Available Securities, the Vested Interests are referred to
herein as "Available Vested Interests" and Unvested Interests are referred to
herein as "Available Unvested Interests". As soon as practicable after the
Company has determined that there will be Available Securities, but in an event
within 150 days after the Termination, the Company shall give written notice
(the "Option Notice") to the Investor (or its designees) setting forth the
number of Available Vested Interests, Available Unvested Interests, and the
purchase price for each of such Available Securities. The Investor (or its
-11-
<PAGE> 12
designees) may elect to purchase all or a portion of (i) Available Vested
Interests, and/or (ii) all or a portion of the Available Unvested Interests by
giving written notice to the Company within 45 days after the Option Notice has
been given by the Company. As soon as practicable, and in any event within ten
days after the expiration of the 45-day period set forth above, the Company
shall notify each holder of Vesting Executive Securities as to the number of
Vested Interests or Unvested Interests being purchased from such holder by the
Investor (or its designees) (the "Supplemental Repurchase Notice"). At the time
the Company delivers the Supplemental Repurchase Notice to the holder(s) of such
Vesting Executive Securities, the Company shall also deliver written notice to
the Investor (or its designees) setting forth the number of Vested Interests and
Unvested Interests which the Investor (or its designees) is entitled to
purchase, the aggregate purchase price and the time and place of the closing of
the transaction.
(d) The closing of the purchase of the Vesting Executive
Securities pursuant to the Repurchase Option shall take place on the date
designated by the Company in the Repurchase Notice or Supplemental Repurchase
Notice, which date shall not be later than the 30th day after the delivery of
the later of such notices to be delivered (or, if later, the 15th day after the
Fair Value is finally determined) nor earlier than the fifth day after such
delivery. The Company and/or the Investor (or its designee) will pay for the
Vesting Executive Securities to be purchased pursuant to the Repurchase Option
by delivery of a certified or cashier's check or wire transfer of funds. The
purchasers of Vesting Executive Securities hereunder will be entitled to receive
customary presentations and warranties from the sellers as to title, authority
and capacity to sell.
(e) Notwithstanding anything to the contrary contained in
this Agreement, all repurchases of Vesting Executive Securities by the Company
shall be subject to applicable legal restrictions. If any such restrictions
prohibit the repurchase of Vesting Executive Securities hereunder which the
Company is otherwise entitled to make, the Company may make such repurchases as
soon as it is permitted to do so under such restrictions.
(f) If a Sale of the Company shall be consummated within
six months of the consummation of the repurchase of Vesting Executive Securities
pursuant to this Section 8, then with respect to each unit of Vested Interests
sold by the Executive pursuant to this Section 8, the Executive shall be
entitled to receive an amount equal to the difference, if any, (i) between the
per unit consideration (with respect to the Common Interests) received by the
Investor in connection with the Sale of the Company and (11) the repurchase
price per unit paid to the Executive; provided, that if the Termination is by
the Company for Cause or by the voluntary resignation of the Executive without a
Good Reason Event, this Section 8(f) shall not apply.
9. Restrictions on Transfer.
(a) If certificated, the Executive Securities will bear
the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION
FROM REGISTRATION THEREUNDER. THE SECURITIES
REPRESENTED BY THIS
-12-
<PAGE> 13
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL
RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE OPTIONS
AND CERTAIN OTHER AGREEMENTS SET FORTH IN AN
EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND THE
SIGNATORY THERETO DATED AS OF NOVEMBER __, 1996. A
COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER
HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS
WITHOUT CHARGE."
(b) No holder of Executive Securities may sell, transfer
or dispose of any units of Executive Securities (except pursuant to an effective
registration statement under the Securities Act) without first delivering to the
Company an opinion of counsel (reasonably acceptable in form and substance to
the Company) that neither registration nor qualification under the Securities
Act and applicable state securities laws is required in connection with such
transfer.
(c) Each holder of Executive Securities agrees not to
effect any sale or distribution of any Executive Securities or other equity
securities of the Company, or any securities convertible into or exchangeable or
exercisable for any of the Company's equity securities, during the seven days
prior to and the 120 days (or, subject to the requirements of the underwriters,
up to 180 days) after the effectiveness of any underwritten public offering,
except as part of such underwritten public offering or if otherwise permitted by
the Company.
10. Notices. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement will
be in writing and will be deemed to have been given when delivered personally,
mailed by certified or registered mail, return receipt requested and postage
prepaid, or sent via a nationally recognized overnight courier, or sent via
facsimile to the recipient with telephonic confirmation by the sending party.
Such notices, demands and other communications will be sent to the address
indicated below:
To the Company or Sleepmaster:
c/o Sleepmaster L.L.C.
2001 Lower Road
Linden, NJ 07036
Attention: President
Telecopy No.: (908) 381-4455
With a copy to:
Citicorp Venture Capital, Ltd.
399 Park Avenue
l4th Floor
New York, NY 10043
Attention: Mr. John Weber
Telecopy No.: (212) 888-2940
-13-
<PAGE> 14
To the Executive:
c/o Sleepmaster L.L.C.
2001 Lower Road
Linden, NJ 07036
Attention: Mr. James Koscica
Telecopy No.: (908) 381-4455
To the Investor:
c/o Citicorp Venture Capital, Ltd.
399 Park Avenue
14th Floor
New York, NY 10043
Attention: Mr. John Weber
Telecopy No.: (212) 888-2940
With a copy to:
Kirkland & Ellis
153 East 53rd Street
New York, NY 10022
Attention: Kirk A. Radke, Esq.
Telecopy No.: (212) 446-4900
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party.
11. Miscellaneous.
(a) Transfers in Violation of Agreement. Any transfer or
attempted transfer of any Executive Securities in violation of any provision of
this Agreement shall be null and void. and the Company shall not record such
transfer on its books or treat any purported transferee of such Executive
Securities as the owner of such securities for any purpose.
(b) Severability. Whenever possible, each provision of
this Agreement will be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or
rule in any jurisdiction, such invalidity, illegality or unenforceability will
not affect any other provision or any other jurisdiction, but this Agreement
will be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained herein.
(c) Complete Agreement. This Agreement, the
Securityholders Agreement, and the Recapitalization Agreement embody the
complete agreement and understanding among the parties and supersede and preempt
any prior understandings, agreements or representations by or among the
-14-
<PAGE> 15
parties, written or oral, which may have related to the subject matter hereof in
any way, including, without limitation, the Previous Agreement.
(d) Counterparts. This Agreement may be executed in
separate counterparts, each of which is deemed to be an original and all of
which taken together constitute one and the same agreement.
(e) Successors and Assigns. Except as otherwise provided
herein, this Agreement shall bind and inure to the benefit of and be enforceable
by the Executive, the Company, the Investor and their respective successors and
assigns (including subsequent holders of Executive Securities); provided that
the rights and obligations of the Executive under this Agreement shall not be
assignable except in connection with a permitted transfer of Executive
Securities hereunder.
(f) Third Party Beneficiary. This Agreement is intended
for the benefit of, and will be enforceable by, the Investor.
(G) GOVERNING LAW. ALL QUESTIONS CONCERNING THE
CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT AND THE EXHIBITS
HERETO WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF
THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF
LAW PROVISION OR RULE (WHETHER OF THE STATE OF NEW YORK OR ANY OTHER
JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION
OTHER THAN THE STATE OF NEW YORK; PROVIDED, THAT ANY QUESTIONS REQUIRING
INTERPRETATION OF THE LAWS GOVERNING LIMITED LIABILITY COMPANIES SHALL BE
GOVERNED BY THE NEW JERSEY LIMITED LIABILITY COMPANY ACT.
(h) Remedies. Each of the parties to this Agreement
(including the Investor) will be entitled to enforce its rights under this
Agreement specifically, to recover damages and costs (including reasonable
attorneys' fees) caused by any breach of any provision of this Agreement and to
exercise all other rights existing in its favor. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or deposit) for specific performance and/or other injunctive relief in
order to enforce or prevent any violations of the provisions of this Agreement.
(i) Amendment and Waiver. The provisions of this
Agreement may be amended and waived only with the prior written consent of the
Company, the Executive and the Investor.
* * * * *
-15-
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have executed this
Employment Agreement as of the date first written above.
SLEEPMASTER HOLDINGS L.L.C.
By: Charles Schweitzer
----------------------------------
Name: James P. Koscica
Title: Executive Vice President
SLEEPMASTER L.L.C.
By: Charles Schweitzer
----------------------------------
Name: James P. Koscica
Title: Executive Vice President
/s/ James Koscica
--------------------------------------
JAMES KOSCICA
Agreed and Accepted:
SLEEP INVESTOR L.L.C.
By: John D. Weber
----------------------------------
Name: John D. Weber
Title: Member
-17-
<PAGE> 17
SCHEDULE A
EBITDA PLAN
<TABLE>
<CAPTION>
FISCAL YEAR EBITDA TARGET
----------------- -------------------
<S> <C>
1996 $ 8,590,000
1997 $10,525,000
1998 $12,323,000
1999 $13,608,000
2000 $15,453,000
2001 $16,137,000
</TABLE>
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<PAGE> 18
SCHEDULE B
EMPLOYEE BENEFITS
Executive Medical Plan --100% reimbursable medical expenses
Personal Term Life Insurance --coverage $1,000,000
Supplemental Disability--Monthly Disability Benefit $5,000
Entertainment Expenses
Car Allowance; $7,800 per annum
Car Expenses
Permitted Vacation: 4 weeks per year
-19-
<PAGE> 1
EXHIBIT 10.12
EXECUTION COPY
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is dated as of November __, 1996, by
and among Sleepmaster Holdings L.L.C., a New Jersey limited liability company
(the "Company"), Sleepmaster L.L.C., a New Jersey limited liability company
("Sleepmaster"), Timothy DuPont (the "Executive") and Sleep Investor L.L.C., a
Delaware limited liability company (the "Investor").
The Company, Sleepmaster and the Executive desire to enter
into an agreement regarding (i) the employment of the Executive as President and
Chief Executive Officer of Sleepmaster, and (ii) certain restrictions regarding
the Company's Class A Common Interests (the "Class A Common") acquired by the
Executive pursuant to the Recapitalization, Redemption and Repurchase Agreement
by and among the Executive, the Company and certain other parties thereto dated
as of October 31, 1996 (the "Recapitalization Agreement").
Certain provisions of this Agreement are intended for the
benefit of, and will be enforceable by, the Investor.
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. As used herein, the following terms shall have
the following meanings.
"Affiliate" means, as to any Person, any other Person which
directly or indirectly controls, or is under common control with, or is
controlled by, such Person. As used in this definition, "control" (including
with its correlative meanings, "controlled by" and "under common control with")
shall mean possession, directly or indirectly, of power to direct or cause the
direction of management or policies (whether through ownership of securities or
partnership or other ownership interests, by contract or otherwise).
"Board" means the Company's board of advisors.
"Business Day" means any day other than a Saturday or Sunday
or a day on which commercial banks are required or authorized to close in New
York, New York.
"Cause" means (i) a breach of the Executive's covenants under
this Agreement or any other agreements with the Company or its Subsidiaries and
such breach shall not have been cured within 30 days after written notice to the
Executive, (ii) the commission by the Executive of a felony, a crime involving
moral turpitude or other act causing material harm to the standing and
reputation of the Company or any of its Subsidiaries, or (iii) the Executive's
repeated wilful failure to comply with the reasonable and lawful written
directives of the Board.
"Common Interests" means the Class A Common and the Company's
Class B Common Interests, as adjusted for any unit split, unit dividend, or
other combination, exchange. conversion, recapitalization, merger, consolidation
or reorganization, or if such Common Interests are exchanged for different
interests or securities of the Company, such other interests or securities and
any other Common Interests of the Company hereinafter issued.
<PAGE> 2
"Disability" means the inability, due to illness, accident,
injury, physical or mental incapacity or other disability, of the Executive to
carry out effectively his duties and obligations to the Company or to
participate effectively and actively in the management of the Company or a
Subsidiary of the Company for a period of at least 90 consecutive days or for
shorter periods aggregating at least 120 days (whether or not consecutive)
during any twelve-month period, as determined in the reasonable judgment of the
Board.
"Executive Securities" means the Class A Common acquired by
the Executive and will include units of the Company's Common Interests issued
with respect to Executive Securities by way of a split, dividend, combination,
exchange, conversion, or other recapitalization, merger, consolidation or
reorganization. Executive Securities will cease to be Executive Securities when
transferred pursuant to a Qualified Public Offering or Sale of the Company.
Executive Securities will continue to be Executive Securities in the hands of
any holder other than the Executive, including all transferees of the Executive
(except for the Company and the Investor (or its designee)), and except as
otherwise provided herein, each such other holder of Executive Securities will
succeed to all rights and obligations attributable to the Executive as a holder
of Executive Securities hereunder.
"Fair Value" of each unit of Class A Common means the average
of the closing prices of the sales of the Company's membership interests on all
securities exchanges on which the membership interests may at the time be
listed, or, if there have been no sales on any such exchange on any day, the
average of the highest bid and lowest asked prices on all such exchanges at the
end of such day, or, if on any day the membership interests are not so listed,
the average of the representative bid and asked prices quoted on the Nasdaq
National Market System ("Nasdaq NMS") as of 4:00 P.M., New York time, or, if on
any day the membership interests are not quoted in the Nasdaq NMS, the average
of the highest bid and lowest asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau
Incorporated, or any similar successor organization, in each such case averaged
over a period of 21 days consisting of the day as of which the Fair Value is
being determined and the 20 consecutive business days prior to such day. If at
any time the Class A Common is not listed on any securities exchange or quoted
in the NMS or the over-the-counter market, the Fair Value of each unit of Class
A Common shall be the fair market value of such unit as determined by the Board
in its good faith judgment.
"GAAP" means U.S. generally accepted accounting principles, as
in effect from time to time and as adopted by the Cornpany with the consent of
its independent public accountants, consistently applied.
"Good Reason Event" means (i) the failure of the Company or
Sleepmaster to make the payments described herein within 5 Business Days of the
applicable payment due date, (ii) the written request by the Board of Advisors
of either the Company or Sleepmaster that the Executive relocate his primary
residence.
"Original Cost" of the Vesting Executive Securities purchased
on the date hereof will be equal to $100.00 per unit.
-2-
<PAGE> 3
"Person" means an individual, a partnership, a corporation, an
association, a limited liability company, a joint stock company, a trust, a
joint venture, an unincorporated organization or a governmental entity or any
department, agency or political subdivision thereof.
"Preferred Interests" means the Company's Series A Preferred
Interests, as adjusted for any unit split, unit dividend or other combination,
exchange, conversion, recapitalization, merger, consolidation or reorganization,
or if the Series A Preferred Interests are hereafter changed into or exchanged
for different interests or securities of the Company, such other interests or
securities, and any other preferred interests of the Company hereinafter issued.
"Public Offering" means any sale of securities of the Company
in an underwritten public offering.
"Qualified Public Offering" means any sale, in an underwritten
public offering registered under the Securities Act, of equity securities of the
Company having an aggregate value of at least $20 million.
"Sale of the Company" means the sale of the Company, in a
single transaction or a series of related transactions, to a third party (which
is not an Affiliate of the Investor) pursuant to which such third party proposes
to acquire all or substantially all of the outstanding Common Interests (whether
by merger, consolidation, recapitalization, reorganization, purchase of the
outstanding Common Interests or otherwise) or all or substantially all of the
consolidated assets of the Company or Sleepmaster.
"Securities Act" means the Securities Act of 1933, as amended
from time to time.
"Securityholders Agreement" means the Securityholders
Agreement dated as of the date hereof by and among the Company, the Executive,
the Investor and certain other parties thereto.
"Subsidiary" means, with respect to any Person, any
corporation, partnership, limited liability company, association or other
business entity of which (i) if a corporation or a limited liability company, a
majority of the total voting power of securities entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
that Person or one or more of the other Subsidiaries of that Person or a
combination thereof, or (ii) if a partnership, association or other business
entity, a majority of the partnership or other similar ownership interest
thereof is at the time owned or controlled, directly or indirectly, by any
Person or one or more Subsidiaries of that Person or a combination thereof. For
purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a partnership, association or other business entity if
such Person or Persons shall be allocated a majority of partnership, association
or other business entity gains or losses or shall be or control the managing
director or general partner of such partnership, association or other business
entity.
"Termination Year" means that fiscal year of the Company
during which the Employment Period ends pursuant to the terms of Section 2(d)
hereof.
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<PAGE> 4
"Vesting Executive Securities" means the 200 units of Class A
Common subject to vesting and any securities issued in connection therewith, as
adjusted for any unit split, unit dividend, or other combination, exchange,
recapitalization, merger, consolidation or reorganization. Vesting Executive
Securities will cease to be Vesting Executive Securities when transferred
pursuant to a Qualified Public Offering or Sale of the Company. Vesting
Executive Securities will continue to be Vesting Executive Securities in the
hands of any holder other than the Executive, including all transferees of the
Executive (except for the Company and the Investor (or its designees)), and
except as otherwise provided herein, each such other holder of Vesting Executive
Securities will succeed to all rights and obligations attributable to the
Executive as a holder of Executive Securities hereunder.
2. Employment.
(a) Employment. Sleepmaster agrees to employ the
Executive, and the Executive hereby accepts employment with Sleepmaster, upon
the terms and conditions set forth in this Agreement for the period beginning on
the date hereof and ending as provided in Section 2(d) (the "Employment
Period").
(b) Position and Duties.
(i) Commencing on the date hereof and continuing
during the Employment Period, the Executive shall serve as President and Chief
Executive Officer of Sleepmaster under the supervision and direction of the
Company's and Sleepmaster's respective hoards of advisors.
(ii) The Executive shall devote his best efforts
and his full business time and attention (except for permitted vacation periods
and reasonable periods of illness other than Disability) to the business and
affairs of the Company, Sleepmaster and their Subsidiaries. The Executive shall
perform his duties and responsibilities to the best of his abilities in a
diligent, trustworthy, businesslike and efficient manner.
(c) Base Salary and Benefits.
(i) Base Salary. During the Employment Period,
Executive's base salary shall be $106,000 per annum through fiscal year 1996 and
will increase as of January 1, 1997 to $111,000 per annum (the "Base Salary"),
which salary shall be paid by Sleepmaster in regular installments in accordance
with Sleepmaster's general payroll practices and shall be subject to customary
withholding.
(ii) Executive Bonus Plan. For each fiscal year
during the Employment Period, the Executive will be eligible to receive a bonus
based on the Company's achievement of the Target EBITDA for such fiscal year as
set forth on the Company's EBITDA Plan attached as Schedule
-4-
<PAGE> 5
A hereto (the "EBITDA Plan"). In the event the Company or Sleepmaster
consummates an acquisition of another Person prior to December 31, 2001, the
EBITDA Plan will be adjusted in good faith by senior management and approved by
the Board, and such adjusted and approved plan shall, once approved, be deemed
the EBITDA Plan for all purposes hereunder.
(A) Once the Board has determined
(which determination shall be made within thirty (30) days from the issuance of
the Company's audited financial statements) the percentage of EBITDA achieved
for such fiscal year as compared to the Target EBITDA for such fiscal year (the
"Achieved EBITDA Percentage"), so long as the Achieved EBITDA Percentage for
such fiscal year equals or exceeds 80%, the Executive shall be entitled to
receive a bonus payment in an amount equal to the product of (x) the Bonus
Multiple (as set forth opposite the Achieved EBITDA Percentage below), (y) 40.5%
and (z) the Executive's Base Salary for such fiscal year. The bonus payment
shall be made within five (5) days of the Board's determination.
<TABLE>
<CAPTION>
Achieved EBITDA Percentage Bonus Multiple
<S> <C>
80% 50%
100% 100%
110% 125%
120% 150%
</TABLE>
(B) Each Bonus Multiple set forth above
shall increase linearly as the Achieved EBITDA Percentage increases; therefore,
so long as the Achieved EBITDA Percentage equals or exceeds 80%, in the event
the actual Achieved EBITDA Percentage falls between any of the target Achieved
EBITDA Percentages set forth above, the applicable Bonus Multiple shall be
adjusted accordingly, provided, that in no event shall the Bonus Multiple exceed
150%. For example, (1) in the event the actual Achieved EBITDA Percentage is
90%, the Bonus Multiple shall be 75% or (2) in the event the actual Achieved
EBITDA Percentage is 115%, the Bonus Multiple shall be 137.5%.
(C) With respect to fiscal year 1996,
the Executive shall be entitled to receive a bonus as follows: (1) the Executive
will be entitled to receive a portion of the bonus earned by the Executive under
that certain Employment Agreement dated January 2, 1995 between Sleepmaster and
the Executive (the "Previous Agreement") determined based on the portion of
fiscal year 1996 prior to the date hereof and (2) the Executive will be entitled
to receive a portion of the bonus earned by the Executive under this Agreement
determined based on the portion of the fiscal year after the date hereof.
(iii) Benefits. In addition to the Base Salary and
any bonuses payable to the Executive pursuant to Section 2(c)(ii), the Executive
shall be entitled, during the Employment Period, to all benefits set forth on
Schedule B hereto (the "Benefits").
(iv) Expenses. The Company shall reimburse the
Executive for all reasonable expenses incurred by him in the course of
performing his duties under this Agreement which are consistent with the
Company's and its Subsidiaries' policies in effect from time to time with
respect to travel, entertainment and other business expenses, subject to the
requirements of the Company and its Subsidiaries with respect to reporting and
documentation of such expenses.
-5-
<PAGE> 6
(d) Term. The Employment Period shall end on November 1,
2001, subject to earlier termination (x) by reason of the Executive's death or
Disability, (y) by resolution of the Board, with or without Cause or (z) upon
the Executive's voluntary resignation with or without a Good Reason Event.
(i) If the Employment Period is terminated on or
before November 1, 2001:
(A) pursuant to Section 2(d)(y) above,
by the Company other than for Cause, the Executive shall be entitled to receive
(1) the stated Base Salary through the period ending on the earlier of November
1, 2001 and the later of (x) January 2, 2000 and (y) the second anniversary of
the date of termination, and (2) a portion of the bonus payment earned by the
Executive during the Termination Year pro rated based on the number of days of
the Termination Year prior to the date of termination, which such payment will
be made when the bonus payments for such Termination Year are otherwise due.
(B) as a result of the Executive's
death or Disability, the Executive or the Executive's estate, as applicable,
shall be entitled to all previously earned and accrued but unpaid Base Salary up
to the date of such termination but shall not be entitled to any further Base
Salary, bonus payments or Benefits for that year or any future year, or to any
other severance compensation of any kind, nature or amount.
(C) as a result of the Executive's
voluntary resignation other than after a Good Reason Event, or by the Company
for Cause, the Executive shall be entitled to all previously earned and accrued
but unpaid Base Salary up to the date of such termination but shall not be
entitled to any further Base Salary, bonus payments or Benefits for that year or
any future year, or to any other severance compensation of any kind, nature or
amount.
(D) as a result of the Executive's
voluntary resignation within 5 days of a Good Reason Event, the Executive shall
be entitled to receive (1) the stated Base Salary through the period ending on
the earlier of November 1, 2001 and the later of (x) January 2, 2000 and (y) the
second anniversary of the date of termination, and (2) a portion of the bonus
payment earned by the Executive during the Termination Year pro rated based on
the number of days of the Termination Year prior to the date of determination,
which such payment will be made when the bonus payments for such Termination
Year are otherwise due.
(ii) Following the termination of the Employment
Period:
(A) the Executive agrees that: (1) the
Executive shall be entitled to the payments provided for in Sections 2(d)(i)(A)
or (D), if any, if and only if Executive has not breached as of the date of
termination of the Employment Period the provisions of Sections 3, 4 and 5
hereof and does not breach such sections at any time during the period for which
such payments are to be made and (2) the Company's obligation to make such
payments will terminate upon the occurrence of any such breach during any such
severance period.
(B) any payments pursuant to Sections
2(d)(i)(A)(1) or 2(d)(i)(D)(1) shall be paid by Sleepmaster in regular
installments in accordance with Sleepmaster's general payroll practices and
shall be subject to customary withholding, and following such payments
-6-
<PAGE> 7
none of the Company, or any of its Subsidiaries shall have any further
obligation to the Executive pursuant to this Section 2(d) except as provided by
law.
(iii) The Executive hereby agrees that except as
expressly provided herein. no severance compensation of any kind, nature or
amount shall be payable to the Executive and except as expressly provided
herein, the Executive hereby irrevocably waives any claim for severance
compensation.
(iv) All of the Executive's rights to Benefits
hereunder (if any) shall cease upon the termination of the Employment Period.
(v) Subject to the restrictive covenant
contained in Section 5, the Executive acknowledges an obligation to seek or
obtain other engagements or employment in a similar position to mitigate any
damages to which the Executive may be entitled by reason of any termination of
this Agreement pursuant to Sections 2(d)(i)(A) or (D). If the Employee does
obtain other engagements or employment of any nature and in any location, the
total compensation actually earned by the Executive from such other employment
or engagements during the period that he is to receive payments, if any,
pursuant to Sections 2(d)(i)(A) or (D) shall reduce any amounts which the
Company would otherwise be required to pay the Executive under this Agreement.
3. Confidential Information. The Executive acknowledges that the
information, observations and data obtained by him while employed by the Company
or any of its Subsidiaries concerning the business or affairs of the Company or
any Subsidiary ("Confidential Information") are the property of the Company or
such Subsidiary. Therefore, the Executive agrees that, except as required by law
or court order, he shall not disclose to any unauthorized person or use for his
own account any Confidential Information without the prior written consent of
the Board, unless and to the extent that the aforementioned matters become
generally known to and available for use by the public other than as a result of
the Executive's acts or omissions to act. The Executive shall deliver to the
Company at the termination of such Executive's employment, or at any other time
the Company may request, all memoranda, notes, plans, records, reports, computer
tapes and software and other documents and data (and copies thereof) relating to
the Confidential Information, Work Product (as defined below) and the business
of the Company or any Subsidiary which he may then possess or have under his
control.
4. Inventions and Patents. The Executive agrees that all
inventions, innovations, improvements, developments, methods, designs, analyses,
drawings, reports, and all similar or related information which relates to the
Company's or any of its Subsidiaries' actual or anticipated business, research
and development or existing or future products or services and which are
conceived, developed or made by the Executive while employed by the Company or
any of its Subsidiaries ("Work Product") belong to the Company or such
Subsidiary. The Executive will promptly disclose such Work Product to the Board
and perform all actions reasonably requested by the Board (whether during or
after the Employment Period) to establish and confirm such ownership (including,
without limitation, assignments, consents, powers of attorney and other
instruments).
-7-
<PAGE> 8
5. Noncompete, Nonsolicitation.
(a) The Executive acknowledges that in the course of his
employment with the Company and its Subsidiaries he has become familiar, and he
will become familiar, with the Company's and its Subsidiaries' trade secrets and
with other Confidential Information and that his services have been and will be
of special, unique and extraordinary value to the Company and its Subsidiaries.
Therefore, the Executive agrees that, during the time he is employed by the
Company and its Subsidiaries and during any applicable Post-Termination Period
(the "Noncompete Period"), he shall not directly or indirectly own, operate,
manage, control, participate in, consult with, advise, provide services for, or
in any manner engage in any business (including by himself or in association
with any person, firm, corporate or other business organization or through any
other entity) in competition with, or potential competition with, the businesses
of the Company or its Subsidiaries as such businesses exist or are in process on
the date of the termination of the Executive's employment, within any
geographical area in which the Company or any of its Subsidiaries engages or
plans to engage in such businesses. Nothing herein shall prohibit the Executive
from being a passive owner of not more than 2% of the outstanding stock of a
corporation which is publicly traded, so long as the Executive has no active
participation in the business of such corporation. For purposes of this Section
5, "Post-Termination Period" means, as applicable: (i) if the Executive is
entitled to receive payments pursuant to Sections 2(d)(i)(A)(1) or
2(d)(i)(D)(1), then for the period through the later of (x) January 2, 2000 and
(y) the second anniversary of the date of termination, (ii) if the Employment
Period ends on November 1, 2001 and not less than 30 days prior to such date
either the Company or Sleepmaster offers the Executive employment on terms
substantially similar to the terms set forth herein and the Executive refuses
such offer, the period of eighteen (18) months (following the Employment Period)
ending on May 1, 2003 or (iii) if the Employment Period is terminated by the
Company for Cause or by the voluntary resignation of the Executive without a
Good Reason Event, the period of eighteen (18) months following the date of
termination.
(b) During the Noncompete Period, the Executive shall not
directly or indirectly through another entity (i) induce or attempt to induce
any employee of the Company or any Subsidiary to leave the employ of the Company
or such Subsidiary, or in any way interfere with the relationship between the
Company or any Subsidiary and any employee thereof, including without
limitation, inducing or attempting to induce any union, employee or group of
employees to interfere with the business or operations of the Company or its
Subsidiaries, (ii) hire any person who was an employee of the Company or any
Subsidiary at any time during the Executive's employment period, or (iii) induce
or attempt to induce any customer, supplier, distributor, franchisee, licensee
or other business relation of the Company or any Subsidiary to cease doing
business with the Company or such Subsidiary, or in any way interfere with the
relationship between any such customer, supplier, distributor, franchisee,
licensee or business relation and the Company or any Subsidiary.
(c) The Executive agrees that: (i) the covenants set
forth in this Section 5 are reasonable in geographical and temporal scope and in
all other respects, (ii) the Company would not have entered into this Agreement
but for the covenants of the Executive contained herein, and (iii) the covenants
contained herein have been made in order to induce the Company to enter into
this Agreement.
(d) If, at the time of enforcement of this Section 5, a
court shall hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing,
-8-
<PAGE> 9
the parties agree that the maximum duration, scope or area reasonable under such
circumstances shall be substituted for the stated duration, scope or area and
that the court shall be allowed to revise the restrictions contained herein to
cover the maximum period, scope and area permitted by law.
(e) The Executive recognizes and affirms that in the
event of his breach of any provision of this Section 5, money damages would be
inadequate and the Company and the Investor would have no adequate remedy at
law. Accordingly, the Executive agrees that in the event of a breach or a
threatened breach by the Executive of any of the provisions of this Section 5,
the Company, in addition and supplementary to other rights and remedies existing
in its favor, may apply to any court of law or equity of competent jurisdiction
for specific performance and/or injunctive or other relief in order to enforce
or prevent any violations of the provisions hereof (without posting a bond or
other security).
6. Executive Securities.
(a) With respect to the Vesting Executive Securities,
within 30 days from the date hereof, the Executive will make an effective
election with the Internal Revenue Service under Section 83(b) of the Internal
Revenue Code and the regulations promulgated thereunder in the form of Exhibit A
attached hereto.
(b) In connection with the acquisition of the Executive
Securities, the Executive represents and warrants to the Company that:
(i) The Executive Securities to be acquired by
the Executive pursuant to this Agreement will be acquired for the Executive's
own account and not with a view to, or intention of, distribution thereof in
violation of the Securities Act, or any applicable state securities laws, and
the Executive Securities will not be disposed of in contravention of the
Securities Act or any applicable state securities laws.
(ii) No commission, fee or other remuneration is
to be paid or given, directly or indirectly, to any Person for soliciting the
Executive to purchase the Executive Securities.
(iii) The Executive is an executive officer of the
Company, is sophisticated in financial matters and is able to evaluate the risks
and benefits of the investment in the Executive Securities and has determined
that such investment in the Executive Securities is suitable for the Executive,
based upon the Executive's financial situation and needs, as well as the
Executive's other securities holdings.
(iv) The Executive qualifies an "accredited
investor" within the meaning of Rule 501 (a) of Regulation D under the
Securities Act.
(v) The Executive is able to bear the economic
risk of the Executive's investment in the Executive Securities for an indefinite
period of time and the Executive understands that the Executive Securities have
not been registered under the Securities Act and cannot be sold unless
subsequently registered under the Securities Act or an exemption from such
registration is available.
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<PAGE> 10
(vi) The Executive has had an opportunity to ask
questions and receive answers concerning the terms and conditions of the
offering of Executive Securities and has had full access to such other
information concerning the Company as the Executive has requested. The Executive
has reviewed, or has had an opportunity to review, the following documents: (A)
the Recapitalization Agreement; (B) the organization documents of the Company
and Sleepmaster; (C) the loan agreements, notes and related documents with the
Company's senior lenders; (D) the loan agreement, notes and related documents
with the Company's senior subordinated lender; and (E) all of the materials
provided by the Company to any Person providing financing to the Company,
including, but not limited to, the Company's pro forma balance sheet, as well as
financial projections, estimates, forecasts, budgets, summaries, reports and
other related documents.
(vii) This Agreement constitutes the legal, valid
and binding obligation of the Executive, enforceable in accordance with its
terms, and the execution, delivery and performance of this Agreement by the
Executive does not and will not conflict with, violate or cause a breach of any
agreement, contract or instrument to which the Executive is a party or any
judgment, order or decree to which the Executive is subject.
(c) As an inducement to the Company to issue the
Executive Securities to the Executive, and as a condition thereto, the Executive
acknowledges and agrees that neither the issuance of the Executive Securities to
the Executive nor any provision contained herein shall entitle the Executive to
remain in the employment of the Company and its Subsidiaries or affect the right
of the Company to terminate the Executive's employment at any time for any
reason.
7. Vesting of Executive Securities. (a) (i) 180 units of the
Class A Common and (ii) 257.14 units of Preferred Interests evidenced by
certificates issued in connection therewith are fully vested as of the date
hereof and are not subject to the terms of Section 4 below. The Vesting
Executive Securities originally acquired by the Executive will become vested in
accordance with the following schedule if, as of each such date, the Executive
is still employed by the Company or its Subsidiaries;
<TABLE>
<CAPTION>
Cumulative Percentage of Units
of Vesting Executive
Date Date Securities Which Will Vest
- --------------------------------------------------------- -------------------------------
<S> <C>
First anniversary of the date hereof ("Year 1") 20%
Second anniversary of the date hereof ("Year 2") 40%
Third anniversary of the date hereof ("Year 3") 60%
Fourth anniversary of the date hereof ("Year 4") 80%
Fifth anniversary of the date hereof ("Year 5") 100%
</TABLE>
provided, that all Vesting Executive Securities shall automatically vest in
connection with a Sale of the Company.
-10-
<PAGE> 11
(b) Units of Vesting Executive Securities which have
become vested are referred to herein as "Vested Interests," and all other units
of Vesting Executive Securities are referred to herein as "Unvested Interests."
8. Repurchase Option on Vesting Executive Interests. In the event
the Executive ceases to be employed by the Company and its Subsidiaries for any
reason (the "Termination"), the Vesting Executive Securities (whether held by
the Executive or one or more of the Executive's transferees) will be subject to
repurchase by the Company and the Investor (or its designees) pursuant to the
terms and conditions set forth in this Section 8 (the "Repurchase Option").
(a) (i) The purchase price for each Unvested Interest of
Vesting Executive Securities will be the Executive's Original Cost for such unit
plus interest thereon calculated at a rate per annum equal to the latest
published rate for United States Treasury Bills with a five year maturity as
published in the "Treasury Bonds, Notes & Bills" column of the Wall Street
Journal; (ii) the purchase price for each Vested interest of Vesting Executive
Securities will be the Fair Value for such unit; and (iii) notwithstanding the
foregoing, if the termination of the Employment Period is by the Company for
Cause or by the voluntary resignation of the Executive without a Good Reason
Event, then the purchase price for each Vested Securities and each Unvested
Securities will be the Executive's Original Cost.
(b) The Board may elect to cause the Company to purchase
(i) all or a portion of the Unvested Interests and/or, (ii) all or a portion of
the Vested Interests by delivering written notice (the "Repurchase Notice") to
the holder or holders of the Vesting Executive Securities within 90 days after
the Termination. The Repurchase Notice will set forth the number of Unvested
Interests and Vested Interests to be acquired from each holder, the aggregate
consideration to be paid for such securities and the time and place for the
closing of the transaction. The number of units of Vesting Executive Securities
to be repurchased by the Company shall first be satisfied to the extent possible
from the Vesting Executive Securities held by the Executive at the time of
delivery of the Repurchase Notice. If the number of Vesting Interests then held
by the Executive is less than the total number of units of Vesting Executive
Securities the Company has elected to purchase the Company shall purchase the
remaining Vesting Executive Securities elected to be purchased from the other
holder(s) of Executive Securities, pro rata according to the amount of such
Vesting Executive Securities held by such other holder(s) at the time of
delivery of such Repurchase Notice (determined as nearly as practicable to the
nearest share). The number of Unvested Interests and Vested Interests to be
repurchased hereunder will be allocated among the Executive and the other
holders of Vesting Executive Securities (if any) pro rata according to the
number of units of Vesting Executive Securities to be purchased from such
Persons.
(c) If for any reason the Company does not elect to
purchase all of the units of Vesting Executive Securities that are subject to
the Repurchase Option, pursuant to such Repurchase Option, the Investor (or its
designees) shall be entitled to exercise the Repurchase Option for the Vesting
Executive Securities the Company has not elected to purchase (the "Available
Securities"). Of the Available Securities, the Vested Interests are referred to
herein as "Available Vested Interests" and Unvested Interests are referred to
herein as "Available Unvested Interests". As soon as practicable after the
Company has determined that there will be Available Securities, but in an event
within 150 days after the Termination, the Company shall give written notice
(the "Option Notice") to the Investor (or its designees) setting forth the
number of Available Vested Interests, Available Unvested Interests, and the
purchase price for each of such Available Securities. The Investor (or its
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<PAGE> 12
designees) may elect to purchase all or a portion of (i) Available Vested
Interests, and/or (ii) all or a portion of the Available Unvested Interests by
giving written notice to the Company within 45 days after the Option Notice has
been given by the Company. As soon as practicable, and in any event within ten
days after the expiration of the 45-day period set forth above, the Company
shall notify each holder of Vesting Executive Securities as to the number of
Vested Interests or Unvested Interests being purchased from such holder by the
Investor (or its designees) (the "Supplemental Repurchase Notice"). At the time
the Company delivers the Supplemental Repurchase Notice to the holder(s) of such
Vesting Executive Securities, the Company shall also deliver written notice to
the Investor (or its designees) setting forth the number of Vested Interests and
Unvested Interests which the Investor (or its designees) is entitled to
purchase, the aggregate purchase price and the time and place of the closing of
the transaction.
(d) The closing of the purchase of the Vesting Executive
Securities pursuant to the Repurchase Option shall take place on the date
designated by the Company in the Repurchase Notice or Supplemental Repurchase
Notice, which date shall not be later than the 30th day after the delivery of
the later of such notices to be delivered (or, if later, the 15th day after the
Fair Value is finally determined) nor earlier than the fifth day after such
delivery. The Company and/or the Investor (or its designee) will pay for the
Vesting Executive Securities to be purchased pursuant to the Repurchase Option
by delivery of a certified or cashier's check or wire transfer of funds. The
purchasers of Vesting Executive Securities hereunder will be entitled to receive
customary presentations and warranties from the sellers as to title, authority
and capacity to sell.
(e) Notwithstanding anything to the contrary contained in
this Agreement, all repurchases of Vesting Executive Securities by the Company
shall be subject to applicable legal restrictions. If any such restrictions
prohibit the repurchase of Vesting Executive Securities hereunder which the
Company is otherwise entitled to make, the Company may make such repurchases as
soon as it is permitted to do so under such restrictions.
(f) If a Sale of the Company shall be consummated within
six months of the consummation of the repurchase of Vesting Executive Securities
pursuant to this Section 8, then with respect to each unit of Vested Interests
sold by the Executive pursuant to this Section 8, the Executive shall be
entitled to receive an amount equal to the difference, if any, (i) between the
per unit consideration (with respect to the Common Interests) received by the
Investor in connection with the Sale of the Company and (11) the repurchase
price per unit paid to the Executive; provided, that if the Termination is by
the Company for Cause or by the voluntary resignation of the Executive without a
Good Reason Event, this Section 8(f) shall not apply.
9. Restrictions on Transfer.
(a) If certificated, the Executive Securities will bear
the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION
FROM REGISTRATION THEREUNDER. THE SECURITIES
REPRESENTED BY THIS
-12-
<PAGE> 13
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL
RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE OPTIONS
AND CERTAIN OTHER AGREEMENTS SET FORTH IN AN
EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND THE
SIGNATORY THERETO DATED AS OF NOVEMBER __, 1996. A
COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER
HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS
WITHOUT CHARGE."
(b) No holder of Executive Securities may sell, transfer
or dispose of any units of Executive Securities (except pursuant to an effective
registration statement under the Securities Act) without first delivering to the
Company an opinion of counsel (reasonably acceptable in form and substance to
the Company) that neither registration nor qualification under the Securities
Act and applicable state securities laws is required in connection with such
transfer.
(c) Each holder of Executive Securities agrees not to
effect any sale or distribution of any Executive Securities or other equity
securities of the Company, or any securities convertible into or exchangeable or
exercisable for any of the Company's equity securities, during the seven days
prior to and the 120 days (or, subject to the requirements of the underwriters,
up to 180 days) after the effectiveness of any underwritten public offering,
except as part of such underwritten public offering or if otherwise permitted by
the Company.
10. Notices. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement will
be in writing and will be deemed to have been given when delivered personally,
mailed by certified or registered mail, return receipt requested and postage
prepaid, or sent via a nationally recognized overnight courier, or sent via
facsimile to the recipient with telephonic confirmation by the sending party.
Such notices, demands and other communications will be sent to the address
indicated below:
To the Company or Sleepmaster:
c/o Sleepmaster L.L.C.
2001 Lower Road
Linden, NJ 07036
Attention: President
Telecopy No.: (908) 381-4455
With a copy to:
Citicorp Venture Capital, Ltd.
399 Park Avenue
l4th Floor
New York, NY 10043
Attention: Mr. John Weber
Telecopy No.: (212) 888-2940
-13-
<PAGE> 14
To the Executive:
c/o Sleepmaster L.L.C.
2001 Lower Road
Linden, NJ 07036
Attention: Mr. Timothy DuPont
Telecopy No.: (908) 381-4455
To the Investor:
c/o Citicorp Venture Capital, Ltd.
399 Park Avenue
14th Floor
New York, NY 10043
Attention: Mr. John Weber
Telecopy No.: (212) 888-2940
With a copy to:
Kirkland & Ellis
153 East 53rd Street
New York, NY 10022
Attention: Kirk A. Radke, Esq.
Telecopy No.: (212) 446-4900
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party.
11. Miscellaneous.
(a) Transfers in Violation of Agreement. Any transfer or
attempted transfer of any Executive Securities in violation of any provision of
this Agreement shall be null and void. and the Company shall not record such
transfer on its books or treat any purported transferee of such Executive
Securities as the owner of such securities for any purpose.
(b) Severability. Whenever possible, each provision of
this Agreement will be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or
rule in any jurisdiction, such invalidity, illegality or unenforceability will
not affect any other provision or any other jurisdiction, but this Agreement
will be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained herein.
(c) Complete Agreement. This Agreement, the
Securityholders Agreement, and the Recapitalization Agreement embody the
complete agreement and understanding among the parties and supersede and preempt
any prior understandings, agreements or representations by or among the
-14-
<PAGE> 15
parties, written or oral, which may have related to the subject matter hereof in
any way, including, without limitation, the Previous Agreement.
(d) Counterparts. This Agreement may be executed in
separate counterparts, each of which is deemed to be an original and all of
which taken together constitute one and the same agreement.
(e) Successors and Assigns. Except as otherwise provided
herein, this Agreement shall bind and inure to the benefit of and be enforceable
by the Executive, the Company, the Investor and their respective successors and
assigns (including subsequent holders of Executive Securities); provided that
the rights and obligations of the Executive under this Agreement shall not be
assignable except in connection with a permitted transfer of Executive
Securities hereunder.
(f) Third Party Beneficiary. This Agreement is intended
for the benefit of, and will be enforceable by, the Investor.
(G) GOVERNING LAW. ALL QUESTIONS CONCERNING THE
CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT AND THE EXHIBITS
HERETO WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF
THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF
LAW PROVISION OR RULE (WHETHER OF THE STATE OF NEW YORK OR ANY OTHER
JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION
OTHER THAN THE STATE OF NEW YORK; PROVIDED, THAT ANY QUESTIONS REQUIRING
INTERPRETATION OF THE LAWS GOVERNING LIMITED LIABILITY COMPANIES SHALL BE
GOVERNED BY THE NEW JERSEY LIMITED LIABILITY COMPANY ACT.
(h) Remedies. Each of the parties to this Agreement
(including the Investor) will be entitled to enforce its rights under this
Agreement specifically, to recover damages and costs (including reasonable
attorneys' fees) caused by any breach of any provision of this Agreement and to
exercise all other rights existing in its favor. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or deposit) for specific performance and/or other injunctive relief in
order to enforce or prevent any violations of the provisions of this Agreement.
(i) Amendment and Waiver. The provisions of this
Agreement may be amended and waived only with the prior written consent of the
Company, the Executive and the Investor.
* * * * *
-15-
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have executed this
Employment Agreement as of the date first written above.
SLEEPMASTER HOLDINGS L.L.C.
By: Charles Schweitzer
-------------------------------------
Name: James P. Koscica
Title: Executive Vice President
SLEEPMASTER L.L.C.
By: Charles Schweitzer
-------------------------------------
Name: James P. Koscica
Title: Executive Vice President
/s/ Timothy DuPont
-----------------------------------------
TIMOTHY DUPONT
Agreed and Accepted:
SLEEP INVESTOR L.L.C.
By: John D. Weber
-------------------------------------
Name: John D. Weber
Title: Member
-16-
<PAGE> 17
SCHEDULE A
EBITDA PLAN
<TABLE>
<CAPTION>
FISCAL YEAR EBITDA TARGET
----------------- -------------------
<S> <C>
1996 $ 8,590,000
1997 $10,525,000
1998 $12,323,000
1999 $13,608,000
2000 $15,453,000
2001 $16,137,000
</TABLE>
-17-
<PAGE> 18
SCHEDULE B
EMPLOYEE BENEFITS
Executive Medical Plan --100% reimbursable medical expenses
Personal Term Life Insurance --coverage $299,760
Permitted Vacation: 3 weeks per year
-18-
<PAGE> 1
EXHIBIT 10.13
EXECUTION COPY
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is dated as of November __, 1996, by
and among Sleepmaster Holdings L.L.C., a New Jersey limited liability company
(the "Company"), Sleepmaster L.L.C., a New Jersey limited liability company
("Sleepmaster"), Michael Reilly (the "Executive") and Sleep Investor L.L.C., a
Delaware limited liability company (the "Investor").
The Company, Sleepmaster and the Executive desire to enter
into an agreement regarding (i) the employment of the Executive as President and
Chief Executive Officer of Sleepmaster, and (ii) certain restrictions regarding
the Company's Class A Common Interests (the "Class A Common") acquired by the
Executive pursuant to the Recapitalization, Redemption and Repurchase Agreement
by and among the Executive, the Company and certain other parties thereto dated
as of October 31, 1996 (the "Recapitalization Agreement").
Certain provisions of this Agreement are intended for the
benefit of, and will be enforceable by, the Investor.
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. As used herein, the following terms shall have
the following meanings.
"Affiliate" means, as to any Person, any other Person which
directly or indirectly controls, or is under common control with, or is
controlled by, such Person. As used in this definition, "control" (including
with its correlative meanings, "controlled by" and "under common control with")
shall mean possession, directly or indirectly, of power to direct or cause the
direction of management or policies (whether through ownership of securities or
partnership or other ownership interests, by contract or otherwise).
"Board" means the Company's board of advisors.
"Business Day" means any day other than a Saturday or Sunday
or a day on which commercial banks are required or authorized to close in New
York, New York.
"Cause" means (i) a breach of the Executive's covenants under
this Agreement or any other agreements with the Company or its Subsidiaries and
such breach shall not have been cured within 30 days after written notice to the
Executive, (ii) the commission by the Executive of a felony, a crime involving
moral turpitude or other act causing material harm to the standing and
reputation of the Company or any of its Subsidiaries, or (iii) the Executive's
repeated wilful failure to comply with the reasonable and lawful written
directives of the Board.
"Common Interests" means the Class A Common and the Company's
Class B Common Interests, as adjusted for any unit split, unit dividend, or
other combination, exchange. conversion, recapitalization, merger, consolidation
or reorganization, or if such Common Interests are exchanged for different
interests or securities of the Company, such other interests or securities and
any other Common Interests of the Company hereinafter issued.
<PAGE> 2
"Disability" means the inability, due to illness, accident,
injury, physical or mental incapacity or other disability, of the Executive to
carry out effectively his duties and obligations to the Company or to
participate effectively and actively in the management of the Company or a
Subsidiary of the Company for a period of at least 90 consecutive days or for
shorter periods aggregating at least 120 days (whether or not consecutive)
during any twelve-month period, as determined in the reasonable judgment of the
Board.
"Executive Securities" means the Class A Common acquired by
the Executive and will include units of the Company's Common Interests issued
with respect to Executive Securities by way of a split, dividend, combination,
exchange, conversion, or other recapitalization, merger, consolidation or
reorganization. Executive Securities will cease to be Executive Securities when
transferred pursuant to a Qualified Public Offering or Sale of the Company.
Executive Securities will continue to be Executive Securities in the hands of
any holder other than the Executive, including all transferees of the Executive
(except for the Company and the Investor (or its designee)), and except as
otherwise provided herein, each such other holder of Executive Securities will
succeed to all rights and obligations attributable to the Executive as a holder
of Executive Securities hereunder.
"Fair Value" of each unit of Class A Common means the average
of the closing prices of the sales of the Company's membership interests on all
securities exchanges on which the membership interests may at the time be
listed, or, if there have been no sales on any such exchange on any day, the
average of the highest bid and lowest asked prices on all such exchanges at the
end of such day, or, if on any day the membership interests are not so listed,
the average of the representative bid and asked prices quoted on the Nasdaq
National Market System ("Nasdaq NMS") as of 4:00 P.M., New York time, or, if on
any day the membership interests are not quoted in the Nasdaq NMS, the average
of the highest bid and lowest asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau
Incorporated, or any similar successor organization, in each such case averaged
over a period of 21 days consisting of the day as of which the Fair Value is
being determined and the 20 consecutive business days prior to such day. If at
any time the Class A Common is not listed on any securities exchange or quoted
in the NMS or the over-the-counter market, the Fair Value of each unit of Class
A Common shall be the fair market value of such unit as determined by the Board
in its good faith judgment.
"GAAP" means U.S. generally accepted accounting principles, as
in effect from time to time and as adopted by the Company with the consent of
its independent public accountants, consistently applied.
"Good Reason Event" means (i) the failure of the Company or
Sleepmaster to make the payments described herein within 5 Business Days of the
applicable payment due date, (ii) the written request by the Board of Advisors
of either the Company or Sleepmaster that the Executive relocate his primary
residence.
"Original Cost" of the Vesting Executive Securities purchased
on the date hereof will be equal to $100.00 per unit.
-2-
<PAGE> 3
"Person" means an individual, a partnership, a corporation, an
association, a limited liability company, a joint stock company, a trust, a
joint venture, an unincorporated organization or a governmental entity or any
department, agency or political subdivision thereof.
"Preferred Interests" means the Company's Series A Preferred
Interests, as adjusted for any unit split, unit dividend or other combination,
exchange, conversion, recapitalization, merger, consolidation or reorganization,
or if the Series A Preferred Interests are hereafter changed into or exchanged
for different interests or securities of the Company, such other interests or
securities, and any other preferred interests of the Company hereinafter issued,
"Public Offering" means any sale of securities of the Company
in an underwritten public offering.
"Qualified Public Offering" means any sale, in an underwritten
public offering registered under the Securities Act, of equity securities of the
Company having an aggregate value of at least $20 million.
"Sale of the Company" means the sale of the Company, in a
single transaction or a series of related transactions, to a third party (which
is not an Affiliate of the Investor) pursuant to which such third party proposes
to acquire all or substantially all of the outstanding Common Interests (whether
by merger, consolidation, recapitalization, reorganization, purchase of the
outstanding Common Interests or otherwise) or all or substantially all of the
consolidated assets of the Company or Sleepmaster.
"Securities Act" means the Securities Act of 1933, as amended
from time to time.
"Securityholders Agreement" means the Securityholders
Agreement dated as of the date hereof by and among the Company, the Executive,
the Investor and certain other parties thereto.
"Subsidiary" means, with respect to any Person, any
corporation, partnership, limited liability company, association or other
business entity of which (i) if a corporation or a limited liability company, a
majority of the total voting power of securities entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
that Person or one or more of the other Subsidiaries of that Person or a
combination thereof, or (ii) if a partnership, association or other business
entity, a majority of the partnership or other similar ownership interest
thereof is at the time owned or controlled, directly or indirectly, by any
Person or one or more Subsidiaries of that Person or a combination thereof. For
purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a partnership, association or other business entity if
such Person or Persons shall be allocated a majority of partnership, association
or other business entity gains or losses or shall be or control the managing
director or general partner of such partnership, association or other business
entity.
"Termination Year" means that fiscal year of the Company
during which the Employment Period ends pursuant to the terms of Section 2(d)
hereof.
-3-
<PAGE> 4
"Vesting Executive Securities" means the 200 units of Class A
Common subject to vesting and any securities issued in connection therewith, as
adjusted for any unit split, unit dividend, or other combination, exchange,
recapitalization, merger, consolidation or reorganization. Vesting Executive
Securities will cease to be Vesting Executive Securities when transferred
pursuant to a Qualified Public Offering or Sale of the Company. Vesting
Executive Securities will continue to be Vesting Executive Securities in the
hands of any holder other than the Executive, including all transferees of the
Executive (except for the Company and the Investor (or its designees)), and
except as otherwise provided herein, each such other holder of Vesting Executive
Securities will succeed to all rights and obligations attributable to the
Executive as a holder of Executive Securities hereunder.
2. Employment.
(a) Employment. Sleepmaster agrees to employ the
Executive, and the Executive hereby accepts employment with Sleepmaster, upon
the terms and conditions set forth in this Agreement for the period beginning on
the date hereof and ending as provided in Section 2(d) (the "Employment
Period").
(b) Position and Duties.
(i) Commencing on the date hereof and continuing
during the Employment Period, the Executive shall serve as President and Chief
Executive Officer of Sleepmaster under the supervision and direction of the
Company's and Sleepmaster's respective hoards of advisors.
(ii) The Executive shall devote his best efforts
and his full business time and attention (except for permitted vacation periods
and reasonable periods of illness other than Disability) to the business and
affairs of the Company, Sleepmaster and their Subsidiaries. The Executive shall
perform his duties and responsibilities to the best of his abilities in a
diligent, trustworthy, businesslike and efficient manner.
(c) Base Salary and Benefits.
(i) Base Salary. During the Employment Period,
Executive's base salary shall be $163,000 per annum through fiscal year 1996 and
will increase as of January 1, 1997 to $171,000 per annum (the "Base Salary"),
which salary shall be paid by Sleepmaster in regular installments in accordance
with Sleepmaster's general payroll practices and shall be subject to customary
withholding.
(ii) Executive Bonus Plan. For each fiscal year
during the Employment Period, the Executive will be eligible to receive a bonus
based on the Company's achievement of the Target EBITDA for such fiscal year as
set forth on the Company's EBITDA Plan attached as Schedule
-4-
<PAGE> 5
A hereto (the "EBITDA Plan"). In the event the Company or Sleepmaster
consummates an acquisition of another Person prior to December 31, 2001, the
EBITDA Plan will be adjusted in good faith by senior management and approved by
the Board, and such adjusted and approved plan shall, once approved, be deemed
the EBITDA Plan for all purposes hereunder.
(A) Once the Board has determined
(which determination shall be made within thirty (30) days from the issuance of
the Company's audited financial statements) the percentage of EBITDA achieved
for such fiscal year as compared to the Target EBITDA for such fiscal year (the
"Achieved EBITDA Percentage"), so long as the Achieved EBITDA Percentage for
such fiscal year equals or exceeds 80%, the Executive shall be entitled to
receive a bonus payment in an amount equal to the product of (x) the Bonus
Multiple (as set forth opposite the Achieved EBITDA Percentage below), (y) 21.5%
and (z) the Executive's Base Salary for such fiscal year. The bonus payment
shall be made within five (5) days of the Board's determination.
<TABLE>
<CAPTION>
Achieved EBITDA Percentage Bonus Multiple
<S> <C>
80% 50%
100% 100%
110% 125%
120% 150%
</TABLE>
(B) Each Bonus Multiple set forth above
shall increase linearly as the Achieved EBITDA Percentage increases; therefore,
so long as the Achieved EBITDA Percentage equals or exceeds 80%, in the event
the actual Achieved EBITDA Percentage falls between any of the target Achieved
EBITDA Percentages set forth above, the applicable Bonus Multiple shall be
adjusted accordingly, provided, that in no event shall the Bonus Multiple exceed
150%. For example, (1) in the event the actual Achieved EBITDA Percentage is
90%, the Bonus Multiple shall be 75% or (2) in the event the actual Achieved
EBITDA Percentage is 115%, the Bonus Multiple shall be 137.5%.
(C) With respect to fiscal year 1996,
the Executive shall be entitled to receive a bonus as follows: (1) the Executive
will be entitled to receive a portion of the bonus earned by the Executive under
that certain Employment Agreement dated January 2, 1995 between Sleepmaster and
the Executive (the "Previous Agreement") determined based on the portion of
fiscal year 1996 prior to the date hereof and (2) the Executive will be entitled
to receive a portion of the bonus earned by the Executive under this Agreement
determined based on the portion of the fiscal year after the date hereof.
(iii) Benefits. In addition to the Base Salary and
any bonuses payable to the Executive pursuant to Section 2(c)(ii), the Executive
shall be entitled, during the Employment Period, to all benefits set forth on
Schedule B hereto (the "Benefits").
(iv) Expenses. The Company shall reimburse the
Executive for all reasonable expenses incurred by him in the course of
performing his duties under this Agreement which are consistent with the
Company's and its Subsidiaries' policies in effect from time to time with
respect to travel, entertainment and other business expenses, subject to the
requirements of the Company and its Subsidiaries with respect to reporting and
documentation of such expenses.
-5-
<PAGE> 6
(d) Term. The Employment Period shall end on November 1,
2001, subject to earlier termination (x) by reason of the Executive's death or
Disability, (y) by resolution of the Board, with or without Cause or (z) upon
the Executive's voluntary resignation with or without a Good Reason Event.
(i) If the Employment Period is terminated on or
before November 1, 2001:
(A) pursuant to Section 2(d)(y) above,
by the Company other than for Cause, the Executive shall be entitled to receive
(1) the stated Base Salary through the period ending on the earlier of November
1, 2001 and the later of (x) January 2, 2000 and (y) the second anniversary of
the date of termination, and (2) a portion of the bonus payment earned by the
Executive during the Termination Year pro rated based on the number of days of
the Termination Year prior to the date of termination, which such payment will
be made when the bonus payments for such Termination Year are otherwise due.
(B) as a result of the Executive's
death or Disability, the Executive or the Executive's estate, as applicable,
shall be entitled to all previously earned and accrued but unpaid Base Salary up
to the date of such termination but shall not be entitled to any further Base
Salary, bonus payments or Benefits for that year or any future year, or to any
other severance compensation of any kind, nature or amount.
(C) as a result of the Executive's
voluntary resignation other than after a Good Reason Event, or by the Company
for Cause, the Executive shall be entitled to all previously earned and accrued
but unpaid Base Salary up to the date of such termination but shall not be
entitled to any further Base Salary, bonus payments or Benefits for that year or
any future year, or to any other severance compensation of any kind, nature or
amount.
(D) as a result of the Executive's
voluntary resignation within 5 days of a Good Reason Event, the Executive shall
be entitled to receive (1) the stated Base Salary through the period ending on
the earlier of November 1, 2001 and the later of (x) January 2, 2000 and (y) the
second anniversary of the date of termination, and (2) a portion of the bonus
payment earned by the Executive during the Termination Year pro rated based on
the number of days of the Termination Year prior to the date of determination,
which such payment will be made when the bonus payments for such Termination
Year are otherwise due.
(ii) Following the termination of the Employment
Period:
(A) the Executive agrees that: (1) the
Executive shall be entitled to the payments provided for in Sections 2(d)(i)(A)
or (D), if any, if and only if Executive has not breached as of the date of
termination of the Employment Period the provisions of Sections 3, 4 and 5
hereof and does not breach such sections at any time during the period for which
such payments are to be made and (2) the Company's obligation to make such
payments will terminate upon the occurrence of any such breach during any such
severance period.
(B) any payments pursuant to Sections
2(d)(i)(A)(1) or 2(d)(i)(D)(1) shall be paid by Sleepmaster in regular
installments in accordance with Sleepmaster's general payroll practices and
shall be subject to customary withholding, and following such payments
-6-
<PAGE> 7
none of the Company, or any of its Subsidiaries shall have any further
obligation to the Executive pursuant to this Section 2(d) except as provided by
law.
(iii) The Executive hereby agrees that except as
expressly provided herein. no severance compensation of any kind, nature or
amount shall be payable to the Executive and except as expressly provided
herein, the Executive hereby irrevocably waives any claim for severance
compensation.
(iv) All of the Executive's rights to Benefits
hereunder (if any) shall cease upon the termination of the Employment Period.
(v) Subject to the restrictive covenant
contained in Section 5, the Executive acknowledges an obligation to seek or
obtain other engagements or employment in a similar position to mitigate any
damages to which the Executive may be entitled by reason of any termination of
this Agreement pursuant to Sections 2(d)(i)(A) or (D). If the Employee does
obtain other engagements or employment of any nature and in any location, the
total compensation actually earned by the Executive from such other employment
or engagements during the period that he is to receive payments, if any,
pursuant to Sections 2(d)(i)(A) or (D) shall reduce any amounts which the
Company would otherwise be required to pay the Executive under this Agreement.
3. Confidential Information. The Executive acknowledges that the
information, observations and data obtained by him while employed by the Company
or any of its Subsidiaries concerning the business or affairs of the Company or
any Subsidiary ("Confidential Information") are the property of the Company or
such Subsidiary. Therefore, the Executive agrees that, except as required by law
or court order, he shall not disclose to any unauthorized person or use for his
own account any Confidential Information without the prior written consent of
the Board, unless and to the extent that the aforementioned matters become
generally known to and available for use by the public other than as a result of
the Executive's acts or omissions to act. The Executive shall deliver to the
Company at the termination of such Executive's employment, or at any other time
the Company may request, all memoranda, notes, plans, records, reports, computer
tapes and software and other documents and data (and copies thereof) relating to
the Confidential Information, Work Product (as defined below) and the business
of the Company or any Subsidiary which he may then possess or have under his
control.
4. Inventions and Patents. The Executive agrees that all
inventions, innovations, improvements, developments, methods, designs, analyses,
drawings, reports, and all similar or related information which relates to the
Company's or any of its Subsidiaries' actual or anticipated business, research
and development or existing or future products or services and which are
conceived, developed or made by the Executive while employed by the Company or
any of its Subsidiaries ("Work Product") belong to the Company or such
Subsidiary. The Executive will promptly disclose such Work Product to the Board
and perform all actions reasonably requested by the Board (whether during or
after the Employment Period) to establish and confirm such ownership (including,
without limitation, assignments, consents, powers of attorney and other
instruments).
-7-
<PAGE> 8
5. Noncompete, Nonsolicitation.
(a) The Executive acknowledges that in the course of his
employment with the Company and its Subsidiaries he has become familiar, and he
will become familiar, with the Company's and its Subsidiaries' trade secrets and
with other Confidential Information and that his services have been and will be
of special, unique and extraordinary value to the Company and its Subsidiaries.
Therefore, the Executive agrees that, during the time he is employed by the
Company and its Subsidiaries and during any applicable Post-Termination Period
(the "Noncompete Period"), he shall not directly or indirectly own, operate,
manage, control, participate in, consult with, advise, provide services for, or
in any manner engage in any business (including by himself or in association
with any person, firm, corporate or other business organization or through any
other entity) in competition with, or potential competition with, the businesses
of the Company or its Subsidiaries as such businesses exist or are in process on
the date of the termination of the Executive's employment, within any
geographical area in which the Company or any of its Subsidiaries engages or
plans to engage in such businesses. Nothing herein shall prohibit the Executive
from being a passive owner of not more than 2% of the outstanding stock of a
corporation which is publicly traded, so long as the Executive has no active
participation in the business of such corporation. For purposes of this Section
5, "Post-Termination Period" means, as applicable: (i) if the Executive is
entitled to receive payments pursuant to Sections 2(d)(i)(A)(1) or
2(d)(i)(D)(1), then for the period through the later of (x) January 2, 2000 and
(y) the second anniversary of the date of termination, (ii) if the Employment
Period ends on November 1, 2001 and not less than 30 days prior to such date
either the Company or Sleepmaster offers the Executive employment on terms
substantially similar to the terms set forth herein and the Executive refuses
such offer, the period of eighteen (18) months (following the Employment Period)
ending on May 1, 2003 or (iii) if the Employment Period is terminated by the
Company for Cause or by the voluntary resignation of the Executive without a
Good Reason Event, the period of eighteen (18) months following the date of
termination.
(b) During the Noncompete Period, the Executive shall not
directly or indirectly through another entity (i) induce or attempt to induce
any employee of the Company or any Subsidiary to leave the employ of the Company
or such Subsidiary, or in any way interfere with the relationship between the
Company or any Subsidiary and any employee thereof, including without
limitation, inducing or attempting to induce any union, employee or group of
employees to interfere with the business or operations of the Company or its
Subsidiaries, (ii) hire any person who was an employee of the Company or any
Subsidiary at any time during the Executive's employment period, or (iii) induce
or attempt to induce any customer, supplier, distributor, franchisee, licensee
or other business relation of the Company or any Subsidiary to cease doing
business with the Company or such Subsidiary, or in any way interfere with the
relationship between any such customer, supplier, distributor, franchisee,
licensee or business relation and the Company or any Subsidiary.
(c) The Executive agrees that: (i) the covenants set
forth in this Section 5 are reasonable in geographical and temporal scope and in
all other respects, (ii) the Company would not have entered into this Agreement
but for the covenants of the Executive contained herein, and (iii) the covenants
contained herein have been made in order to induce the Company to enter into
this Agreement.
(d) If, at the time of enforcement of this Section 5, a
court shall hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing,
-8-
<PAGE> 9
the parties agree that the maximum duration, scope or area reasonable under such
circumstances shall be substituted for the stated duration, scope or area and
that the court shall be allowed to revise the restrictions contained herein to
cover the maximum period, scope and area permitted by law.
(e) The Executive recognizes and affirms that in the
event of his breach of any provision of this Section 5, money damages would be
inadequate and the Company and the Investor would have no adequate remedy at
law. Accordingly, the Executive agrees that in the event of a breach or a
threatened breach by the Executive of any of the provisions of this Section 5,
the Company, in addition and supplementary to other rights and remedies existing
in its favor, may apply to any court of law or equity of competent jurisdiction
for specific performance and/or injunctive or other relief in order to enforce
or prevent any violations of the provisions hereof (without posting a bond or
other security).
6. Executive Securities.
(a) With respect to the Vesting Executive Securities,
within 30 days from the date hereof, the Executive will make an effective
election with the Internal Revenue Service under Section 83(b) of the Internal
Revenue Code and the regulations promulgated thereunder in the form of Exhibit A
attached hereto.
(b) In connection with the acquisition of the Executive
Securities, the Executive represents and warrants to the Company that:
(i) The Executive Securities to be acquired by
the Executive pursuant to this Agreement will be acquired for the Executive's
own account and not with a view to, or intention of, distribution thereof in
violation of the Securities Act, or any applicable state securities laws, and
the Executive Securities will not be disposed of in contravention of the
Securities Act or any applicable state securities laws.
(ii) No commission, fee or other remuneration is
to be paid or given, directly or indirectly, to any Person for soliciting the
Executive to purchase the Executive Securities.
(iii) The Executive is an executive officer of the
Company, is sophisticated in financial matters and is able to evaluate the risks
and benefits of the investment in the Executive Securities and has determined
that such investment in the Executive Securities is suitable for the Executive,
based upon the Executive's financial situation and needs, as well as the
Executive's other securities holdings.
(iv) The Executive qualifies an "accredited
investor" within the meaning of Rule 501 (a) of Regulation D under the
Securities Act.
(v) The Executive is able to bear the economic
risk of the Executive's investment in the Executive Securities for an indefinite
period of time and the Executive understands that the Executive Securities have
not been registered under the Securities Act and cannot be sold unless
subsequently registered under the Securities Act or an exemption from such
registration is available.
-9-
<PAGE> 10
(vi) The Executive has had an opportunity to ask
questions and receive answers concerning the terms and conditions of the
offering of Executive Securities and has had full access to such other
information concerning the Company as the Executive has requested. The Executive
has reviewed, or has had an opportunity to review, the following documents: (A)
the Recapitalization Agreement; (B) the organization documents of the Company
and Sleepmaster; (C) the loan agreements, notes and related documents with the
Company's senior lenders; (D) the loan agreement, notes and related documents
with the Company's senior subordinated lender; and (E) all of the materials
provided by the Company to any Person providing financing to the Company,
including, but not limited to, the Company's pro forma balance sheet, as well as
financial projections, estimates, forecasts, budgets, summaries, reports and
other related documents.
(vii) This Agreement constitutes the legal, valid
and binding obligation of the Executive, enforceable in accordance with its
terms, and the execution, delivery and performance of this Agreement by the
Executive does not and will not conflict with, violate or cause a breach of any
agreement, contract or instrument to which the Executive is a party or any
judgment, order or decree to which the Executive is subject.
(c) As an inducement to the Company to issue the
Executive Securities to the Executive, and as a condition thereto, the Executive
acknowledges and agrees that neither the issuance of the Executive Securities to
the Executive nor any provision contained herein shall entitle the Executive to
remain in the employment of the Company and its Subsidiaries or affect the right
of the Company to terminate the Executive's employment at any time for any
reason.
7. Vesting of Executive Securities. (a) (i) 180 units of the
Class A Common and (ii) 257.14 units of Preferred Interests evidenced by
certificates issued in connection therewith are fully vested as of the date
hereof and are not subject to the terms of Section 4 below. The Vesting
Executive Securities originally acquired by the Executive will become vested in
accordance with the following schedule if, as of each such date, the Executive
is still employed by the Company or its Subsidiaries;
<TABLE>
<CAPTION>
Cumulative Percentage of Units
of Vesting Executive
Date Date Securities Which Will Vest
- -------------------------------------------------------- -------------------------------
<S> <C>
First anniversary of the date hereof ("Year 1") 20%
Second anniversary of the date hereof ("Year 2") 40%
Third anniversary of the date hereof ("Year 3") 60%
Fourth anniversary of the date hereof ("Year 4") 80%
Fifth anniversary of the date hereof ("Year 5") 100%
</TABLE>
provided, that all Vesting Executive Securities shall automatically vest in
connection with a Sale of the Company.
-10-
<PAGE> 11
(b) Units of Vesting Executive Securities which have
become vested are referred to herein as "Vested Interests," and all other units
of Vesting Executive Securities are referred to herein as "Unvested Interests."
8. Repurchase Option on Vesting Executive Interests. In the event
the Executive ceases to be employed by the Company and its Subsidiaries for any
reason (the "Termination"), the Vesting Executive Securities (whether held by
the Executive or one or more of the Executive's transferees) will be subject to
repurchase by the Company and the Investor (or its designees) pursuant to the
terms and conditions set forth in this Section 8 (the "Repurchase Option").
(a) (i) The purchase price for each Unvested Interest of
Vesting Executive Securities will be the Executive's Original Cost for such unit
plus interest thereon calculated at a rate per annum equal to the latest
published rate for United States Treasury Bills with a five year maturity as
published in the "Treasury Bonds, Notes & Bills" column of the Wall Street
Journal; (ii) the purchase price for each Vested interest of Vesting Executive
Securities will be the Fair Value for such unit; and (iii) notwithstanding the
foregoing, if the termination of the Employment Period is by the Company for
Cause or by the voluntary resignation of the Executive without a Good Reason
Event, then the purchase price for each Vested Securities and each Unvested
Securities will be the Executive's Original Cost.
(b) The Board may elect to cause the Company to purchase
(i) all or a portion of the Unvested Interests and/or, (ii) all or a portion of
the Vested Interests by delivering written notice (the "Repurchase Notice") to
the holder or holders of the Vesting Executive Securities within 90 days after
the Termination. The Repurchase Notice will set forth the number of Unvested
Interests and Vested Interests to be acquired from each holder, the aggregate
consideration to be paid for such securities and the time and place for the
closing of the transaction. The number of units of Vesting Executive Securities
to be repurchased by the Company shall first be satisfied to the extent possible
from the Vesting Executive Securities held by the Executive at the time of
delivery of the Repurchase Notice. If the number of Vesting Interests then held
by the Executive is less than the total number of units of Vesting Executive
Securities the Company has elected to purchase the Company shall purchase the
remaining Vesting Executive Securities elected to be purchased from the other
holder(s) of Executive Securities, pro rata according to the amount of such
Vesting Executive Securities held by such other holder(s) at the time of
delivery of such Repurchase Notice (determined as nearly as practicable to the
nearest share). The number of Unvested Interests and Vested Interests to be
repurchased hereunder will be allocated among the Executive and the other
holders of Vesting Executive Securities (if any) pro rata according to the
number of units of Vesting Executive Securities to be purchased from such
Persons.
(c) If for any reason the Company does not elect to
purchase all of the units of Vesting Executive Securities that are subject to
the Repurchase Option, pursuant to such Repurchase Option, the Investor (or its
designees) shall be entitled to exercise the Repurchase Option for the Vesting
Executive Securities the Company has not elected to purchase (the "Available
Securities"). Of the Available Securities, the Vested Interests are referred to
herein as "Available Vested Interests" and Unvested Interests are referred to
herein as "Available Unvested Interests". As soon as practicable after the
Company has determined that there will be Available Securities, but in an event
within 150 days after the Termination, the Company shall give written notice
(the "Option Notice") to the Investor (or its designees) setting forth the
number of Available Vested Interests, Available Unvested Interests, and the
purchase price for each of such Available Securities. The Investor (or its
-11-
<PAGE> 12
designees) may elect to purchase all or a portion of (i) Available Vested
Interests, and/or (ii) all or a portion of the Available Unvested Interests by
giving written notice to the Company within 45 days after the Option Notice has
been given by the Company. As soon as practicable, and in any event within ten
days after the expiration of the 45-day period set forth above, the Company
shall notify each holder of Vesting Executive Securities as to the number of
Vested Interests or Unvested Interests being purchased from such holder by the
Investor (or its designees) (the "Supplemental Repurchase Notice"). At the time
the Company delivers the Supplemental Repurchase Notice to the holder(s) of such
Vesting Executive Securities, the Company shall also deliver written notice to
the Investor (or its designees) setting forth the number of Vested Interests and
Unvested Interests which the Investor (or its designees) is entitled to
purchase, the aggregate purchase price and the time and place of the closing of
the transaction.
(d) The closing of the purchase of the Vesting Executive
Securities pursuant to the Repurchase Option shall take place on the date
designated by the Company in the Repurchase Notice or Supplemental Repurchase
Notice, which date shall not be later than the 30th day after the delivery of
the later of such notices to be delivered (or, if later, the 15th day after the
Fair Value is finally determined) nor earlier than the fifth day after such
delivery. The Company and/or the Investor (or its designee) will pay for the
Vesting Executive Securities to be purchased pursuant to the Repurchase Option
by delivery of a certified or cashier's check or wire transfer of funds. The
purchasers of Vesting Executive Securities hereunder will be entitled to receive
customary presentations and warranties from the sellers as to title, authority
and capacity to sell.
(e) Notwithstanding anything to the contrary contained in
this Agreement, all repurchases of Vesting Executive Securities by the Company
shall be subject to applicable legal restrictions. If any such restrictions
prohibit the repurchase of Vesting Executive Securities hereunder which the
Company is otherwise entitled to make, the Company may make such repurchases as
soon as it is permitted to do so under such restrictions.
(f) If a Sale of the Company shall be consummated within
six months of the consummation of the repurchase of Vesting Executive Securities
pursuant to this Section 8, then with respect to each unit of Vested Interests
sold by the Executive pursuant to this Section 8, the Executive shall be
entitled to receive an amount equal to the difference, if any, (i) between the
per unit consideration (with respect to the Common Interests) received by the
Investor in connection with the Sale of the Company and (11) the repurchase
price per unit paid to the Executive; provided, that if the Termination is by
the Company for Cause or by the voluntary resignation of the Executive without a
Good Reason Event, this Section 8(f) shall not apply.
9. Restrictions on Transfer.
(a) If certificated, the Executive Securities will bear
the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION
FROM REGISTRATION THEREUNDER. THE SECURITIES
REPRESENTED BY THIS
-12-
<PAGE> 13
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL
RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE OPTIONS
AND CERTAIN OTHER AGREEMENTS SET FORTH IN AN
EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND THE
SIGNATORY THERETO DATED AS OF NOVEMBER __, 1996. A
COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER
HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS
WITHOUT CHARGE."
(b) No holder of Executive Securities may sell, transfer
or dispose of any units of Executive Securities (except pursuant to an effective
registration statement under the Securities Act) without first delivering to the
Company an opinion of counsel (reasonably acceptable in form and substance to
the Company) that neither registration nor qualification under the Securities
Act and applicable state securities laws is required in connection with such
transfer.
(c) Each holder of Executive Securities agrees not to
effect any sale or distribution of any Executive Securities or other equity
securities of the Company, or any securities convertible into or exchangeable or
exercisable for any of the Company's equity securities, during the seven days
prior to and the 120 days (or, subject to the requirements of the underwriters,
up to 180 days) after the effectiveness of any underwritten public offering,
except as part of such underwritten public offering or if otherwise permitted by
the Company.
10. Notices. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement will
be in writing and will be deemed to have been given when delivered personally,
mailed by certified or registered mail, return receipt requested and postage
prepaid, or sent via a nationally recognized overnight courier, or sent via
facsimile to the recipient with telephonic confirmation by the sending party.
Such notices, demands and other communications will be sent to the address
indicated below:
To the Company or Sleepmaster:
c/o Sleepmaster L.L.C.
2001 Lower Road
Linden, NJ 07036
Attention: President
Telecopy No.: (908) 381-4455
With a copy to:
Citicorp Venture Capital, Ltd.
399 Park Avenue
l4th Floor
New York, NY 10043
Attention: Mr. John Weber
Telecopy No.: (212) 888-2940
-13-
<PAGE> 14
To the Executive:
c/o Sleepmaster L.L.C.
2001 Lower Road
Linden, NJ 07036
Attention: Mr. Michael Reilly
Telecopy No.: (908) 381-4455
To the Investor:
c/o Citicorp Venture Capital, Ltd.
399 Park Avenue
14th Floor
New York, NY 10043
Attention: Mr. John Weber
Telecopy No.: (212) 888-2940
With a copy to:
Kirkland & Ellis
153 East 53rd Street
New York, NY 10022
Attention: Kirk A. Radke, Esq.
Telecopy No.: (212) 446-4900
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party.
11. Miscellaneous.
(a) Transfers in Violation of Agreement. Any transfer or
attempted transfer of any Executive Securities in violation of any provision of
this Agreement shall be null and void. and the Company shall not record such
transfer on its books or treat any purported transferee of such Executive
Securities as the owner of such securities for any purpose.
(b) Severability. Whenever possible, each provision of
this Agreement will be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or
rule in any jurisdiction, such invalidity, illegality or unenforceability will
not affect any other provision or any other jurisdiction, but this Agreement
will be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained herein.
(c) Complete Agreement. This Agreement, the
Securityholders Agreement, and the Recapitalization Agreement embody the
complete agreement and understanding among the parties and supersede and preempt
any prior understandings, agreements or representations by or among the
-14-
<PAGE> 15
parties, written or oral, which may have related to the subject matter hereof in
any way, including, without limitation, the Previous Agreement.
(d) Counterparts. This Agreement may be executed in
separate counterparts, each of which is deemed to be an original and all of
which taken together constitute one and the same agreement.
(e) Successors and Assigns. Except as otherwise provided
herein, this Agreement shall bind and inure to the benefit of and be enforceable
by the Executive, the Company, the Investor and their respective successors and
assigns (including subsequent holders of Executive Securities); provided that
the rights and obligations of the Executive under this Agreement shall not be
assignable except in connection with a permitted transfer of Executive
Securities hereunder.
(f) Third Party Beneficiary. This Agreement is intended
for the benefit of, and will be enforceable by, the Investor.
(G) GOVERNING LAW. ALL QUESTIONS CONCERNING THE
CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT AND THE EXHIBITS
HERETO WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF
THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF
LAW PROVISION OR RULE (WHETHER OF THE STATE OF NEW YORK OR ANY OTHER
JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION
OTHER THAN THE STATE OF NEW YORK; PROVIDED, THAT ANY QUESTIONS REQUIRING
INTERPRETATION OF THE LAWS GOVERNING LIMITED LIABILITY COMPANIES SHALL BE
GOVERNED BY THE NEW JERSEY LIMITED LIABILITY COMPANY ACT.
(h) Remedies. Each of the parties to this Agreement
(including the Investor) will be entitled to enforce its rights under this
Agreement specifically, to recover damages and costs (including reasonable
attorneys' fees) caused by any breach of any provision of this Agreement and to
exercise all other rights existing in its favor. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or deposit) for specific performance and/or other injunctive relief in
order to enforce or prevent any violations of the provisions of this Agreement.
(i) Amendment and Waiver. The provisions of this
Agreement may be amended and waived only with the prior written consent of the
Company, the Executive and the Investor.
* * * * *
-15-
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have executed this
Employment Agreement as of the date first written above.
SLEEPMASTER HOLDINGS L.L.C.
By: James P. Koscica
----------------------------------------
Name: James P. Koscica
Title: Executive Vice President
SLEEPMASTER L.L.C.
By: James P. Koscica
----------------------------------------
Name: James P. Koscica
Title: Executive Vice President
/s/ Michael Reilly
--------------------------------------------
MICHAEL REILLY
Agreed and Accepted:
SLEEP INVESTOR L.L.C.
By: John D. Weber
--------------------------------------------
Name: John D. Weber
Title: Member
-16-
<PAGE> 17
SCHEDULE A
EBITDA PLAN
<TABLE>
<CAPTION>
FISCAL YEAR EBITDA TARGET
----------------- -------------------
<S> <C>
1996 $ 8,590,000
1997 $10,525,000
1998 $12,323,000
1999 $13,608,000
2000 $15,453,000
2001 $16,137,000
</TABLE>
-17-
<PAGE> 18
SCHEDULE B
EMPLOYEE BENEFITS
Executive Medical Plan --100% reimbursable medical expenses
Personal Term Life Insurance --coverage $265,793
Entertainment Expenses
Car Allowance; $6,120 per annum
Permitted Vacation: 3 weeks per year
-18-
<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, except as to Note 18, which is as of May 18, 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 22, 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
September 22, 1999
