<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported):
June 30, 2000
SLEEPMASTER L.L.C.
(Exact name of registrant as it appears in its charter)
Commission file number 333-81987
<TABLE>
<S> <C> <C>
New Jersey 333-81987 22-3341313
------------------------------------------- -------------------------------------- -----------------------------------
(State or other jurisdiction of (Commission file number) (IRS Employer ID Number)
incorporation or organization)
2001 Lower Road, Linden, New Jersey 07036-6520
--------------------------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
<TABLE>
<S> <C> <C>
(732) 381-5000
------------------------------------ ---------------------------------------------------------- --------------------------
(Registrant's telephone number, including area code)
</TABLE>
<PAGE> 2
ITEM 7. Financial Statements and Exhibits
On July 17, 2000, Sleepmaster L.L.C. ("Sleepmaster") filed a Current Report on
Form 8-K to report its acquisition of Crescent Sleep Products Company
("Crescent"). Pursuant to Item 7 of Form 8-K, Sleepmaster indicated that it
would file certain financial information no later than the date required under
Item 7 of Form 8-K. This Amendment is filed to provide the required financial
information.
(a) Financial Statements of Business Acquired
The following audited financial statements of Crescent are included
herein:
Report of Independent Public Accountants
Balance Sheets as of December 31, 1999 and 1998
Statements of Operations for the Year Ended December 31, 1999, and
the Period from January 20, 1998 (Inception) to December 31, 1998
Statements of Shareholders' Equity for the Year Ended December 31,
1999, and the Period from January 20, 1998 (Inception) to December
31, 1998
Statements of Cash Flows for the Year Ended December 31,
1999, and the Period from January 20, 1998 (Inception) to December
31, 1998
Notes to Financial Statements
<PAGE> 3
Report of Independent Public Accountants
Statements of Operations for the Period from January 1, 1998 to
March 17, 1998, and for the Year Ended December 31, 1997
Statements of Shareholders' Equity for the Period from January 1,
1998 to March 17, 1998, and for the Year Ended December 31, 1997
Statements of Cash Flows for the Period from January 1, 1998 to
March 17, 1998, and for the Year Ended December 31, 1997
Notes to Financial Statements
The following unaudited interim financial statements of Crescent are
included herein:
Unaudited Condensed Balance Sheet as of March 31, 2000
Unaudited Condensed Statements of Income for the Three Months Ended
March 31, 2000 and 1999
Unaudited Condensed Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999
Notes to Unaudited Condensed Financial Statements
(b) Pro Forma Financial Information
The following unaudited pro forma financial information of Sleepmaster
and Crescent is included herein:
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
March 31, 2000
Unaudited Pro Forma Condensed Consolidated Statement of Income for
the Year Ended December 31, 1999
Unaudited Pro Forma Condensed Consolidated Statement of Income for
the Three Months Ended March 31, 2000
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information
(c) Exhibits
2.1 Agreement and Plan of Merger, dated June 29, 2000, by and among
Sleepmaster L.L.C., as buyer, Crescent Acquisition Corp., as buyer
subsidiary, and Crescent Sleep Products Company (incorporated by
reference to Exhibit 2.1 to Company's Report on Form 8-K dated July 17,
2000 (File No. 333- 81987).
4.1 Trust Indenture, dated September 1, 1999, between The Guilford County
Industrial Facilities and Pollution Control Financing Authority, as
Issuer, and U.S. Bank Trust National Association, as Trustee, securing
$5,900,000 in aggregate principal amount of The Guilford County
Industrial Facilities and Pollution Control Financing Authority
Industrial Development Revenue Bonds (Crescent Sleep Products Company
Project) Series 1999 (incorporated by reference to Exhibit 4.1 to
Company's Report on Form 8-K dated July 17, 2000 (File No. 333-81987).
4.2 Indenture of Trust, dated March 1, 1995, by and between First-Citizens
Bank & Trust Company, as Trustee, and Iowa Finance Authority relating
to the issuance of $3,000,000 Tax-Exempt Adjustable Mode Industrial
Development Revenue Bonds (Dixie Bedding Company Project) Series 1995
(incorporated by reference to Exhibit 4.2 to Company's Report on Form
8-K dated July 17, 2000 (File No. 333-81987).
10.1 Third Amended and Restated Credit Agreement, dated June 30, 2000, among
Sleepmaster L.L.C., as borrower, Sleepmaster Holdings L.L.C., as the
Parent, the Domestic Subsidiaries of Sleepmaster L.L.C., as guarantors,
the lenders party thereto and First Union National Bank, as
administrative agent (incorporated by reference to Exhibit 10.1 to
Company's Report on Form 8-K dated July 17, 2000 (File No. 333-81987).
10.2 Third Amended and Restated Pledge Agreement, dated June 30, 2000, among
Sleepmaster L.L.C., as Borrower, the guarantors listed on the signature
page thereto and First Union National Bank, as Administrative Agent
(incorporated by reference to Exhibit 10.2 to Company's Report on Form
8-K dated July 17, 2000 (File No. 333-81987).
10.3 Third Amended and Restated Security Agreement, dated June 30, 2000,
among Sleepmaster L.L.C., as Borrower, the Domestic Subsidiaries of the
Borrower and First Union National Bank, as administrative agent
(incorporated by reference to Exhibit 10.3 to Company's Report on Form
8-K dated July 17, 2000 (File No. 333-81987).
10.4 License Agreement and Memorandum of Agreement, each dated March 17,
1998, by and between Serta, Inc. and Crescent Sleep Products Company
covering certain territories in South Carolina (incorporated by
reference to Exhibit 10.4 to Company's Report on Form 8-K dated July
17, 2000 (File No. 333-81987).
10.5 License Agreement and Memorandum of Agreement, each dated March 17,
1998, by and between Serta, Inc. and Crescent Sleep Products Company
covering certain territories in Nebraska (incorporated by reference to
Exhibit 10.5 to Company's Report on Form 8-K dated July 17, 2000 (File
No. 333-81987).
10.6 License Agreement and Memorandum of Agreement, each dated March 17,
1998, by and between Serta, Inc. and Crescent Sleep Products Company
covering certain territories in Georgia (incorporated by reference to
Exhibit 10.6 to Company's Report on Form 8-K dated July 17, 2000 (File
No. 333-81987).
10.7 Negotiated Contract Agreement, dated March 1, 1999, between Crescent
Sleep Products Company and Union of Needletrades, Industrial and
Textile Employees AFL-CIO, CLC (incorporated by reference to Exhibit
10.7 to Company's Report on Form 8-K dated July 17, 2000 (File No. 333-
81987).
10.8 Loan Agreement, dated March 1, 1995, by and between the Iowa Finance
Authority, as Issuer, a public instrumentality and agency duly
organized and existing under the laws of the State of Iowa and Dixie
Bedding Company (incorporated by reference to Exhibit 10.8 to Company's
Report on Form 8- K dated July 17, 2000 (File No. 333-81987).
10.9 Irrevocable Letter of Credit issued on March 1, 1995, in the amount of
$3,262,500 at the request and for the account of Dixie Bedding Company
in favor of First-Citizens Bank & Trust Company, as Trustee under the
Trust Indenture (incorporated by reference to Exhibit 10.9 to Company's
Report on Form 8-K dated July 17, 2000 (File No. 333-81987).
10.10 Supplemental Assignment and Assumption Agreement, dated March 17, 1998,
by and between Dixie Bedding Company, Crescent Sleep Products Company
and the Iowa Finance Authority and acknowledged by First-Citizens Bank
& Trust Company, as Trustee, under the Trust Indenture (incorporated by
reference to Exhibit 10.10 to Company's Report on Form 8-K dated July
17, 2000 (File No. 333-81987).
10.11 Amended and Restated Reimbursement and Security Agreement, dated March
17, 1998, by and among Crescent Sleep Products Company, Dixie Bedding
Company and Wachovia Bank, National Association (incorporated by
reference to Exhibit 10.11 to Company's Report on Form 8-K dated July
17, 2000 (File No. 333-81987).
10.12 Loan Agreement, dated September 1, 1999, by and between The Guilford
County Industrial Facilities and Pollution Control Financing Authority,
as Issuer, and Crescent Sleep Products Company (incorporated by
reference to Exhibit 10.12 to Company's Report on Form 8-K dated July
17, 2000 (File No. 333-81987).
10.13 Employment Agreement, dated June 30, 2000, by and among Crescent Sleep
Products Company, Sleepmaster L.L.C. and Stanley Webster (incorporated
by reference to Exhibit 10.13 to Company's Report on Form 8-K dated
July 17, 2000 (File No. 333-81987).
10.14 Employment and Management Securities Agreement, dated June 30, 2000, by
and among Crescent Sleep Products Company, Sleepmaster Holdings L.L.C.,
Sleep Investor L.L.C. and Hampton Culler (incorporated by reference to
Exhibit 10.14 to Company's Report on Form 8-K dated July 17, 2000 (File
No. 333-81987).
10.15 Employment and Management Securities Agreement, dated June 30, 2000, by
and among Crescent Sleep Products Company, Sleepmaster Holdings L.L.C.,
Sleep Investor L.L.C. and Charles Johnson (incorporated by reference to
Exhibit 10.15 to Company's Report on Form 8-K dated July 17, 2000 (File
No. 333-81987).
10.16 Employment and Management Securities Agreement, dated June 30, 2000, by
and among Crescent Sleep Products Company, Sleepmaster Holdings L.L.C.,
Sleep Investor L.L.C. Thomas Sanfilippo (incorporated by reference to
Exhibit 10.16 to Company's Report on Form 8-K dated July 17, 2000 (File
No. 333-81987).
10.17 Board of Advisor and Unit Purchase Agreement, dated June 30, 2000, by
and among Sleepmaster Holdings L.L.C., Sleepmaster L.L.C., R. Guy Boyle
and Sleep Investor L.L.C. (incorporated by reference to Exhibit 10.17
to Company's Report on Form 8-K dated July 17, 2000 (File No. 333-
81987)
10.18* Third Amended and Restated Limited Liability Company Operating
Agreement, dated June 30, 200, by and among Sleepmaster Holding, L.L.C
and each of the persons designated as a Member on Schedule A attached
thereto.
99.1 Press release issued by Sleepmaster L.L.C. on June 30, 2000
(incorporated by reference to Exhibit 99.1 to Company's Report on Form
8-K dated July 17, 2000 (File No. 333-81987).
* Filed herewith.
<PAGE> 4
CRESCENT SLEEP PRODUCTS COMPANY
Financial Statements as of December 31, 1999 and 1998
Together with Report of Independent Public Accountants
<PAGE> 5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Crescent Sleep Products Company:
We have audited the accompanying balance sheets of Crescent Sleep Products
Company (a Delaware corporation) as of December 31, 1999 and 1998, and the
related statements of operations, shareholders' equity and cash flows for the
year ended December 31, 1999, and the period from January 20, 1998 (inception),
to December 31, 1998, as restated - see Note 3. 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 in accordance with auditing standards generally accepted
in the United States. Those standards 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Crescent Sleep Products Company
as of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the year ended December 31, 1999, and the period from January 20, 1998
(inception), to December 31, 1998, in conformity with accounting principles
generally accepted in the United States.
Greensboro, North Carolina,
August 15, 2000.
<PAGE> 6
CRESCENT SLEEP PRODUCTS COMPANY
BALANCE SHEETS -- DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS (NOTE 5) 1999 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,767,367 $ 2,034,216
Restricted cash from bond proceeds 1,870,008 0
Accounts receivable - Trade, less allowance for doubtful accounts of
$413,000 and $132,000 in 1999 and 1998, respectively 6,926,724 6,009,500
Accounts receivable - Serta, Inc. 472,236 427,207
Other receivables 332,051 182,510
Inventories 3,197,984 2,660,491
Prepaid and other current assets 96,581 227,667
Deferred income taxes 539,000 197,000
----------- -----------
Total current assets 16,201,951 11,738,591
PROPERTY AND EQUIPMENT, net 16,614,440 11,046,663
DEFERRED INCOME TAXES 4,405,000 0
GOODWILL, net 51,261,352 57,293,337
DEFERRED FINANCING COSTS, net 981,144 855,646
OTHER ASSETS 49,082 108,791
----------- -----------
$89,512,969 $81,043,028
=========== ===========
</TABLE>
<PAGE> 7
CRESCENT SLEEP PRODUCTS COMPANY
BALANCE SHEETS -- DECEMBER 31, 1999 AND 1998 -(CONTINUED)
<TABLE>
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' 1999 1998
EQUITY ------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 6,776,000 $ 5,686,000
Accounts payable 2,493,172 2,131,879
Payable to contractor 1,947,825 0
Accrued advertising expenses 1,096,560 805,178
Accrued promotional expenses 471,376 641,932
Accrued bonus and profit sharing 1,170,486 849,006
Accrued interest 128,524 1,003,890
Accrued management fees 301,875 205,000
Income taxes payable 450,665 283,351
Other accrued expenses 1,056,285 689,205
------------ ------------
Total current liabilities 15,892,768 12,295,441
------------ ------------
LONG-TERM LIABILITIES:
Bonds payable 8,900,000 3,000,000
Long-term debt 40,575,433 47,191,005
Stock appreciation rights 11,900,000 5,200,000
Deferred income taxes 0 149,000
------------ ------------
Total long-term liabilities 61,375,433 55,540,005
------------ ------------
77,268,201 67,835,446
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY:
Common stock-
Class A voting; $.01 par value; 2,000,000 shares authorized, 955,000
shares issued and outstanding 9,550 9,550
Class B nonvoting, $.01 par value; 300,000 shares authorized, 152,222
shares issued and outstanding 1,522 1,522
Additional paid-in capital 11,038,928 11,038,928
Stock warrants 1,756,000 1,000,000
Retained (deficit) earnings (561,232) 1,157,582
------------ ------------
Total shareholders' equity 12,244,768 13,207,582
------------ ------------
$ 89,512,969 $ 81,043,028
============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
<PAGE> 8
CRESCENT SLEEP PRODUCTS COMPANY
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999, AND THE PERIOD FROM
JANUARY 20, 1998 (INCEPTION), TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
Net sales $ 77,878,195 $ 51,808,712
Other 754,804 605,396
------------ ------------
78,632,999 52,414,108
------------ ------------
COST OF GOODS SOLD:
Direct raw materials 32,122,619 21,426,401
Plant labor and overhead 9,829,533 6,383,959
------------ ------------
41,952,152 27,810,360
------------ ------------
Gross profit 36,680,847 24,603,748
------------ ------------
OPERATING EXPENSES:
Selling and advertising 13,447,516 8,975,478
General and administrative 12,196,698 3,704,982
Delivery 3,081,915 2,154,355
Amortization of goodwill 3,880,985 3,193,396
------------ ------------
Total operating expenses 32,607,114 18,028,211
------------ ------------
Net operating income 4,073,733 6,575,537
------------ ------------
OTHER EXPENSE:
Interest, net 5,312,502 4,672,847
Other, net 42,045 7,757
------------ ------------
5,354,547 4,680,604
------------ ------------
Income (loss) before benefit (provision) for income taxes (1,280,814) 1,894,933
BENEFIT (PROVISION) FOR INCOME TAXES 318,000 (737,351)
------------ ------------
NET (LOSS) INCOME $ (962,814) $ 1,157,582
============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
<PAGE> 9
CRESCENT SLEEP PRODUCTS COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999, AND THE PERIOD FROM
JANUARY 20, 1998 (INCEPTION), TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------- --------------------------------
COMMON STOCK COMMON STOCK
-------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, January 20, 1998 (inception) 0 $ 0 0 $ 0
Issuance of common stock 955,000 9,550 125,000 1,250
Issuance of stock warrants 0 0 0 0
Conversion of stock warrants to nonvoting
common stock 0 0 27,222 272
Net income 0 0 0 0
------------ ------------ ------------ ------------
BALANCE, December 31, 1998 955,000 9,550 152,222 1,522
Accretion of stock warrants 0 0 0 0
Net loss 0 0 0 0
------------ ------------ ------------ ------------
BALANCE, December 31, 1999 955,000 $ 9,550 152,222 $ 1,522
============ ============ ============ ============
<CAPTION>
ADDITIONAL RETAINED
PAID-IN STOCK (DEFICIT)
CAPITAL WARRANTS EARNINGS TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, January 20, 1998 (inception) $ 0 $ 0 $ 0 $
Issuance of common stock 10,789,200 0 0 10,800,000
Issuance of stock warrants 0 1,250,000 0 1,250,000
Conversion of stock warrants to nonvoting
common stock 249,728 (250,000) 0 0
Net income 0 0 1,157,582 1,157,582
------------ ------------ ------------ ------------
BALANCE, December 31, 1998 11,038,928 1,000,000 1,157,582 13,207,582
Accretion of stock warrants 0 756,000 (756,000) 0
Net loss 0 0 (962,814) (962,814)
------------ ------------ ------------ ------------
BALANCE, December 31, 1999 $ 11,038,928 $ 1,756,000 $ (561,232) $ 12,244,768
============ ============ ============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
<PAGE> 10
CRESCENT SLEEP PRODUCTS COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999, AND THE PERIOD FROM
JANUARY 20, 1998 (INCEPTION), TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (962,814) $ 1,157,582
Adjustments to reconcile net (loss) income to net cash provided by
operating activities-
Depreciation and amortization 5,112,765 3,804,940
Amortization of debt discount 160,428 127,005
Deferred income taxes (2,699,000) (48,000)
Increase in SAR liability 6,700,000 0
Loss on sale of equipment 1,712 9,255
Changes in current assets and liabilities:
Accounts receivable (1,111,794) (1,189,776)
Inventories (537,493) (171,643)
Prepaid and other assets 136,625 6,338
Accounts payable 361,293 607,035
Accrued expenses (15,105) 2,833,143
Income taxes payable 167,314 283,351
------------ ------------
Net cash provided by operating activities 7,313,931 7,419,230
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,691,471) (314,099)
Increase in payable to contractor 1,947,825 0
Proceeds from sale of property and equipment 12,437 5,500
Payments for acquisition and related costs 0 (68,924,000)
------------ ------------
Net cash used in investing activities (4,731,209) (69,232,599)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in bonds payable, net of restricted bond proceeds
of $1,870,008 4,029,992 0
Payments of long-term debt (5,686,000) (3,000,000)
Borrowings on revolving credit agreement 2,700,000 2,000,000
Payments on revolving credit agreement (2,700,000) (2,000,000)
Payments of deferred financing fees (193,563) (952,415)
Issuance of long-term debt and warrants 0 57,000,000
Issuance of common stock 0 10,800,000
------------ ------------
Net cash (used in) provided by financing activities (1,849,571) 63,847,585
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 733,151 2,034,216
CASH AND CASH EQUIVALENTS, beginning of period 2,034,216 0
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 2,767,367 $ 2,034,216
============ ============
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $6,216,000 $3,484,000
Cash paid for income taxes 2,214,000 502,000
========== ==========
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
The Company increased the value of outstanding stock warrants by $756,000
as a charge to retained earnings in 1999.
The Company revised its estimate of purchase price allocation for the
March 17, 1998, transaction described in Note 1 in 1999. The impact of
this change in estimate was an increase to deferred income tax assets
and accrued liabilities of $2,197,000 and $46,000, respectively, and a
decrease to goodwill of $2,151,000 as of January 1, 1999.
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
<PAGE> 12
CRESCENT SLEEP PRODUCTS COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. NATURE OF BUSINESS AND ACQUISITION:
NATURE OF BUSINESS
Crescent Sleep Products Company (the Company) is engaged in manufacturing and
selling bedding products under the brand name of Serta. The Company's
manufacturing facilities are located in North Carolina, Georgia and Iowa.
Licensee agreements with Serta, Inc. (Serta) establish exclusive manufacturing
rights for the Company within the entire states of North Carolina, South
Carolina, Nebraska, North Dakota and Minnesota, most of Georgia, Iowa and South
Dakota and parts of Wisconsin. The Company also participates with other Serta
licensees in sales to regional and national customers under the Serta brand
name.
ACQUISITION
On March 17, 1998, the Company purchased the majority of the assets and assumed
certain liabilities of Dixie Bedding Company (Dixie) under the terms of the
Asset Purchase Agreement (the Agreement) dated March 17, 1998. The acquisition
consideration was $68,924,000 cash plus the issuance of $5,200,000 of stock
appreciation rights (Note 10). The acquisition was partially financed through
borrowings.
The acquisition was accounted for in accordance with the purchase method of
accounting, which requires assets and liabilities to be stated at their fair
values at the acquisition date. A portion of the purchase price was allocated to
identifiable tangible and intangible assets, with the remaining amount allocated
to goodwill. The assets acquired and liabilities assumed were recorded based
upon estimates of fair value at the date of the acquisition. In 1999, management
finalized its allocation of the Dixie purchase price as follows:
<TABLE>
<S> <C>
Accounts receivable $ 5,429,000
Inventory 2,489,000
Property, plant and equipment 11,262,000
Deferred income tax assets 2,197,000
Other assets 2,027,000
Accounts payable and accrued expenses (2,932,000)
Note payable (1,684,000)
Bonds payable (3,000,000)
Stock appreciation rights (5,200,000)
Goodwill 58,336,000
------------
$ 68,924,000
============
</TABLE>
<PAGE> 13
2
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PERIOD OF OPERATIONS
The accompanying financial statements for 1998 reflect the results of operations
for the period from January 20, 1998 (inception), to December 31, 1998. The
Company was inactive from formation until the acquisition described in Note 1 on
March 17, 1998. The accompanying financial statements for 1999 reflect the
results of operations for the 12 months ended December 31, 1999.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash in banks, cash on hand, and highly
liquid investments with original maturities of three months or less.
RESTRICTED CASH FROM BOND PROCEEDS
As of December 31, 1999, the Company had $1,870,008 of cash from bonds which is
restricted to the payment of expenditures related to the Company's new
manufacturing facility in Guilford County, North Carolina (Notes 5 and 7).
ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
Substantially all of the Company's accounts receivables are concentrated in the
furniture industry. In the normal course of business, the Company extends
credit, on open accounts, to its customers after performing a credit analysis
based on a number of financial and other criteria. The Company performs ongoing
credit evaluations of its customers' financial conditions, and does not require
collateral. Allowances are maintained for potential credit losses.
INVENTORIES
Inventories are valued at the lower of cost (FIFO) or market and include the
costs of materials, direct labor and manufacturing overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided for financial reporting purposes using the
straight-line and double declining-balance methods over the following estimated
useful lives of the assets:
<TABLE>
<S> <C>
Land improvements 20 years
Buildings and improvements 39 years
Machinery and equipment 10 years
Automobiles and trucks 5 years
Office furniture and fixtures 7 to 10 years
</TABLE>
Accelerated methods are used for income tax reporting purposes. Leasehold
improvements are amortized over the shorter of the terms of the leases or lives
of the assets. The costs of major improvements are capitalized, while the costs
of maintenance and repairs, which do not improve or extend the life of the
respective assets, are expensed when incurred. The cost of assets retired or
otherwise disposed of and the accumulated depreciation thereon are removed from
the accounts, with any gain or loss realized upon the sale or disposal charged
or credited to earnings at the time of the asset retirement or disposal.
<PAGE> 14
3
GOODWILL
Goodwill represents the excess of the purchase price paid over the fair value of
net assets acquired and is amortized on a straight-line basis over 15 years.
Accumulated amortization was $7,074,000 at December 31, 1999, and $3,193,000 at
December 31, 1998.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically assesses the potential for impairment of its long-lived
assets (namely, property and equipment and goodwill) by determining whether the
depreciation/amortization of the asset over its remaining life can be recovered
through projected undiscounted future cash flows. The amount of impairment, if
any, would be measured based on the excess of the asset balance to the projected
discounted future results using a discount rate reflecting the Company's average
cost of funds.
DEFERRED FINANCING FEES
Deferred financing fees are being amortized over the life of the related debt.
Accumulated amortization was $229,000 at December 31, 1999, and $100,000 at
December 31, 1998.
ADVERTISING COSTS
The Company expenses advertising costs, consisting primarily of cooperative
advertising with dealers and retailers, when revenue from sales to customers is
recorded. Advertising costs for the year ended December 31, 1999, and the period
from January 20, 1998 (inception), to December 31, 1998, amounted to $6,009,000
and $4,536,000, respectively.
PROMOTIONAL COSTS
Promotional costs, consisting primarily of conferences sponsored by the Company,
are expensed as earned by customers based on purchases under the program.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes," which requires the use of the asset and liability method of
accounting for deferred income taxes. Deferred income tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective income tax basis. The effect on deferred income
tax assets and liabilities of a change in tax rates is recognized in the income
statement in the period of the tax rate change. Valuation allowances are
established when necessary to reduce deferred income tax assets to the amount
expected to be realized.
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 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.
<PAGE> 15
4
DEBT DISCOUNT
In connection with the acquisition discussed above, the Company issued a senior
subordinated note payable in the amount of $16,000,000 (see Note 6). A debt
discount of $1,250,000 was recorded as an offset to this debt to reflect the
value of warrants to purchase 136,111 shares of common stock which were issued
in conjunction with the note (see Note 6). This discount is being amortized over
the life of the note as an increase to interest expense.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to account for stock-based compensation using the
intrinsic-value method prescribed in Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Certain employees of the Company have been granted stock options (Note 9). In
electing to follow APB No. 25, the Company is obliged to provide the expanded
disclosures required under SFAS No. 123 for stock-based compensation including,
if material, disclosure of pro forma additional compensation expense had
compensation expense relating to the stock option grants been measured under the
fair value recognition provision of SFAS No. 123. The pro forma amounts of
additional compensation expense for the year ended December 31, 1999, and the
period from January 20, 1998 (inception), to December 31, 1998, are $60,000 and
$50,000, respectively.
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.
RECLASSIFICATIONS
Certain items in the 1998 financial statements have been reclassified to conform
to their 1999 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - an Amendment of FASB Statement No
133." This statement delays the effective date of SFAS No. 133 one year from
June 15, 1999, to June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company plans to adopt
the provisions of this statement in the first quarter of 2001. Management
believes that the impact of the adoption of SFAS No. 133 will not materially
impact the financial position of the Company.
<PAGE> 16
5
3. RESTATEMENT OF 1999 FINANCIAL STATEMENTS
Subsequent to the original issuance of its 1999 financial statements, the
Company discovered an oversight of facts related to the calculation of its
allocated potential liability related to Serta's deferred compensation plan for
Serta's chief executive officer (Note 12). Had management been aware of these
facts, it would have concluded that the likelihood of the Company having a
liability related to this plan was probable and would have established a
$219,000 liability in 1999. Accordingly, the 1999 financial statements have been
restated to correct this error, the effect of which increased the previously
reported loss for 1999 by $133,000 to $962,814, after recognizing the related
tax effect of $86,000.
4. INVENTORIES:
At December 31, 1999 and 1998, inventories are comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Raw materials $2,383,326 $1,872,690
Work-in-process 344,033 288,235
Finished goods 470,625 499,566
---------- ----------
$3,197,984 $2,660,491
========== ==========
</TABLE>
5. PROPERTY AND EQUIPMENT:
At December 31, 1999 and 1998, property and equipment are comprised of the
following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land and land improvements $ 2,289,704 $ 1,015,723
Buildings and improvements 7,604,077 4,835,088
Machinery and equipment 6,792,917 4,514,546
Automobiles and trucks 917,227 776,134
Office furniture and fixtures 511,646 413,747
Leasehold improvements 80,540 6,200
CIP 38,518 0
----------- -----------
18,234,629 11,561,438
Less - Accumulated depreciation 1,620,189 514,775
----------- -----------
$16,614,440 $11,046,663
=========== ===========
</TABLE>
Depreciation and amortization expense was approximately $1,110,000 and $515,000
for the year ended December 31, 1999, and the period from January 20, 1998
(inception), to December 31, 1998, respectively.
As of December 31, 1999, $1,948,000 was owed to vendors related to the
construction of the Company's new manufacturing facility in Guilford County,
North Carolina (Note 7). These costs are included in the appropriate property
and equipment classifications above.
<PAGE> 17
6
6. LONG-TERM DEBT:
At December 31, 1999 and 1998, long-term debt is comprised of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Senior term loan payable to banks, due in varying installments through December
31, 2003, principal and interest payable quarterly at the Eurodollar rate
plus a variable percentage ranging from 0.75% to 2.75% (8.94% at December
31, 1999 ) collateralized by substantially all assets $ 32,314,000 $ 38,000,000
Senior subordinated notes payable, principal due September 30, 2005, interest
payable quarterly at 12% 16,000,000 16,000,000
------------ ------------
48,314,000 54,000,000
Less - Unamortized debt discount related to warrants issued to the senior
subordinated notes payable holders (Note 9) (962,567) (1,122,995)
------------ ------------
47,351,433 52,877,005
Less - Current portion 6,776,000 5,686,000
------------ ------------
Long-term debt $ 40,575,433 $ 47,191,005
============ ============
</TABLE>
CREDIT AGREEMENT
In connection with the acquisition discussed in Note 1, the Company entered into
a revolving credit agreement with two banks expiring in March 2003 providing for
borrowings up to $6,000,000, based upon the aggregate revolving commitment
amounts plus the aggregate letters-of-credit commitment amounts. As of December
31, 1999, the maximum borrowing base was $6,000,000. Interest is payable
quarterly for Eurodollar advances at a rate equal to the adjusted Eurodollar
rate plus 2.5%. Interest is payable monthly for reference advances at a note
equal to the reference note from U.S. Bonds plus 0.5%, with the exception of
reference advances for unpaid drawings with respect to the letters of credit,
which shall bear interest at a rate equal to the reference rate plus 0.75%. As
of December 31, 1999 and 1998, there were no borrowings outstanding related to
the revolving credit facility.
Among other restrictions, the revolving credit agreement, senior term loan and
senior subordinated note agreements contain provisions which (i) require the
Company to achieve minimum levels of profitability, (ii) restrict the Company's
ability to make capital expenditures and (iii) requires that financial ratios
must be met with respect to interest and fixed charge coverage and cash flow
leverage. The agreements also prohibit the Company from incurring certain
additional indebtedness and limit certain investments and dividends. As of
December 31, 1999, the Company was in compliance with or had received waivers
from the banks for all covenants of the agreements.
The senior term-loan agreement requires mandatory prepayments of principal
within 120 days of December 31 if the Company achieves certain excess cash flow
levels, as defined, for each year. Prepayments are applied to installments due
in reverse order of their maturity. The Company prepaid $936,000 in 1999 and
will prepay $1,026,000 in 2000 related to this requirement. The amount of the
mandatory prepayment has been included in the current portion of long-term debt
in the accompanying balance sheets.
Future maturities of long-term debt as of December 31, 1999, are as follows:
<TABLE>
<S> <C>
2000 $ 6,776,000
2001 6,750,000
2002 7,375,000
2003 5,538,000
2004 5,875,000
Thereafter 16,000,000
-----------
$48,314,000
===========
</TABLE>
<PAGE> 18
7
7. BONDS PAYABLE:
IOWA
The Iowa Finance Authority (the Issuer) issued Tax-exempt Adjustable Mode
Industrial Development Revenue Bonds (Dixie Bedding Company Project) Series 1996
(the Iowa Bonds) in the aggregate principal amount of $3,000,000 on March 15,
1995. The Iowa Bonds were issued pursuant to an Indenture of Trust dated as of
March 1, 1995, between the Issuer and First Citizens Bank & Trust Company, as
trustee. The Iowa Bonds mature April 1, 2015, and bear interest to be paid each
January 1, April 1, July 1 and October 1, at the weekly rate (5.65% at December
31, 1999), as stated in the indenture.
The proceeds from the sale of the Iowa Bonds were loaned to Dixie pursuant to a
loan agreement dated as of March 1, 1995, between the Issuer and Dixie, for
purposes of providing the financing for a portion of the costs associated with
acquiring, constructing, improving and equipping the mattress manufacturing
facility in Clear Lake, Iowa (the Project). The Company assumed the Bonds in
connection with the acquisition described in Note 1. The Iowa Bonds are secured
by a letter of credit issued by U.S. Bank, National Association (the Credit
Issuer) pursuant to a Reimbursement and Security Agreement (the Reimbursement
Agreement) dated as of March 1, 1995, between U.S. Bancorp Piper Jaffray, Inc.
and Dixie. To secure its obligations under the Reimbursement Agreement, the
Company has granted to the Credit Issuer a mortgage and security interest in the
real and personal property comprising the Project pursuant to a mortgage and
security agreement dated as of March 1, 1995. Crescent elected to replace the
provider of the Credit Facility in 1999. The original Credit Facility (formerly
arranged with Wachovia Bank of North Carolina, National Association) terminated
November 17, 1999. The alternate Credit Facility issued by U.S. Bank, National
Association was effective November 15, 1999.
GUILFORD COUNTY
The Guilford County Industrial Facilities and Pollution Control Financing
Authority (the Issuer) issued Industrial Development Revenue Bonds (Crescent
Sleep Products Company Project) Series 1999 (the Guilford Bonds) in the
aggregate principal amount of $5,900,000 on September 17, 1999. The Guilford
Bonds were issued pursuant to an Indenture of Trust dated as of September 1,
1999, between the Issuer and U.S. Bank Trust National Association, as trustee.
The Guilford Bonds mature September 1, 2019, and bear interest to be paid on a
monthly basis at the weekly rate (5.65% at December 31, 1999), as stated in the
indenture.
<PAGE> 19
8
The proceeds from the sale of the Guilford Bonds were loaned to the Company
pursuant to a loan agreement dated as of September 1, 1999, between the Issuer
and the Company, for purposes of providing the financing for a portion of the
costs associated with the cost of acquisition, construction and equipping of a
133,000 square foot facility for the manufacture of mattresses in Guilford
County, North Carolina (the Project). The Guilford Bonds are secured by a letter
of credit issued by U.S. Bank National Association, Minneapolis, Minnesota (the
Credit Issuer). The initial letter of credit was issued pursuant to a Credit
Agreement dated as of March 17, 1999, and amended as of September 1, 1999 (the
Reimbursement Agreement), between the Company, the Credit Issuer and Antares
Capital Corp. The letter of credit custodian is Bank One, Colorado, N.A.,
Denver, Co. To secure its obligations under the Reimbursement Agreement, the
Company has granted to the Credit Issuer a mortgage and security interest in the
real and the personal property comprising the Project pursuant to a mortgage and
security agreement dated as of September 1, 1999. The project was substantially
completed in December 1999.
8. INCOME TAXES:
The components of the income tax provision for the year ended December 31, 1999,
and the period from January 20, 1998 (inception), to December 31, 1998,
consisted of:
<TABLE>
<CAPTION>
1999 1998
============== ============
<S> <C> <C>
Current provision-
Federal $(1,894,000) $(663,369)
State (487,000) (121,982)
-------------- ------------
Total current provision (2,381,000) (785,351)
-------------- ------------
Deferred benefit-
Federal 2,149,000 44,000
State 550,000 4,000
-------------- ------------
Total deferred benefit 2,699,000 48,000
-------------- ------------
Benefit (provision) for income taxes $ 318,000 $(737,351)
============== ============
</TABLE>
Deferred income taxes consisted of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
============== =============
<S> <C> <C>
Deferred tax assets-
Stock appreciation rights $4,674,000 $1,945,000
Accrued liabilities 462,000 197,000
Accounts receivable 162,000 0
Inventory 40,000 0
------------- -------------
5,338,000 2,142,000
-------------- -------------
Deferred tax liabilities-
Property and equipment (394,000) (107,000)
Intangibles 0 (1,987,000)
-------------- -------------
(394,000) (2,094,000)
-------------- -------------
Net deferred tax asset $4,944,000 $ 48,000
============== =============
</TABLE>
The Company increased its deferred tax assets $2,197,000 in 1999 due to its
final allocation of the Dixie purchase price (Note 1).
<PAGE> 20
9
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>
1999 1998
--------- ---------
<S> <C> <C>
Income tax (benefit) expense at federal statutory rate (34.0)% 34.0%
State income tax (benefit) expense, net of federal benefit (2.8) 4.1
Nondeductible goodwill 11.7 0.0
Other, net 3.2 0.8
--------- ---------
(21.9%) 38.9%
========= =========
</TABLE>
9. SHAREHOLDERS' EQUITY:
WARRANTS
In connection with the issuance of the senior subordinated notes payable (Note
6), the Company issued 136,111 warrants to the senior subordinated notes payable
holders. Each warrant entitles the holder to receive one share of the Company's
nonvoting common stock through March 17, 2007. The warrants have no exercise
price and were recorded at their estimated fair value of $1,250,000. Warrant
holders converted 27,222 of the originally issued warrants to nonvoting common
stock of the Company in 1998, leaving 108,889 warrants outstanding as of
December 31, 1999 and 1998.
The warrant agreement allows the warrant holder to require the warrants to be
purchased by the Company at fair value any time after March 17, 2003, or earlier
if certain conditions set forth in the warrant agreement exist. In addition, the
Company can repurchase the warrants at any time after March 17, 2004, at the
fair market value. Management will be accreting the value of the warrants to
their estimated purchase price at the earliest date the circumstances would
allow the warrant holder to require the Company to purchase the warrants. The
actual purchase price may vary from management's current estimate. Management
estimates the fair value of the outstanding warrants at December 31, 1999, to be
$1,756,000. The increase in fair value of the outstanding warrants in 1999 was
recorded as a charge to retained earnings.
STOCK OPTIONS
The Company has a stock option plan whereby the Company may grant up to 140,766
shares of voting common stock to employees of the Company. On March 17, 1998,
the Company granted options for the purchase of 140,766 shares of common stock
to certain members of the Company's management at an exercise price of $10 per
share, which represented the common stock's fair value at the date of grant. The
options become fully vested at the earlier of the achievement of financial
performance measures or March 17, 2008. The options are exercisable through
March 17, 2008.
<PAGE> 21
10
Stock option transactions for the period from January 20, 1998 (inception), to
December 31, 1999, were as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
=============== ===============
<S> <C> <C>
Options-
Granted 140,766 $10.00
Exercised 0 N/A
Canceled 0 N/A
--------------- ---------------
Options outstanding at December 31, 1999 140,766 $10.00
=============== ===============
Exercisable at December 31, 1999 46,922 $10.00
=============== ===============
Available for grant at December 31, 1999 0 N/A
=============== ===============
</TABLE>
The weighted average fair value of options granted in 1998 was $4.27. Based on
the financial performance of the Company, 46,922 stock options became
exercisable in 1999.
10. STOCK APPRECIATION RIGHTS:
In connection with the acquisition described in Note 1, the Company instituted a
plan covering key employees of the Company under which cash and/or common stock
awards are tied to the value of the Company's common stock. The Company issued
520,000 units valued at $10 each on March 17, 1998. No compensation expense was
recognized in 1998 as management believes that there was not a material change
in the fair value per unit of the stock appreciation rights from March 17, 1998,
to December 31, 1998. The Company recorded $6,700,000 of compensation expense,
which is included in general and administrative expenses in the accompanying
statement of operations, related to this plan in 1999 based primarily on the
estimated change in fair value of the Company, as defined in the plan agreement.
11. PROFIT-SHARING AND 401(k) PLAN:
The Company maintains a defined contribution profit-sharing and 401(k) benefit
plan under which substantially all of the Company's employees are covered. The
Company, at the discretion of the Board of Directors, may make a contribution to
the defined contribution profit-sharing plan. Effective January 1, 1999, the
plan was amended such that the Company must make a minimum annual contribution
of 3% of total wages for all eligible employees with additional contributions at
the discretion of the Board of Directors. The Company recorded contribution
expense related to the plan of $487,000 and $338,000 for the year ended December
31, 1999, and the period from January 20, 1998 (inception), to December 31,
1998, respectively. Under the 401(k) feature of plan, employees may also defer
up to a maximum of 18% of their salary in the plan.
<PAGE> 22
12. COMMITMENTS AND CONTINGENCIES:
MANAGEMENT AGREEMENT
In March 1998, the Company entered into a management agreement with its majority
shareholder whereby the majority shareholder will provide advisory and
consulting services to the Company. This agreement requires the Company to make
annual payments of $300,000 plus 3% of free cash flows, as defined. Management
fees charged to expense for the year ended December 31, 1999, and the period
from January 20, 1998 (inception), to December 31, 1998, were approximately
$519,000 and $505,000, respectively.
LEASE COMMITMENTS
The Company has commitments under operating leases through 2005 which are
payable as follows:
<TABLE>
<S> <C>
2000 $ 441,000
2001 390,000
2002 343,000
2003 336,000
2004 317,000
Thereafter 46,000
-------------
$1,873,000
=============
</TABLE>
Rent expense related to the operating leases was approximately $193,000 and
$136,000 for the year ended December 31, 1999, and the period from January 20,
1998 (inception), to December 31, 1998, respectively.
COMMITMENT TO SERTA, INC.
Serta licenses the right for manufacturers, such as the Company, to manufacture
and distribute Serta brand products. Serta is owned by its licensees located in
the United States and has no manufacturing or distribution facilities of its
own. Serta's income is derived from base fees from licensees and sales royalty
fees. The Company is committed to Serta in the amount of $3,204,000 for 2000 in
regard to these fees. The Company paid Serta $2,883,000 and $1,769,000 during
the year ended December 31, 1999, and the period from January 20, 1998
(inception), to December 31, 1998, respectively, related to these fees. These
fees were included in operating expenses on the accompanying statements of
operations.
SERTA, INC. DEFERRED COMPENSATION PLAN
Serta has a deferred compensation plan for its chief executive officer to be
funded by the shareholders of Serta. The amount of this deferred compensation
plan is determined based on the cumulative aggregate profits of all Serta
licensees for the years from 1996 to 2000 in excess of certain benchmarks
determined by Serta. The required funding of this plan will be in five equal
payments from 2001 to 2005. Interest will accrue on any obligations at the
five-year Treasury Bill rate. As of December 31, 1999, the Company's allocated
potential liability related to this plan is $219,000 and is included in other
accrued expenses in the accompanying balance sheets.
LITIGATION AND OTHER CONTINGENCIES
The Company, in the normal course of business, has commitments, lawsuits,
contingent liabilities and claims; however, based on facts currently known, the
Company does not expect that the resolution of any of these matters will have a
material adverse effect on its financial position.
<PAGE> 23
13. MAJOR CUSTOMERS AND VENDORS:
One of the Company's customers accounted for 23% and 22% of the Company's net
sales for the year ended December 31, 1999, and the period from January 20, 1998
(inception), to December 31, 1998, respectively. Amounts receivable from this
customer represented approximately 11% and 14% of the trade accounts receivable
balance at December 31, 1999 and 1998, respectively.
Purchases of raw materials from one vendor represented approximately 38% of
total raw material purchases for both 1999 and 1998, respectively.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Due to the short maturities of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, the carrying value of these financial
instruments approximates fair value. The carrying amounts of borrowings under
the senior term loan and bonds payable approximate fair value because the
interest rates adjust to market rates. Management estimates the fair value of
the senior subordinated notes payable to be approximately $13,900,000 at
December 31, 1999, using the discounted cash flows method. The carrying value of
the senior subordinated notes payable is $15,037,433 at December 31, 1999.
15. SUBSEQUENT EVENTS:
On March 1, 2000, the Company sold its former manufacturing facility in
Greensboro, North Carolina, for approximately $912,000, resulting in a gain on
the sale of approximately $236,000.
On June 30, 2000, pursuant to the terms of an agreement and plan of merger, by
and among the Company and Sleepmaster L.L.C. (an SEC registrant), Sleepmaster
acquired all of the capital stock of the Company for a total purchase price of
approximately $126,500,000 minus the amount of outstanding debt and related
interest (bank debt and bonds) plus any tax refund proceeds of the Company. The
senior term loan and senior subordinated notes payable, including prepayment
penalties of $320,000, were paid at closing and Sleepmaster assumed the
$8,900,000 of bonds payable. Under the terms of the agreement, $8,500,000 of the
purchase price was placed in escrow, with $4,250,000 to be released on June 30,
2001, and the remainder to be available on February 28, 2002.
As described in Note 9, key employees of the Company own stock appreciation
rights covering 520,000 reference shares, in the aggregate. Each stock
appreciation right was settled by a cash payment with the same rights (to escrow
and tax refund funds) as a holder of common stock.
These same individuals hold options to purchase 140,766 shares of the Company's
common stock. Of the total 140,766 options, 81,109 options were settled by a
cash payment with the same rights as a holder of common stock. The remaining
59,657 options were converted to options to purchase an aggregate of 287.52
Class C common units and 1,439.22 preferred units of Sleepmaster Holdings LLC,
the majority owner of Sleepmaster.
As described in Note 8, there were 136,111 warrants issued in connection with
the senior subordinated notes payable, of which 108,889 were outstanding at June
29, 2000. These warrants were settled by a cash payment with the same rights as
a holder of common stock.
The funds for the settlement of the stock appreciation rights, stock options and
warrants came from the purchase price described above.
<PAGE> 24
DIXIE BEDDING COMPANY
Statements of Operations, Shareholders' Equity and Cash Flows for the Period
From January 1, 1998, to March 17, 1998, and for the Year Ended December 31,
1997
Together with Report of Independent Public Accountants
<PAGE> 25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Dixie Bedding Company:
We have audited the accompanying statements of operations, shareholders' equity
and cash flows of Dixie Bedding Company (a North Carolina Subchapter S
corporation) for the period from January 1, 1998, to March 17, 1998, and for the
year ended December 31, 1997 as restated - see Note 3. 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 in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements referred
to above are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Dixie Bedding
Company for the period from January 1, 1998, to March 17, 1998, and for the year
ended December 31, 1997, in conformity with accounting principles generally
accepted in the United States.
Greensboro, North Carolina,
August 15, 2000.
<PAGE> 26
DIXIE BEDDING COMPANY
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 17, 1998, AND FOR THE YEAR ENDED
DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
=============== ==============
(11 WEEKS) (52 WEEKS)
<S> <C> <C>
REVENUES:
Net sales $ 11,092,191 $ 54,973,598
Other 98,457 337,843
--------------- --------------
11,190,648 55,311,441
--------------- --------------
COST OF GOODS SOLD:
Direct raw materials 4,698,562 22,857,735
Plant labor and overhead 1,471,615 7,271,078
--------------- --------------
6,170,177 30,128,813
--------------- --------------
Gross profit 5,020,471 25,182,628
--------------- --------------
OPERATING EXPENSES:
Selling and advertising 1,968,361 9,460,358
General and administrative 10,598,920 4,564,716
Delivery 499,995 2,335,211
Transaction expenses 924,179 0
Total operating expenses --------------- --------------
13,991,455 16,360,285
--------------- --------------
Net operating (loss) income (8,970,984) 8,822,343
--------------- --------------
OTHER INCOME (EXPENSES):
Interest, net 27,231 135,077
Other, net (5,160) (19,085)
--------------- --------------
22,071 115,992
--------------- --------------
NET (LOSS) INCOME $ (8,948,913) $ 8,938,335
=============== ==============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
<PAGE> 27
DIXIE BEDDING COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1998, TO MARCH 17, 1998,
AND FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------- ------------------------
COMMON STOCK COMMON STOCK
------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
========== =========== ========= ===========
<S> <C> <C> <C> <C>
BALANCE, January 1, 1997 1,660 $ 16,600 14,940 $ 149,400
Net income 0 0 0 0
Dividends declared 0 0 0 0
---------- ----------- --------- -----------
BALANCE, December 31, 1997 1,660 16,600 14,940 149,400
Net loss 0 0 0 0
---------- ----------- --------- -----------
BALANCE, March 17, 1998 1,660 $ 16,600 14,940 $ 149,400
========== =========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED
CAPITAL EARNINGS TOTAL
=================== ============== ===============
<S> <C> <C> <C>
BALANCE, January 1, 1997 $ 0 $ 9,801,944 $ 9,967,944
Net income 0 8,938,335 8,938,335
Dividends declared 0 (7,150,644) (7,150,644)
------------------- -------------- ---------------
BALANCE, December 31, 1997 0 11,589,635 11,755,635
Net loss 0 (8,948,913) (8,948,913)
------------------- -------------- ---------------
BALANCE, March 17, 1998 $ 0 $ 2,640,722 $ 2,806,722
=================== ============== ===============
</TABLE>
<PAGE> 28
DIXIE BEDDING COMPANY
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1998, TO MARCH 17, 1998,
AND FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
================ ===============
(11 WEEKS) (52 WEEKS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (8,948,913) $ 8,938,335
Adjustments to reconcile net (loss) income to net cash provided by operating
activities-
Depreciation and amortization 194,322 979,320
Loss on sale of equipment 0 256
Changes in current assets and liabilities:
Accounts receivable (398,736) (165,640)
Inventories (9,164) (79,209)
Prepaid and other assets (153,379) 116,252
Accounts payable 77,496 1,141,758
Accrued expenses 10,123,004 99,003
---------------- ---------------
Net cash provided by operating activities 884,630 11,030,075
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (14,899) (537,361)
Proceeds from sale of property and equipment 0 16,818
Purchase of investments (1,318) 0
---------------- ---------------
Net cash used in investing activities (16,217) (520,543)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES - Dividends paid (691,411) (8,662,164)
---------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 177,002 1,847,368
CASH AND CASH EQUIVALENTS, beginning of period 8,356,721 6,509,353
---------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 8,533,723 $ 8,356,721
================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 91,191 $ 328,800
================ ===============
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Dividends declared but unpaid at December 31, 1997 $ 0 $ 691,411
================ ===============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
<PAGE> 29
DIXIE BEDDING COMPANY
NOTES TO FINANCIAL STATEMENTS
MARCH 17, 1998
1. NATURE OF BUSINESS AND ACQUISITION:
NATURE OF BUSINESS
Dixie Bedding Company (the Company) is engaged in manufacturing and selling
bedding products under the brand name of Serta. The Company's manufacturing
facilities are located in North Carolina, Georgia and Iowa. Licensee agreements
with Serta, Inc. (Serta) establish exclusive manufacturing rights for the
Company within the entire states of North Carolina, South Carolina, Nebraska,
North Dakota and Minnesota, most of Georgia, Iowa and South Dakota and parts of
Wisconsin. The Company also participates with other Serta licensees in sales to
regional and national customers under the Serta brand name.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PERIOD OF OPERATIONS
The accompanying financial statements for 1997 reflect the results of operations
for the 12 months ended December 31, 1997. The accompanying financial statements
for 1998 reflect the results of operations for the period from January 1, 1998,
to March 17, 1998. On March 17, 1998, Crescent Sleep Products Company (Crescent)
purchased the majority of the assets and assumed certain liabilities of the
Company under the terms of the Asset Purchase Agreement dated March 17, 1998
(Note 9).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash in banks, cash on hand, and highly
liquid investments with original maturities of three months or less.
ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
Substantially all of the Company's accounts receivable are concentrated in the
furniture industry. In the normal course of business, the Company extends
credit, on open accounts, to its customers after performing a credit analysis
based on a number of financial and other criteria. The Company performs ongoing
credit evaluations of its customers' financial conditions, and does not require
collateral. Allowances are maintained for potential credit losses.
INVENTORIES
Inventories are valued at the lower of cost (LIFO) or market and include the
costs of materials, direct labor and manufacturing overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided for financial reporting purposes using the
straight-line and double declining-balance methods over the following estimated
useful lives of the assets:
<TABLE>
<CAPTION>
<S> <C>
Land improvements 20 years
Buildings and improvements 39 years
Machinery and equipment 10 years
Automobiles and trucks 5 years
Office furniture and fixtures 7 to 10 years
</TABLE>
<PAGE> 30
Leasehold improvements are amortized over the shorter of the terms of the leases
or lives of the assets. The costs of major improvements are capitalized, while
the costs of maintenance and repairs, which do not improve or extend the life of
the respective assets, are expensed when incurred. The cost of assets retired or
otherwise disposed of and the accumulated depreciation thereon are removed from
the accounts, with any gain or loss realized upon the sale or disposal charged
or credited to earnings at the time of the asset retirement or disposal.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically assesses the potential for impairment of its long-lived
assets (namely property and equipment) by determining whether the
depreciation/amortization of the asset over its remaining life can be recovered
through projected undiscounted future cash flows. The amount of impairment, if
any, would be measured based on the excess of the asset balance to the projected
discounted future results using a discount rate reflecting the Company's average
cost of funds.
ADVERTISING COSTS
The Company expenses advertising costs, consisting primarily of cooperative
advertising with dealers and retailers, when revenue from sales to customers is
recorded. Advertising costs for period from January 1, 1998, to March 17, 1998
and for the year ended December 31, 1997 amounted to $731,075 and $3,512,508
respectively.
INCOME TAXES
The Company has elected, by unanimous consent of its stockholders, to be taxed
under the provisions of Subchapter S of the Internal Revenue Code. Under those
provisions, the Company does not pay corporate income taxes on its taxable
income. Instead, the stockholders are liable for individual income taxes on
their respective share of the Company's taxable income.
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 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.
3. RESTATEMENT OF 1997 FINANCIAL STATEMENTS
Subsequent to the issuance of its 1997 financial statements, the Company
discovered that it had failed to provide accruals for employee vacation, had
miscalculated its property tax accrual and had miscalculated its sales discount
reserve as of December 31, 1997. These errors also existed at the balance sheet
dates prior to December 31, 1997. The impact of the correction of these errors
was to reduce retained earnings by $273,457 as of January 1, 1997, to
$9,801,944. The 1997 statement of operations has not been restated because the
impact to the 1997 statement of operations for these errors was not material.
<PAGE> 31
4. BONDS PAYABLE:
IOWA
The Iowa Finance Authority (the Iowa Issuer) issued Tax-exempt Adjustable Mode
Industrial Development Revenue Bonds (Dixie Bedding Company Project) Series 1996
(the Iowa Bonds) in the aggregate principal amount of $3,000,000 on March 15,
1995. The Iowa Bonds were issued pursuant to an Indenture of Trust dated as of
March 1, 1995, between the Iowa Issuer and First Citizens Bank & Trust Company,
as trustee. The Bonds mature April 1, 2015, and bear interest to be paid each
January 1, April 1, July 1 and October 1, at the weekly rate (3.15% at March 17,
1998), as stated in the indenture.
The proceeds from the sale of the Iowa Bonds were loaned to the Company pursuant
to a loan agreement dated as of March 1, 1995, between the Iowa Issuer and the
Company, for purposes of providing the financing for a portion of the costs
associated with acquiring, constructing, improving and equipping the mattress
manufacturing facility in Clear Lake, Iowa (the Iowa Project). The Iowa Bonds
are secured by a letter of credit issued by Wachovia Bank of North Carolina,
National Association (the Iowa Credit Issuer) pursuant to a Reimbursement and
Security Agreement (the Iowa Reimbursement Agreement) dated as of March 1, 1995,
between the Iowa Credit Issuer and the Company. To secure its obligations under
the Iowa Reimbursement Agreement, the Company has granted to the Iowa Credit
Issuer a mortgage and security interest in the real and personal property
comprising the Iowa Project pursuant to a mortgage and security agreement dated
as of March 1, 1995.
COLUMBIA COUNTY
The Development Authority of Columbia County (the Columbia County Issuer) issued
Tax-exempt Adjustable Mode Industrial Development Revenue Bonds (Dixie Bedding
Company Project), Series 1996 (the Columbia County Bonds), in the aggregate
principal amount of $4,000,000 on February 1, 1996. The Columbia County Bonds
were issued pursuant to an Indenture of Trust (the Columbia County Indenture)
dated as of February 1, 1996, between the Columbia County Issuer and First
Citizens Bank & Trust Company, as trustee. The Columbia County Bonds mature
April 1, 2016, and bear interest to be paid each January 1, April 1, July 1 and
October 1, commencing April 1, 1997, at the weekly rate (3.30% at March 17,
1998) as stated in the Columbia County Indenture. The proceeds from the sale of
the Columbia County Bonds were loaned to the Company pursuant to a Loan
Agreement dated February 1, 1996, between the Columbia County Issuer and the
Company, for purposes of providing the financing for a portion of the costs
associated with acquiring, constructing, improving and equipping the Company's
mattress manufacturing facility in Columbia County, Georgia (the Columbia County
Project). The Columbia County Bonds are secured by a letter of credit issued by
Wachovia Bank of North Carolina, National Association (the Columbia County
Credit Issuer) pursuant to a Reimbursement and Security Agreement (the Columbia
County Reimbursement Agreement) dated as of February 1, 1996, between the
Columbia County Credit Issuer and the Company. To secure its obligations under
the Columbia County Reimbursement Agreement, the Company has granted to the
Columbia County Credit Issuer a security interest in the real and personal
property comprising the Columbia County Project pursuant to a Deed to Secure
Debt and Security Agreement dated as of February 1, 1996. The Tax-exempt
Adjustable Mode Industrial Development Revenue Bonds for the Development
Authority of Columbia County were paid in full based on the sales agreement
dated March 17, 1998 (Note 9).
5. PROFIT-SHARING PLAN:
The Company, at the discretion of the Board of Directors, may make a
contribution to the defined contribution profit-sharing plan under which
substantially all of the Company's employees are covered. The Company recorded
contribution expense related to the plan of $73,000 for the period from January
1, 1998, to March 17, 1998, and $343,000 for the year ended December 31, 1997.
<PAGE> 32
6. DEFERRED UNIT INCENTIVE PLAN
The Company maintains a noncontributory unit incentive plan for key employees in
which participants are allocated units (phantom shares of stock) each year,
based on the pre-tax profit and book value of the Company. If a participant is
terminated as an employee of the Company for any reason other than death,
disability, normal or early retirement before he has accrued five years of
service under the plan and before he has attained age 65, he will forfeit all
rights under the plan. The liability under the plan as of March 17, 1998 and
December 31, 1997, was $11,898,000 and $2,002,000, respectively. Expense for the
period from January 1, 1998, to March 17, 1998 and the year ended December 31,
1997, is $10,044,000 and $295,000, respectively, and is included in general and
administrative expenses in the accompanying statements of operations.
7. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
The Company has commitments under operating leases through 2003 which are
payable as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $178,000
1999 245,000
2000 177,000
2001 115,000
2002 36,000
2003 3,000
------------
$754,000
============
</TABLE>
Rent expense related to the operating leases was approximately $84,000 and
$384,000 for the period from January 1, 1998, to March 17, 1998, and the year
ended December 31, 1997, respectively.
COMMITMENT TO SERTA, INC.
Serta licenses the right for manufacturers, such as the Company, to manufacture
and distribute Serta brand products. Serta is owned by its licensees located in
the United States and has no manufacturing or distribution facilities of its
own. Serta's income is derived from base fees from licensees and sales royalty
fees. The Company is committed to Serta, in the amount of $1,769,000 for the
remainder of 1998 in regard to these fees. The Company paid Serta $476,000 and
$2,142,000 during the period from January 1, 1998, to March 17, 1998, and the
year ended December 31, 1997, respectively, related to these fees. These fees
were included in operating expenses on the accompanying statements of
operations.
LITIGATION AND OTHER CONTINGENCIES
The Company, in the normal course of business, has commitments, lawsuits,
contingent liabilities and claims; however, based on facts currently known, the
Company does not expect that the resolution of any of these matters will have a
material adverse effect on its financial position.
Serta has a deferred compensation plan for its chief executive officer to be
funded by the shareholders of Serta. The amount of this deferred compensation
plan is determined based on the cumulative aggregate profits of all Serta
licensees for the years from 1996 to 2000 in excess of certain benchmarks
determined by Serta. The required funding of this plan will be in five equal
payments from 2001 to 2005. Interest will accrue on any obligations at the
five-year Treasury Bill rate. As of December 31, 1997, the Company's allocated
potential liability related to this plan is $0.
CONCENTRATION OF CASH HELD AT FINANCIAL INSTITUTION
The Company has some financial risk related to cash in the respect that amounts
on deposit at one financial institution at various times, including March 17,
1998, exceed the maximum amount insured by the FDIC.
<PAGE> 33
8. MAJOR CUSTOMERS AND VENDORS:
One of the Company's customers accounted for 19% and 16% of the Company's net
sales for the period from January 1, 1998, to March 17, 1998, and for the year
ended December 31, 1997, respectively.
Purchases of raw materials from one vendor represented approximately 43% of
total raw material purchases for both the periods from January 1, 1998, to March
17, 1998, and for the year ended December 31, 1997.
9. SUBSEQUENT EVENT
ACQUISITION
Pursuant to the terms of the Asset Purchase Agreement (the Agreement) dated
March 17, 1998, Crescent, a Delaware corporation, purchased the majority of the
assets and assumed certain liabilities of the Company for a total purchase price
of approximately $68,924,000. As part of the Agreement, Crescent also obtained
the right to the Company's Serta license.
Transaction costs related to the acquisition totaling $924,000 were recorded as
operating expenses during the period from January 1, 1998 to March 17, 1998.
Additionally, the Company incurred $10,044,000 of compensation expense from
January 1, 1998 to March 17, 1998 related to the settlement of a phantom stock
plan in place between the Company and certain members of management. This amount
is included in general and administrative expenses in the accompanying statement
of operations for the period from January 1, 1998 to March 17, 1998. This amount
had not been paid as of March 17, 1998 and accordingly, was included in accrued
expenses at March 17, 1998.
<PAGE> 34
CRESCENT SLEEP PRODUCTS COMPANY
CONDENSED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 2000
--------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 3,111,480
Accounts receivable, less allowance for doubtful accounts
of $ 432,876 ................................................... 8,057,195
Other receivables...................................................... 227,812
Inventories............................................................ 3,123,350
Prepaid and other current assets....................................... 374,930
Deferred income taxes.................................................. 539,000
------------
Total current assets................................................. 15,433,767
Property, plant and equipment, net........................................ 16,139,635
Intangible assets, net.................................................... 50,291,105
Other assets.............................................................. 999,923
Deferred income taxes..................................................... 4,405,000
------------
Total assets......................................................... $ 87,269,430
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 3,530,104
Accrued advertising and sales allowances............................... 1,255,840
Accrued interest....................................................... 139,561
Other current liabilities.............................................. 2,427,736
Current portion of long-term debt...................................... 6,000,000
------------
Total current liabilities............................................ 13,353,241
------------
Bonds payable............................................................. 8,900,000
Long-term debt............................................................ 40,141,540
Stock appreciation rights................................................. 11,900,000
------------
Total long-term liabilities.......................................... 60,941,540
------------
Stockholders' equity:
Class A voting; $.01 par value; 2,000,000 shares authorized, 955,000
shares issued and outstanding.................................... 9,550
Class B nonvoting; $ .01 par value; 300,000 shares authorized, 152,222
shares issued and outstanding....................................... 1,522
Additional paid-in capital............................................. 11,038,928
Stock warrants........................................................ 1,756,000
Retained earnings...................................................... 168,649
------------
Total stockholders' equity........................................... 12,974,649
------------
Total liabilities and stockholders' equity........................... $ 87,269,430
============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE> 35
CRESCENT SLEEP PRODUCTS COMPANY
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
---------------------------------------
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Net sales.................................................... $ 19,046,561 $ 18,330,835
Cost of sales................................................ 10,684,788 9,848,698
------------------ ----------------
Gross profit............................................ 8,361,773 8,482,137
Selling, general and administrative expenses................. 5,138,012 5,003,071
Amortization of intangibles.................................. 971,497 1,009,344
------------------ ----------------
Income from operations.................................. 2,252,264 2,469,722
Interest expense, net........................................ 1,399,581 1,358,458
Other income, net............................................ (173,933) --
------------------ ----------------
Income before provision for income taxes................ 1,026,616 1,111,264
Provision for income taxes................................... 296,735 445,884
------------------ ----------------
Net income.............................................. $ 729,881 $ 665,380
================= ================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE> 36
CRESCENT SLEEP PRODUCTS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
-------------------------------------
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Net cash used in operating activities..................... $ (234,135) $ (9,166)
Cash flows from investing activities:
Purchases of property, plant and equipment, net........ (727,749) (141,509)
Proceeds from sale of assets........................... 685,989 --
---------------- ---------------
Net cash used in investing activities................ (41,760) (141,509)
----------------- ---------------
Cash flows from financing activities:
Payments on long-term debt............................. (1,250,000) (1,000,000)
----------------- ----------------
Net cash used in financing activities................ (1,250,000) (1,000,000)
----------------- ----------------
Net decrease in cash and cash equivalents................. (1,525,895) (1,150,675)
Cash and cash equivalents, beginning of period............ 4,637,375 2,034,216
---------------- ---------------
Cash and cash equivalents, end of period.................. $ 3,111,480 $ 883,541
================ ===============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE> 37
CRESCENT SLEEP PRODUCTS COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of
Crescent Sleep Products Company ("Crescent"). All material intercompany
transactions and balances have been eliminated. The interim statements
are unaudited and, in the opinion of management, include all adjustments
(consisting of only normal recurring adjustments) considered necessary
for a fair presentation of Crescent's financial position as of March 31,
2000 and the results of its operations and cash flows for the interim
periods presented. 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.
2. INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following (in thousands):
MARCH 31,
2000
----
<S> <C>
Raw materials...................................................................... $2,223,350
Work-in-process.................................................................... 351,832
Finished goods..................................................................... 548,168
-----------
Total inventories.............................................................. $3,123,350
==========
</TABLE>
3. SUBSEQUENT EVENT
On June 30, 2000, Sleepmaster L.L.C. acquired all of the capital stock of
Crescent for approximately $118,277,000 in cash and the assumption of
$8,900,000 of industrial revenue bonds. The accompanying financial
statements do not reflect any adjustments related the sale of
Crescent's stock.
<PAGE> 38
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
On June 30, 2000, Sleepmaster L.L.C. ("Sleepmaster") acquired all of the
capital stock of Crescent Sleep Products Company for approximately $118,277,000,
including estimated costs of acquisition, pursuant to a stock purchase agreement
by and among Crescent, Sleepmaster, and the stockholders listed on the
Stockholders Exhibit attached thereto.
The following unaudited pro forma condensed consolidated financial
information of Sleepmaster has been prepared to give effect to the acquisition
of Crescent, as well as the previous acquisitions of the Simon Mattress
Manufacturing Company ("Simon"), acquired on April 28, 2000, Herr Manufacturing
Company ("Herr"), Star Bedding Products (1986) Limited ("Star"), and Adam Wuest
Inc. and Adam Wuest Realty (collectively "Adam Wuest") in 1999. The following
also gives effect to the issuance of the senior subordinated notes on June 30,
2000 and in 1999 and the application of the proceeds therefrom. The pro forma
adjustments presented are based upon available information and assumptions that
Sleepmaster believes are reasonable.
The unaudited pro forma condensed consolidated balance sheet of
Sleepmaster as of March 31, 2000 gives effect to the acquisitions of Crescent
and Simon as if they had occurred on March 31, 2000. The unaudited pro forma
condensed consolidated statements of income of Sleepmaster for the year ended
December 31, 1999 and the three months ended March 31, 2000 give effect to the
acquisitions of Crescent and Simon, as if the transactions had occurred as of
January 1, 1999 and give effect to the acquisitions of Herr, Star, and Adam
Wuest, which actually occurred on February 26, 1999, May 18, 1999, and
November 5, 1999 respectively, and the issuance of the senior subordinated
notes on May 18, 1999, including the application of the net proceeds therefrom,
as if the transactions had occurred as of January 1, 1999.
The pro forma financial data should be read in conjunction with
Sleepmaster's Annual Report on Form 10-K/A for the year ended December 31, 1999,
Sleepmaster's Amendment No. 4 to the Form S-4, filed on November 24, 1999,
Sleepmaster's Report on Form 8-K/A filed on July 12, 2000 for Simon and the
historical consolidated financial statements of Crescent and the accompanying
notes thereto included elsewhere herein. 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 Crescent, Simon, Herr,
Star, and Adam Wuest, and the issuance of the senior subordinated notes, been
completed on the dates indicated, or to project Sleepmaster's results of
operations for any future date or period.
<PAGE> 39
SLEEPMASTER L.L.C.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
MARCH 31, 2000
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA
HISTORICAL PRO FORMA ADJUSTMENTS FOR PRO FORMA ADJUSTMENTS FOR AS
SLEEPMASTER SIMON(a) SIMON CRESCENT(j) CRESCENT ADJUSTED
----------- --------- --------------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents ...................... $ 1,746 $ 3,627 $ 42,379 (b) $ 3,112 $ 79,737 (k) $ 11,633
(42,379)(c) 41,500 (l)
(118,089)(m)
Marketable securities .......................... -- 824 -- 824
Accounts receivable, net ....................... 24,704 5,699 8,057 38,460
Accounts receivable-other ...................... 1,256 -- 225 (d) 228 1,484
Inventories .................................... 7,883 3,188 (45)(c) 3,123 207 (n) 14,626
Deferred tax assets ............................ 720 295 539 1,554
Other current assets ........................... 1,031 365 25 (b) 375 (45)(m) 1,706
--------- --------- (45)(c) --------- ---------
Total current assets ........................ 37,340 13,998 15,434 70,287
Property, plant and equipment, net ............. 20,915 6,928 16,139 43,982
Intangible assets, net ......................... 129,982 -- 19,485 (e) -- 93,394 (o) 296,053
6,304 (f) 4,244 (p)
7,532 (g) 35,112 (q)
42,615 (c) 118,277 (m)
(42,615)(h) (118,277)(r)
Deferred tax assets 12,049 284 4,405 16,738
Other assets ................................... 7,408 434 1,085 (b) 297 4,813 (k) 14,037
--------- --------- --------- ---------
Total assets ........................... $ 207,694 $ 21,644 $ 36,275 $ 441,097
========= ========= ========= =========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT):
Accounts payable ............................... $ 16,180 $ 2,622 $ 3,530 $ 22,332
Accrued advertising and sales allowances ....... 4,846 737 1,256 6,839
Accrued interest ............................... 5,096 -- 50 (628) (k) 4,518
Deferred tax liabilities ....................... 208 208
Other current liabilities ...................... 4,408 1,296 3 (b) 2,107 78 (k) 8,244
191 (c) 161 (m)
Current portion of long-term debt .............. 5,013 -- -- 4,000 (k) 9,013
--------- --------- --------- ---------
Total current liabilities ................... 35,543 4,863 6,943 51,154
--------- --------- --------- ---------
Long-term debt ................................. 157,248 -- 43,361 (b) 8,900 157,500 (k) 290,609
(76,400)(k)
Deferred tax liabilities 7,532 (g) 35,112 (q) 42,644
Other liabilities .............................. 1,456 180 -- 1,636
--------- --------- --------- ---------
Total long-term liabilities ................. 158,704 180 8,900 334,889
--------- --------- --------- ---------
Redeemable cumulative preferred interests ...... 21,034 -- -- 21,034
Members' equity (deficit) ...................... (7,587) 16,601 125 (b) 20,432 41,500 (l) 34,020
--------- --------- --------- ---------
225 (d) (18)(m)
(42,615)(h) 207 (n)
25,789 (i) (118,277)(r)
97,638 (s)
Total liabilities and members'
equity (deficit) ......................... $ 207,694 $ 21,644 $ 36,275 $ 441,097
========= ========= ========= =========
</TABLE>
<PAGE> 40
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
The pro forma condensed consolidated balance sheet gives effect to the following
pro forma adjustments:
(a) Represents the acquisition of Simon, which occurred on April 28, 2000,
derived from the unaudited financial statements of Simon as of March 31,
2000, as previously filed with the SEC on Form 8-K/A on July 12, 2000
(these historical financial statements as included in this filing for
Simon were subsequently restated and this filing will be amended. The
restated historical Simon financial statements are presented herein),
adjusted to eliminate certain assets and liabilities not acquired or
assumed by Sleepmaster pursuant to the stock purchase agreement, as
follows:
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
SIMON ADJUSTMENTS SIMON
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents ....................... $ 3,627 $ -- $ 3,627
Marketable securities ........................... 824 -- 824
Accounts receivable, net ........................ 5,699 -- 5,699
Inventory ....................................... 3,188 -- 3,188
Other current assets ............................ 660 -- 660
------- ------- -------
Total current assets ......................... 13,998 -- 13,998
Property and equipment, net ..................... 6,928 -- 6,928
Intangible assets, net .......................... 505 (505)(2) --
Other assets .................................... 718 -- 718
------- ------- -------
Total assets ................................. $22,149 $ (505) $21,644
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable ................................ 2,622 -- 2,622
Accrued advertising and sales allowances ........ 737 -- 737
Other current liabilities ....................... 1,160 (111)(1) 1,049
Income taxes payable ............................ 455 -- 455
------- ------- -------
Total current liabilities .................... 4,974 (111) 4,863
Other liabilities ............................... 180 -- 180
------- ------- -------
Total liabilities ............................ 5,154 (111) 5,043
Stockholders' equity ............................ 16,995 (394) 16,601
------- ------- -------
Total liabilities and stockholders' equity ... $22,149 $ (505) $21,644
======= ======= =======
</TABLE>
(1) Deferred compensation relating to an incentive compensation
agreement with a key employee which was paid by seller. This
agreement was eliminated as of the acquisition date.
(2) Elimination of Historical Goodwill (Refer to adjustment (f) for
calculation of Goodwill upon acquisition)
(b) Represents adjustments to reflect proceeds from the issuance of $35,000
term debt and a revolving loan borrowing of $8,361, net of estimated
closing costs of $1,085, and $125 of common interests contributed by
Sleepmaster Holdings L.L.C.
(c) Represents adjustments to record the acquisition of Simon for $42,615,
including estimated costs of acquisition.
(d) Represents adjustment of Simon's inventory to its estimated fair value at
the date of acquisition.
(e) Represents an allocation of the purchase price for the fair value
ascribed to the Serta license.
<PAGE> 41
(f) Represents adjustment to record the excess of purchase price over the
estimated fair values of the net assets acquired of Simon as follows:
<TABLE>
<S> <C>
Purchase price, including estimated costs of acquisition................ $ 42,615
Net book value of net tangible assets acquired.......................... (16,601)
Adjustment to book value of Simon's inventory (see adjustment (d)) ..... (225)
Serta license (adjustment (e)).......................................... (19,485)
----------
Goodwill................................................................ $ 6,304
==========
</TABLE>
(g) Represents adjustment to record a deferred tax liability associated with
the Serta license acquired and related goodwill.
(h) Represents the elimination entries required to reflect the consolidation
of Simon with Sleepmaster and its existing subsidiaries.
(i) Represents adjustments to members' equity (deficit) as a result of the
acquisition of Simon as follows:
<TABLE>
<S> <C>
Goodwill (adjustment (f)) .............................................. 6,304
Serta license (adjustment (e)).......................................... 19,485
----------
Total................................................................... $ 25,789
==========
</TABLE>
<PAGE> 42
(j) Represents the acquisition of Crescent, which occurred on June 30, 2000,
derived from the unaudited financial statements of Crescent as of March
31, 2000, included elsewhere herein, adjusted to eliminate certain assets
and liabilities not acquired or assumed by Sleepmaster pursuant to the
stock purchase agreement, as follows:
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
CRESCENT ADJUSTMENTS CRESCENT
---------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents ....................... $ 3,112 $ -- $ 3,112
Accounts receivable, net ........................ 8,057 -- 8,057
Other receivables ............................... 228 -- 228
Inventories ..................................... 3,123 -- 3,123
Prepaid and other current assets ................ 375 -- 375
Deferred income taxes ........................... 539 -- 539
-------- -------- --------
Total current assets ......................... 15,434 -- 15,434
Property, plant and equipment, net .............. 16,139 -- 16,139
Intangible assets, net .......................... 50,291 (50,291)(6) --
Other assets .................................... 1,000 (703)(5) 297
Deferred income taxes ........................... 4,405 -- 4,405
-------- -------- --------
Total assets ................................. $ 87,269 $(50,994) $ 36,275
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable ................................ 3,530 -- 3,530
Accrued advertising and sales allowances ........ 1,256 -- 1,256
Accrued interest ................................ 139 (89)(3) 50
Other current liabilities ....................... 2,428 (236)(7) 2,107
(85)(4)
Current portion of long-term debt ............... 6,000 (6,000)(2) --
-------- -------- --------
Total current liabilities .................... 13,353 (6,410) 6,943
-------- -------- --------
Bonds payable ................................... 8,900 -- 8,900
Long-term debt .................................. 40,141 (40,141)(2) --
Stock appreciation rights ....................... 11,900 (11,900)(1) --
-------- -------- --------
Total long-term liabilities .................. 60,941 (52,041) 8,900
-------- -------- --------
Stockholders' equity ............................ 12,975 7,457 20,432
-------- -------- --------
Total liabilities and stockholders' equity ... $ 87,269 $(50,994) $ 36,275
======== ======== ========
</TABLE>
(1) Amount relates to an agreement which provided stock appreciation
rights to various key employees which was paid by sellers at
closing. This agreement was eliminated as of the acquisition date.
(2) Debt of Crescent which Sleepmaster did not assume pursuant to the
stock purchase agreement.
(3) Accrued interest on debt not assumed by Sleepmaster (Note 2).
(4) Accrued bonuses relating to an incentive compensation agreement
with key employees which were paid by sellers at closing. This
agreement was eliminated as of the acquisition date.
(5) Deferred financing fees associated with debt not assumed by
Sleepmaster (Note 2).
(6) Elimination of Historical Goodwill (Refer to adjustment (p) for
calculation of Goodwill upon acquisition)
(7) Income taxes payable not assumed by Sleepmaster
<PAGE> 43
(k) Represents adjustments to reflect proceeds from the issuance of $132,500
term debt, a revolving loan borrowing of $4,000, and $25,000 of 13.4%
senior subordinated notes, net of estimated closing costs of $4,813.
Additionally, some of these proceeds were used to repay the principal and
interest outstanding under the existing credit facility totaling $76,400
and $628, respectively.
(l) Represents a cash contribution by Sleepmaster Holdings L.L.C. of $41,500
in return for common interests in Sleepmaster.
(m) Represents adjustments to record the acquisition of Crescent for
$118,277, including estimated costs of acquisition.
(n) Represents adjustment of Crescent's inventory to its estimated fair value
at the date of acquisition.
(o) Represents an allocation of the purchase price for the fair value
ascribed to the Serta license.
(p) Represents adjustment to record the excess of purchase price over the
estimated fair values of the net assets acquired of Crescent as follows:
<TABLE>
<S> <C>
Purchase price, including estimated costs of acquisition.................... $ 118,277
Net book value of net tangible assets acquired.............................. (20,432)
Adjustment to book value of Crescent's inventory (see adjustment (n)) ...... (207)
Serta license (adjustment (o)).............................................. (93,394)
----------
Goodwill.................................................................... $ 4,244
=========
</TABLE>
(q) Represents adjustment to record a deferred tax liability associated with
the Serta license acquired and related goodwill.
(r) Represents the elimination entries required to reflect the consolidation
of Crescent with Sleepmaster and its existing subsidiaries.
(s) Represents adjustments to members' equity (deficit) as a result of the
acquisition of Crescent as follows:
<TABLE>
<S> <C>
Goodwill (adjustment (p)) .................................................. 4,244
Serta license (adjustment (o)).............................................. 93,394
---------
Total....................................................................... 97,638
=========
</TABLE>
<PAGE> 44
SLEEPMASTER L.L.C.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
YEAR ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA AS
ADJUSTMENTS ADJUSTED
FOR HERR, FOR HERR,
HISTORICAL STAR, STAR,
HISTORICAL HISTORICAL HISTORICAL ADAM AND AND ADAM
SLEEPMASTER HERR (a) STAR (b) WUEST (c) ADAM WUEST WUEST
----------- ---------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales .......................... $ 171,319 $ 2,748 $ 5,753 $ 42,582 (40)(d) $ 222,362
Cost of sales ...................... 104,924 1,697 3,533 24,292 (40)(d) 134,402
(4)(e)
--------- --------- --------- --------- ---------
Gross profit .................. 66,395 1,051 2,220 18,290 87,960
Selling, general & administrative
expenses ........................ 43,322 739 1,188 12,524 (370)(f) 57,320
(83)(h)
Amortization of intangibles ........ 2,216 3 -- -- 1,359 (i) 3,578
--------- --------- --------- --------- ---------
Operating income .............. 20,857 309 1,032 5,766 27,062
Interest expense, (net) ............ 12,536 2 9 76 64 (g) 17,421
4,734 (j)
Other expense (income), net ........ 83 (16) (9) (21) 37
--------- --------- --------- --------- ---------
Income (loss) before income
taxes and extraordinary
items ......................... 8,238 323 1,032 5,711 9,604
Provision (benefit) for income
taxes ........................... 3,248 126 351 2,250 (l) (2,191) (k) 3,784
--------- --------- --------- --------- ---------
Income (loss) before
extraordinary items ........... $ 4,990 $ 197 $ 681 $ 3,461 $ 5,820
========= ========= ========= ========= =========
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
SIMON (m) FOR SIMON AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
Net sales .......................... $ 59,021 $ 281,383
Cost of sales ...................... 36,118 225 (r) 170,745
--------- ---------
Gross profit .................. 22,903 110,638
Selling, general & administrative
expenses ........................ 18,869 (99)(n) 76,038
(52)(n)
Amortization of intangibles ........ -- 813 (o) 4,391
--------- ---------
Operating income .............. 4,034 30,209
Interest expense, (net) ............ (208) 4,184 (p) 21,594
197 (q)
Other expense (income), net ........ (427) (390)
--------- ---------
Income (loss) before income
taxes and extraordinary
items ......................... 4,669 9,005
Provision (benefit) for income
taxes ........................... 1,630 (1,856)(s) 3,558
--------- ---------
Income (loss) before
extraordinary items ........... $ 3,039 $ 5,447
========= =========
</TABLE>
<PAGE> 45
SLEEPMASTER L.L.C.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
YEAR ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO PRO FORMA
FORMA ADJUSTMENTS PRO
AS HISTORICAL FOR FORMA AS
ADJUSTED CRESCENT (t) CRESCENT ADJUSTED
--------- ------------ ----------- ---------
<S> <C> <C> <C>
Net sales ................................. $ 281,383 $ 78,358 $ 359,741
Cost of sales ............................. 170,745 41,833 207 (x) 212,785
--------- --------- ---------
Gross profit ......................... 110,638 36,525 146,956
Selling, general &
administrative expenses .............. 76,038 28,625 (433)(u) 96,928
(6,700)(u)
(602)(u)
Amortization of intangibles ............... 4,391 3,881 (3,886)(u) 7,699
--------- --------- ---------
3,313 (v)
Operating income ..................... 30,209 4,019 42,329
Interest expense, (net) (a) ............... 21,594 5,306 (4,973)(u) 31,261
(283)(u)
9,617 (w)
Other expense (income), net ............... (390) (6) (396)
--------- --------- ---------
Income (loss) before income
taxes and extraordinary items ........ 9,005 (1,281) 11,464
Provision (benefit) for income taxes ...... 3,558 (318) 1,288 (y) 4,528
--------- --------- ---------
Income (loss) before
extraordinary items .................. $ 5,447 $ (963) $ 6,936
========= ========= =========
</TABLE>
<PAGE> 46
SLEEPMASTER L.L.C.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
SLEEPMASTER SIMON (m) FOR SIMON AS ADJUSTED CRESCENT (t) FOR CRESCENT AS ADJUSTED
----------- ---------- ----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales .......................... $ 56,101 $ 14,880 $ 70,981 $ 19,047 $ 90,028
Cost of sales ...................... 34,839 9,250 44,089 10,685 54,774
-------- -------- -------- -------- --------
Gross profit ................... 21,262 5,630 26,892 8,362 35,254
Selling, general & administrative
expenses ....................... 14,255 5,351 (25)(n) 19,581 5,138 (108)(u) 24,536
(75)(u)
Amortization of intangibles ........ 842 -- 203(o) 1,045 971 (971)(u) 1,873
828 (v)
-------- -------- -------- -------- --------
Operating income ............... 6,165 279 6,266 2,253 8,845
Interest expense, (net) (a) ........ 4,537 -- 1,046(p) 5,632 1,400 (1,230)(u) 8,136
49(q) (71)(u)
2,405 (w)
Other expense (income), net ........ 32 (78) (46) (174) (220)
-------- -------- -------- -------- --------
Income before income taxes ..... 1,596 357 680 1,027 929
Provision (benefit) for income
taxes .......................... 624 124 (480)(s) 268 297 (198)(y) 367
-------- -------- -------- -------- --------
Net income ..................... $ 972 $ 233 $ 412 $ 730 $ 562
======== ======== ======== ======== ========
</TABLE>
<PAGE> 47
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
The pro forma consolidated statements of income for the year ended
December 31, 1999 and the three months ended March 31, 2000 give effect to the
following pro forma adjustments:
(a) Represents the results of operations of Herr prior to its
acquisition for the period from January 1, 1999 to February 25,
1999.
(b) Represents the results of operations of Star prior to its
acquisition for the period from January 1, 1999 to May 18, 1999.
(c) Represents the results of operations of Adam Wuest prior to its
acquisition for the period from January 1, 1999 to November 4,
1999.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C> <C>
(d) Elimination of intercompany sales transactions $ 40
(e) Decreased depreciation expense of Herr's factory 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 $ 4
(f) Represents expense associated with phantom stock
compensation arrangements for certain key employees and
non-shareholder officers of Adam Wuest that will not be
continued after the acquisition. This adjustment is solely
as the result of changed circumstances that will exist
after the acquisition. The duties and responsibilities of
these employees will not be diminished or cause other costs
to be incurred to offset the pro forma adjustment to
compensation expense $ 370
(g) Represents an adjustment to record fees associated with the
letter of credit collateralizing the economic development revenue
bonds of Adam Wuest $ 64
(h) Represents an adjustment to depreciation expense to conform the
depreciation method used by Adam Wuest with that of Sleepmaster $ 83
(i) Represents the amortization over 40 years of the excess of
purchase price over the estimated fair values of the net assets
acquired of Herr, Star and Adam Wuest as follows:
Herr for the period from January 1, 1999 through February 25,
1999, Star for the period from January 1, 1999 to May 17, 1999
and Adam Wuest for the period from January 1, 1999 to November 4,
1999 $ 1,359
</TABLE>
<PAGE> 48
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C> <C>
(j) Interest expense on the notes $ 4,779
Amortization of issuance costs associated with
the old note offering over the life of the notes $ 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
acquisition of Herr has not been included herein since the
acquisition debt is assumed to be repaid from the proceeds
from the old note offering $ (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 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 $ (247)
Elimination of interest expense associated with debt of Star not assumed by
Sleepmaster $ (9)
Elimination of interest expense associated with related party capital lease
obligation of Adam Wuest $ (291)
Elimination of interest income related to Adam Wuest's cash and cash equivalents and
marketable securities $ 216
Interest expense associated with debt incurred in connection with the acquisition of
Adam Wuest $ 2,667
Interest expense on economic development revenue bonds assumed in connection with
the acquisition of Adam Wuest $ 94
Amortization of issuance costs associated with debt incurred in connection with the
acquisition of Adam Wuest $ 171
-----
Total $ 4,734
=======
</TABLE>
(k) Represents an adjustment to income tax expense for the effects of
the aforementioned adjustments (e) through (k) (39.4% effective
tax rate for the year ended December 31, 1999 and for the three
months ended March 31, 2000).
(l) Represents an adjustment to income tax expense (39.4% effective
tax rate) as a result of including the results of operations of
Adam Wuest indicated in adjustment (d). Prior to the acquisition,
Adam Wuest had elected to include its taxable income with that of
its shareholders and consequently did not provide for income
taxes at the corporate level.
(m) Derived from the audited financial statements of Simon for the
year ended December 31, 1999 and from the unaudited financial
statements of Simon for the period January 1, 2000 through March
31, 2000, as previously filed with the SEC on Form 8-K/A on July
12, 2000. (These historical financial statements as included in
this filing for Simon were subsequently restated and this filing
will be amended. The restated historical Simon financial
statements are presented herein.)
<PAGE> 49
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1999 MARCH 31, 2000
----------------- --------------------
<S> <C> <C> <C>
(n) Represents the elimination of costs incurred
by Simon that Sleepmaster has not assumed:
Expense associated with the salary paid (including
payroll taxes) to the chairman whose employment will not
continue after the acquisition as provided for in the
purchase agreement $ (99) $ (25)
Expense associated with a deferred compensation
agreement with a certain key employee that will not be
continued after the acquisition $ (52) --
(o) Amortization over 40 years for the following-
The excess of the purchase price over the
estimated fair values of the net tangible assets
acquired of Simon $ 158 $ 39
Serta license acquired from Simon $ 466 $117
Additional goodwill resulting from recording
deferred tax liability associated with the fair
value ascribed to the Serta license $ 189 $ 47
--- --
Total $ 813 $ 203
===== =====
(p) Interest expense associated with debt incurred in
connection with the acquisition of Simon $ 4,184 $ 1,046
(q) Amortization of issuance costs associated with debt
incurred in connection with the acquisition of Simon $ 197 $ 49
</TABLE>
If the variable rate of interest on the additional debt incurred in
connection with the acquisition of Simon were to increase by 1/8%, pro forma net
income would decrease by $32 and $8 for the year ended December 31, 1999 and
the three months ended March 31, 2000, respectively. If such variable rate were
to decrease by 1/8%, pro forma net income would increase by $32 and $8 for the
year ended December 31, 1999 and the three months ended March 31, 2000,
respectively.
(r) Adjustment in connection with recording Simon's inventory at its
estimated fair value.
(s) Represents an adjustment to income tax expense for the effects of
the aforementioned adjustments (o) through (s) (39.5% effective
rate for the year ended December 31, 1999 and for the three
months ended March 31, 2000).
<PAGE> 50
(t) Derived from the audited financial statements of Crescent for the
year ended December 31, 1999 and from the unaudited financial
statements of Crescent for the period January 1, 2000 through
March 31, 2000, included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1999 MARCH 31, 2000
----------------- --------------
<S> <C> <C> <C>
(u) Represents the elimination of costs incurred
by Crescent that Sleepmaster has not assumed:
Expense associated with the salary (including bonuses and
payroll taxes) paid to the chief executive officer whose
employment will not continue after the acquisition as
provided for in the purchase agreement $ (433) $ (108)
Expense associated with stock appreciation right agreements to
certain key employees that will not continue after the
acquisition. This adjustment is solely as the result of changed
circumstances that will exist after the acquisition. The duties
and responsibilities of these employees will not be diminished
or cause other costs to be incurred to offset the pro forma
adjustment to compensation expense. (Crescent did not record
this expense in the three months ended March 31, 2000. As such,
no adjustment is necessary) $ (6,700) --
Interest expense associated with debt of Crescent
not assumed by Sleepmaster $ (4,973) $ (1,230)
Amortization expense of debt issuance costs and
original issue discount associated with debt of Crescent $ (283) $ (71)
Represents expense associated with management fees
relating to strategic guidance and lending relationships
that will not continue after the
acquisition $ (602) $ (75)
Amortization expense related to
goodwill of Crescent $ (3,886) $ (971)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(v) Amortization over 40 years for the following-
The excess of the purchase price over the
estimated fair values of the net tangible assets $ 106 $ 27
acquired of Crescent
Serta license acquired from Crescent $ 2,329 $ 582
Additional goodwill resulting from recording
deferred tax liability associated with the fair
value ascribed to the Serta license $ 878 $ 219
--------- --------
Total $ 3,313 $ 828
========= ========
(w) Interest expense associated with debt incurred in
connection with the acquisition of Crescent $ 5,527 $ 1,382
Interest expense associated with the issuance of senior
subordinated notes in connection with acquisition of
Crescent $ 3,350 $ 838
Amortization of issuance costs associated with debt
incurred in connection with the acquisition of Crescent $ 740 $ 185
--------- --------
Total $ 9,617 $ 2,405
========= ========
</TABLE>
If the variable rate of interest on the debt incurred in connection with
the acquisition of Crescent were to increase by 1/8%, pro forma net income
would decrease by $45 and $11 for the year ended December 31, 1999 and the
three months ended March 31, 2000, respectively. If such variable rate were to
decrease by 1/8%, pro forma net income would increase by $45 and $11 for the
year ended December 31, 1999 and the three months ended March 31, 2000,
respectively.
(x) Adjustment in connection with recording Crescent's inventory at
its estimated fair value.
(y) Represents an adjustment to income tax expense for the
effects of the aforementioned adjustments (v) through (y)
(39.5% effective rate for the year ended December 31, 1999
and for the three months ended March 31, 2000).
<PAGE> 51
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: September 13, 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 September 13, 2000
------------------------------- Officer, Advisor
Charles Schweitzer
/s/ James P. Koscica Executive Vice President and Chief September 13, 2000
------------------------------- Financial Officer, Advisor
James P. Koscica
</TABLE>
