<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended March 31, 2000.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from _______________ to _________________.
Commission file number 333-81987
SLEEPMASTER L.L.C.
(Exact name of registrant as it appears in its charter)
<TABLE>
<S> <C>
New Jersey 22-3341313
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
2001 Lower Road, Linden, New Jersey 07036-6520
(Address of principal executive offices) (Zip Code)
</TABLE>
(732) 381-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
All of the registrant's voting and nonvoting membership interests are held by
affiliates of the registrant.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practical date.
Class A common units, no par value - 8,000 units as of May 12, 2000
Class B common units, no par value - 0 units as of May 12, 2000
1
<PAGE> 2
SLEEPMASTER L.L.C.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I - Financial Information (unaudited)
Item 1 - Financial Statements
Sleepmaster L.L.C.
Condensed Consolidated Statements of Income for the Three Months Ended
March 31, 2000 and 1999 .................................................. 3
Condensed Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999 .................................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999 ............................................ 5
Notes to Condensed Consolidated Financial Statements ....................... 6-13
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................. 14-15
Item 3 - Quantitative and Qualitative Disclosures about Market Risk ............... 15
PART II - Other Information
Item 1 - Legal Proceedings ........................................................ 16
Item 6 - Exhibits and Reports on Form 8-K ......................................... 16
Signatures ................................................................................. 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SLEEPMASTER L.L.C.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Net sales $ 56,101 $ 34,227
Costs and expenses:
Cost of sales 34,839 21,261
Selling, general and administrative expenses 14,255 8,385
Amortization of intangibles 842 378
Interest expense, net 4,537 2,030
Other expense (income), net 32 (86)
-------- --------
Income before income taxes 1,596 2,259
Provision for income taxes 624 915
-------- --------
Net income $ 972 $ 1,344
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
SLEEPMASTER L.L.C.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,746 $ 2,842
Accounts receivable, less allowance for doubtful accounts
of $2,080 and $2,360 24,704 24,217
Accounts receivable--other 1,256 1,691
Inventories 7,883 7,531
Other current assets 1,751 1,333
--------- ---------
Total current assets 37,340 37,614
--------- ---------
Property, plant and equipment, net 20,915 20,967
Intangible assets, net 129,982 130,824
Other assets 19,457 19,582
--------- ---------
Total assets $ 207,694 $ 208,987
========= =========
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Accounts payable $ 16,180 $ 14,264
Accrued advertising and sales allowances 4,846 5,755
Accrued interest 5,096 2,077
Other current liabilities 4,408 6,472
Current portion of long-term debt 5,013 5,010
--------- ---------
Total current liabilities 35,543 33,578
--------- ---------
Long-term debt 157,248 161,603
Other liabilities 1,456 1,463
--------- ---------
Total long-term liabilities 158,704 163,066
--------- ---------
Commitments and contingencies
Redeemable cumulative preferred interests 21,034 20,423
Members' Deficit:
Class A common interests 12,229 12,229
Class B common interests -- --
Accumulated deficit (20,111) (20,472)
Foreign currency translation adjustment 295 163
--------- ---------
Total members' deficit (7,587) (8,080)
--------- ---------
Total liabilities and members' deficit $ 207,694 $ 208,987
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
SLEEPMASTER L.L.C.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Net cash provided by operating activities $ 3,769 $ 2,278
Cash flows from investing activities:
Purchases of property, plant and equipment, net (512) (571)
Acquisition, net of cash acquired -- (24,356)
-------- --------
Net cash used in investing activities (512) (24,927)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt -- 23,748
Payments on long-term debt (1,253) (95)
Borrowings under revolving line of credit 3,200 --
Payments on revolving line of credit (6,300) --
Loan origination fees -- (467)
-------- --------
Net cash (used in) provided by financing activities. (4,353) 23,186
-------- --------
Net (decrease) increase in cash and cash equivalents (1,096) 537
Cash and cash equivalents, beginning of period 2,842 162
-------- --------
Cash and cash equivalents, end of period $ 1,746 $ 699
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
SLEEPMASTER L.L.C.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of Sleepmaster L.L.C. ("Sleepmaster") and all majority-owned
domestic and foreign subsidiaries (the "Company"). All material intercompany
transactions and balances have been eliminated. The interim statements are
unaudited and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation of the Company's financial position as of March 31, 2000 and
the results of its operations and cash flows for the interim periods presented.
The condensed consolidated balance sheet data at December 31, 1999 is derived
from the audited financial statements which are included in the Company's
Form 10-K/A for the year ended December 31, 1999 and which should be read
in connection with these financial statements. 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.
Operating results for the three month period ended March 31, 2000 are
not necessarily indicative of the results that may be expected for any other
interim period or for the year ending December 31, 2000.
Certain reclassifications of previously reported financial information
were made to conform to the 2000 presentation.
2. ACQUISITIONS
Sleepmaster L.L.C. ("Sleepmaster") acquired the stock of Herr on
February 26, 1999, substantially all of the assets of Star on May 18, 1999 and
substantially all of the assets of Adam Wuest on November 5, 1999. Each of these
acquisitions has been accounted for under the purchase method of accounting and,
accordingly, their results are included in these unaudited condensed
consolidated financial statements since their respective dates of acquisition.
The following summarized unaudited pro forma financial information (in
thousands) assumes that the acquisitions of Herr, Star and Adam Wuest were
consummated on January 1, 1999. The following also gives effect to the issuance
of $115,000,000 of 11% senior subordinated notes on May 18, 1999 and the
application of the proceeds therefrom. This information is not necessarily
indicative of the results that the Company would have achieved had these events
actually occurred on such dates or of the Company's actual or future results.
<TABLE>
<CAPTION>
March 31, 1999
<S> <C>
Net sales........................................................ $ 52,600
Net income....................................................... $ 1,087
</TABLE>
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
<S> <C> <C>
Raw materials.................................................... $ 5,688 $ 5,402
Work-in-process.................................................. 427 476
Finished goods................................................... 1,768 1,653
---------------- ----------------
Total inventories....................................... $ 7,883 $ 7,531
================ ================
</TABLE>
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4. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
<S> <C> <C>
Goodwill......................................................... $ 35,176 $ 35,176
Licenses......................................................... 100,249 100,249
---------------- ----------------
135,425 135,425
Less: accumulated amortization................................... 5,443 4,601
---------------- ----------------
$ 129,982 $ 130,824
================ ================
</TABLE>
5. SUPPLEMENTAL CASH FLOW INFORMATION
The Company recorded a charge to retained earnings (deficit) of
$611,000 and $548,000 for the three months ended March 31, 2000 and 1999,
respectively, representing the accretion of redeemable cumulative preferred
interests at a compounded annual rate of 12%.
6. SUBSEQUENT EVENTS
On April 28, 2000, Sleepmaster entered into and consummated a stock
purchase agreement with Simon Mattress Manufacturing Co. ("Simon Mattress")
and its stockholders, pursuant to which Sleepmaster purchased the capital stock
of Simon Mattress for approximately $40,000,000, net of cash acquired.
Sleepmaster financed the acquisition using proceeds from an expanded credit
facility, entered into on April 28, 2000. This facility amended and restated the
Company's existing credit facility to provide for an aggregate amount of
borrowings of up to $103,875,000, comprising a $33,000,000 revolving credit
facility, a $35,875,000 amortizing term loan facility and a $35,000,000
incremental amortizing term loan facility. The acquisition of Simon Mattress was
financed by borrowings under the incremental term loan facility and a portion
of the revolving credit facility. The terms of the amended and restated
facility are substantially equivalent to those of the prior facility.
7. GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION
As of May 18, 1999, Sleepmaster and each of its domestic wholly owned
subsidiaries ("Guarantor Subsidiaries") fully and unconditionally guaranteed, on
a joint and several basis, the obligation to pay principal and interest with
respect to the $115,000,000 of 11% senior subordinated notes due 2009 (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 this subsidiary over the claims of creditors of
Sleepmaster, including the holders of the Notes.
The following supplemental condensed consolidating financial statements
present:
1. Condensed consolidating balance sheets as of March 31, 2000 and
December 31, 1999; condensed consolidating statements of income and
cash flows for the three months ended March 31, 2000 and 1999.
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.
7
<PAGE> 8
SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
GUARANTOR NON-GUARANTOR
SLEEPMASTER SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $ 18,763 $ 34,160 $ 3,809 $ (631) $ 56,101
Costs and expenses:
Cost of sales 12,485 20,590 2,395 (631) 34,839
Selling, general and
administrative 4,486 8,939 830 -- 14,255
Amortization of intangibles 122 623 97 -- 842
Interest expense, net 2,696 1,846 (5) -- 4,537
Other expense (income), net 57 (4) (21) -- 32
-------- -------- -------- -------- --------
(Loss) income before income
taxes (1,083) 2,166 513 -- 1,596
(Benefit) provision for income taxes (398) 857 165 -- 624
(Income) loss from equity
investees, net of tax (1,657) -- -- 1,657 --
-------- -------- -------- -------- --------
Net income (loss) $ 972 $ 1,309 $ 348 $ (1,657) $ 972
======== ======== ======== ======== ========
</TABLE>
8
<PAGE> 9
SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
GUARANTOR
SLEEPMASTER SUBSIDIARIES ELIMINATIONS TOTAL
<S> <C> <C> <C> <C>
Net sales $ 18,185 $ 16,084 $ (42) $ 34,227
Costs and expenses:
Cost of sales 11,826 9,477 (42) 21,261
Selling, general and administrative expenses 4,354 4,031 -- 8,385
Amortization of intangibles 162 216 -- 378
Interest expense, net 1,981 49 -- 2,030
Other income, net (85) (1) -- (86)
-------- -------- -------- --------
(Loss) income before income taxes (53) 2,312 -- 2,259
(Benefit) provision for income taxes (21) 936 -- 915
(Income) loss from equity investees,
net of tax (1,376) -- 1,376 --
-------- -------- -------- --------
Net income (loss) $ 1,344 $ 1,376 $ (1,376) $ 1,344
======== ======== ======== ========
</TABLE>
9
<PAGE> 10
SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED NON-
GUARANTOR GUARANTOR
SLEEPMASTER SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 0 $ 782 $ 964 $ 0 $ 1,746
Accounts receivable 11,442 12,170 1,441 (349) 24,704
Accounts receivable--other 823 433 -- -- 1,256
Intercompany receivable (payable) 0 22,056 2,179 (24,235) --
Inventories 2,400 5,032 451 -- 7,883
Other current assets 1,268 838 37 (392) 1,751
--------- --------- --------- --------- ---------
Total current assets 15,933 41,311 5,072 (24,976) 37,340
--------- --------- --------- --------- ---------
Property, plant and equipment, net 4,532 15,684 699 -- 20,915
Intangible assets, net 17,003 97,085 15,894 -- 129,982
Intercompany receivable (payable) 69,142 -- -- (69,142) --
Investment in subsidiaries 69,286 -- -- (69,286) --
Other assets 19,571 900 4 (1,018) 19,457
--------- --------- --------- --------- ---------
Total assets $ 195,467 $ 154,980 $ 21,669 $(164,422) $ 207,694
========= ========= ========= ========= =========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 6,295 $ 9,850 $ 384 $ (349) $ 16,180
Accrued advertising and sales allowances 2,694 1,848 304 -- 4,846
Accrued interest 5,031 65 -- -- 5,096
Other current liabilities 390 3,018 1,392 (392) 4,408
Intercompany payable (receivable) 23,994 325 -- (24,319) --
Current portion of long-term debt 4,500 513 -- -- 5,013
--------- --------- --------- --------- ---------
Total current liabilities 42,904 15,619 2,080 (25,060) 35,543
--------- --------- --------- --------- ---------
Intercompany payable (receivable) -- 69,142 -- (69,142) --
Long-term debt 149,575 7,673 -- -- 157,248
Other liabilities 446 1,338 690 (1,018) 1,456
--------- --------- --------- --------- ---------
Total long-term liabilities 150,021 78,153 690 (70,160) 158,704
--------- --------- --------- --------- ---------
Redeemable cumulative preferred interests 21,034 -- -- -- 21,034
Members' (deficit) equity (18,492) 61,208 18,899 (69,202) (7,587)
--------- --------- --------- --------- ---------
Total liabilities and members' equity
(deficit) $ 195,467 $ 154,980 $ 21,669 $(164,422) $ 207,694
========= ========= ========= ========= =========
</TABLE>
10
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SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED NON-
GUARANTOR GUARANTOR
SLEEPMASTER SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,294 $ 934 $ 612 $ 2 $ 2,842
Accounts receivable 10,282 11,800 2,310 (175) 24,217
Accounts receivable--other 1,061 630 -- -- 1,691
Intercompany (payable) receivable (17) 18,144 1,503 (19,630) --
Inventories 2,378 4,637 516 -- 7,531
Other current assets 1,076 626 24 (393) 1,333
--------- --------- --------- --------- ---------
Total current assets 16,074 36,771 4,965 (20,196) 37,614
--------- --------- --------- --------- ---------
Property, plant and equipment, net 4,477 15,773 717 -- 20,967
Intangible assets, net 17,119 97,707 15,998 -- 130,824
Intercompany receivable (payable) 67,378 -- -- (67,378) --
Investment in subsidiaries 67,628 -- -- (67,628) --
Other assets 19,132 569 3 (122) 19,582
--------- --------- --------- --------- ---------
Total assets $ 191,808 $ 150,820 $ 21,683 $(155,324) $ 208,987
========= ========= ========= ========= =========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 4,984 $ 8,808 $ 645 $ (173) $ 14,264
Accrued advertising and sales allowances 3,541 1,758 456 -- 5,755
Other current liabilities 4,251 3,327 1,364 (393) 8,549
Intercompany payable (receivable) 19,599 -- -- (19,599) --
Current portion of long-term debt 4,500 510 -- -- 5,010
--------- --------- --------- --------- ---------
Total current liabilities 36,875 14,403 2,465 (20,165) 33,578
--------- --------- --------- --------- ---------
Intercompany payable (receivable) -- 67,378 -- (67,378) --
Long-term debt 153,800 7,803 -- -- 161,603
Other liabilities (437) 1,337 685 (122) 1,463
--------- --------- --------- --------- ---------
Total long-term liabilities 153,363 76,518 685 (67,500) 163,066
--------- --------- --------- --------- ---------
Redeemable cumulative preferred interests 20,423 -- -- -- 20,423
Members' (deficit) equity (18,853) 59,899 18,533 (67,659) (8,080)
--------- --------- --------- --------- ---------
Total liabilities and members' equity
(deficit) $ 191,808 $ 150,820 $ 21,683 $(155,324) $ 208,987
========= ========= ========= ========= =========
</TABLE>
11
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SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
GUARANTOR NON-GUARANTOR
SLEEPMASTER SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities $ 4,851 $ 204 $ 371 $(1,657) $ 3,769
------- ------- ------- ------- -------
Cash flows from investing activities:
Purchases of property, plant and
equipment, net (263) (232) (17) -- (512)
Net activity in investment in
subsidiaries (1,657) -- -- 1,657 --
------- ------- ------- ------- -------
Net cash (used in) provided by investing
activities (1,920) (232) (17) 1,657 (512)
------- ------- ------- ------- -------
Cash flows from financing activities:
Payments on long-term debt (1,125) (128) -- -- (1,253)
Borrowings under revolving line of credit 3,200 -- -- -- 3,200
Payments on revolving line of credit (6,300) -- -- -- (6,300)
------- ------- ------- ------- -------
Net cash used in financing activities (4,225) (128) -- -- (4,353)
------- ------- ------- ------- -------
Net (decrease) increase in cash and cash
equivalents (1,294) (156) 354 -- (1,096)
Cash and cash equivalents, beginning of
period 1,294 938 610 -- 2,842
------- ------- ------- ------- -------
Cash and cash equivalents, end of period $ -- $ 782 $ 964 $ -- $ 1,746
======= ======= ======= ======= =======
</TABLE>
12
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SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
GUARANTOR
SLEEPMASTER SUBSIDIARIES ELIMINATIONS TOTAL
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating activities $ 3,563 $ 59 $ (1,344) $ 2,278
Cash flows from investing activities:
Purchases of property, plant and equipment, net (571) -- -- (571)
Net activity in investment in subsidiaries (1,376) -- 1,376 --
Acquisition, net of cash acquired (24,356) -- -- (24,356)
-------- -------- -------- --------
Net cash (used in) provided by investing
activities (26,303) -- 1,376 (24,927)
-------- -------- -------- --------
Cash flow from financing activities:
Proceeds from long-term debt 23,748 -- -- 23,748
Payments on long-term debt -- (95) -- (95)
Loan origination fees (467) -- -- (467)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities 23,281 (95) -- 23,186
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents 541 (36) 32 537
Cash and cash equivalents, beginning of period 41 153 (32) 162
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 582 $ 117 $ -- $ 699
======== ======== ======== ========
</TABLE>
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the Company's results of operations and of its
liquidity and capital resources should be read in conjunction with the Condensed
Consolidated Financial Statements of the Company and the related Notes thereto
included elsewhere herein.
GENERAL
Sleepmaster acquired the stock of Herr on February 26, 1999, substantially
all of the assets of Star on May 18, 1999 and substantially all of the assets of
Adam Wuest on November 5, 1999. Each of these acquisitions has been accounted
for using the purchase method of accounting. The Company's historical results of
operations reflect the results of the acquired businesses since their respective
dates of acquisition. Therefore, the historical operating results of the Company
for the periods presented are not necessarily comparable.
QUARTER ENDED MARCH 31, 2000 AS COMPARED TO QUARTER ENDED MARCH 31, 1999
Net Sales. Net sales increased 63.9%, or $21.9 million, to $56.1 for the
first quarter of 2000, from $34.2 million for the first quarter of 1999. A
significant portion of the increase was due to the contribution of net sales
from Herr, acquired on February 26, 1999, Star, acquired on May 18, 1999 and
Adam Wuest, acquired on November 5, 1999. Net sales contributed by Herr, Star
and Adam Wuest in the first quarter of 2000 were $5.7 million, $3.7 million and
$12.2 million, respectively. Excluding the acquisitions of Herr, Star, and Adam
Wuest, net sales increased by 7.1%, or $2.3 million, for the first quarter of
2000. Generally, higher unit sales volumes and higher average unit selling
prices resulting from shifts in product sales mix toward higher priced products
contributed to this increase.
Cost of Sales. Cost of sales increased 63.9%, or $13.5 million, to $34.8
for the first quarter of 2000, from $21.3 million for the first quarter of 1999.
Cost of sales as a percentage of net sales remained constant at 62.1% in 2000
and 1999. Margins were favorably impacted by Sleepmaster successfully
obtaining volume-related cost savings on raw material purchases as a result of
the acquisitions of Herr, Star and Adam Wuest. This impact was offset by an
increase in direct labor costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased 70.0%, or $5.9 million, to $14.3
million for the first quarter of 2000 from $8.4 million for the similar period
of 1999. The increase in SG&A is primarily due to the SG&A associated with the
Company's acquisitions of Herr, Star and Adam Wuest in 1999. SG&A as a
percentage of sales increased to 25.4% in the first quarter of 2000 from 24.5%
in the first quarter of 1999. This increase is primarily attributable to the
increase of corporate costs associated with the aforementioned acquisitions.
Amortization of Intangibles. Amortization of intangibles increased $0.4
million to $0.8 million for the first quarter of 2000 from $0.4 for the first
quarter of 1999. The increase is a result of the intangible assets acquired in
connection with the acquisitions of Herr, Star and Adam Wuest in 1999.
Interest Expense, Net. Interest expense increased $2.5 million to $4.5
million for the quarter ended March 31, 2000 from $2.0 million for the quarter
ended March 31, 1999. This increase was due primarily to the cost of additional
debt financing incurred for the acquisition of Adam Wuest and the issuance of
senior subordinated notes on May 18, 1999.
Provision for Income Taxes. The provision for income taxes resulted in an
effective tax rate of 39.1% in the first quarter of 2000, down from 40.5% in
the first quarter of 1999. The effective tax rate decreased due to the
expansion of business activities into lower tax jurisdictions as a result of
the aforementioned acquisitions.
Net Income. As a result of the above factors, net income decreased by $0.3
million, to $1.0 million for the quarter ended March 31, 2000 compared to $1.3
million for the quarter ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to fund its liquidity needs is net
cash provided by operating activities and availability under its current credit
facility. Cash and cash equivalents decreased by $1.1 million to $1.7 million
14
<PAGE> 15
as of March 31, 2000 from $2.8 million at December 31, 1999. Net cash provided
by operating activities totaled $3.8 million in the first quarter of 2000
compared to $2.3 in the first quarter of 1999. The increase in cash flows from
operations is primarily a result of the acquisitions of Herr, Star and Adam
Wuest. During the first quarter of 1999, net cash used in investing activities
totaled $24.9 million, primarily resulting from the acquisition of Herr on
February 26, 1999. During the first quarter of 2000, net cash of $4.4 million
was used in financing activities to reduce outstanding long-term borrowings,
compared with cash inflows of $23.2 million during the first quarter of 1999.
Financing cash inflows in 1999 arose primarily from borrowings under an
increased credit facility to acquire Herr.
Capital expenditures totaled $0.5 million for the first quarter of 2000.
These capital expenditures consisted primarily of normal recurring capital
expenditures. Management expects that capital expenditures at all of its
existing facilities will be approximately $4.5 million in 2000. Management
believes that annual capital expenditure limitations under its current credit
facility will not significantly inhibit Sleepmaster from meeting its capital
needs.
As of March 31, 2000, the Company had approximately $20.4 million
available under its revolving credit facility with letters of credit issued
totaling approximately $9.4 million outstanding. Management believes that cash
flows generated from operations, together with its borrowing capacity, are
sufficient to support the Company's operations and general business and
liquidity requirements for the foreseeable future.
SUBSEQUENT EVENTS
On April 28, 2000, Sleepmaster entered into a stock purchase agreement
with another Serta, Inc. licensee, Simon Mattress Manufacturing Co. ("Simon
Mattress"), and its stockholders, pursuant to which Sleepmaster acquired the
capital stock of Simon Mattress. Simon Mattress is engaged in the manufacturing
and sale of conventional bedding products, including mattresses and box springs,
which are sold to both institutional purchasers and retailers in Northern
California, Oregon, Washington, Idaho, Nevada and Hawaii. Sleepmaster, as a
result of the transaction, will operate three additional manufacturing
facilities located in California, Washington and Hawaii which were previously
owned by Simon Mattress.
The purchase price of the acquisition was approximately $40.0 million,
net of cash acquired. Sleepmaster financed the acquisition using proceeds from
an expanded credit facility entered into on April 28, 2000 with its existing
lenders.
YEAR 2000
In order to minimize or eliminate the effect of the Year 2000 risk on the
Company's business systems and applications, the Company identified, evaluated,
implemented and tested changes to its computer systems, applications and
software necessary to achieve Year 2000 compliance. The computer systems and
equipment successfully transitioned to the Year 2000 with no significant issues.
The Company continues to keep its Year 2000 project management in place to
monitor latent problems that could surface at key dates or events in the future.
Management does not anticipate any significant problems related to these events.
The total cost of the Year 2000 compliance program was approximately $650,000
and was incurred principally during the first two quarters of 1999. The Company
expensed and capitalized the costs to complete its compliance plan in accordance
with appropriate accounting policies.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from fluctuations in interest rates,
which could impact its consolidated financial position, results of operations
and cash flows. The Company manages its exposure to market risk through its
regular operating and financing activities. The Company does not use derivative
financial instruments for speculative or trading purposes and does not maintain
such instruments that may expose the Company to significant market risk.
The Company's earnings are sensitive to changes in short-term interest
rates as a result of its borrowings under the amended and restated credit
facility. The Company also manages its portfolio of fixed-rate debt to reduce
its exposure to interest rate changes. The fair value of the Company's
fixed-rate long-term debt is sensitive to interest rate changes. Interest rate
changes would result in gains or losses in the fair value of this debt due to
differences between market interest rates and rates at the inception of the
obligation. Management does not foresee nor expect any significant changes in
its exposure to interest rate fluctuations, or in how such exposure is managed
in the near future.
15
<PAGE> 16
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This document contains forward-looking statements within the meaning of
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Although the Company believes its plans are based upon reasonable
assumptions as of the current date, it can give no assurance that such
expectations can be attained. Factors that could cause actual results to differ
materially from the Company's expectations include; general business and
economic conditions; competitive factors; raw materials availability and
pricing; fluctuations in demand; and retention and availability of qualified
employees.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is, from time to time, a party to litigation arising in the
normal course of business, most of which involves claims for personal injury
and property damage incurred in connection with its operations. Management
believes that none of these actions will have a material adverse effect on the
financial position, results of operations or cash flows, of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
27.1 Financial Data Schedule.
(b) Report on Form 8-K:
Report on Form 8-K, filed May 12, 2000, regarding the Company's
acquisition of Simon Mattress Manufacturing Company.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Linden,
State of New Jersey.
SLEEPMASTER L.L.C.
By: /s/ Charles Schweitzer
--------------------------------------
President and Chief Executive Officer
Dated: May 15, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
/s/ Charles Schweitzer President and Chief Executive May 15, 2000
---------------------------
Charles Schweitzer Officer, Advisor
/s/ James P. Koscica Executive Vice President and Chief May 15, 2000
---------------------------
James P. Koscica Financial Officer, Advisor
</TABLE>
17
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