<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission File No. 333-95945
MATTRESS DISCOUNTERS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
52-1710722
(I.R.S. Employer Identification No.)
9822 Fallard Court
Upper Marlboro, MD 20722
(Address of principal executive offices)
(301) 856-6755
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
No Yes X
-------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at 09/30/00 Class
----------------------- -----
100 Common Stock, $.01 Par Value
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<PAGE>
MATTRESS DISCOUNTERS CORPORATION
--------------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheets
as of January 1, 2000 and September 30, 2000 (unaudited)................................. 3
Consolidated Statements of Operations (unaudited)
For the Three Months and Nine Months Ended
September 30, 1999 and 2000.............................................................. 4
Consolidated Statements of
Cash Flows - (unaudited) For the Nine Months
Ended September 30, 1999 and 2000........................................................ 5
Consolidated Statement of Stockholder's
Equity - (unaudited) For the Nine Months
Ended September 30, 2000................................................................. 6
Notes to Consolidated
Financial Statements (Unaudited)......................................................... 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................... 10
Item 3 Quantitative and Qualitative Disclosures About
Market Risks............................................................................. 14
PART II OTHER INFORMATION
Item 1 Legal Proceedings........................................................................ 15
Item 2 Changes in Securities.................................................................... 15
Item 3 Defaults upon Senior Securities.......................................................... 15
Item 4 Submission of Matters to a Vote of Security Holders...................................... 15
Item 5 Other Information........................................................................ 15
Item 6 Exhibits and Reports on Form 8-K......................................................... 15
Signatures......................................................................................... 16
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of January 1, 2000 and September 30, 2000
<TABLE>
<CAPTION>
January 1, September 30,
--------- ------------
2000 2000
---- ----
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 7,511,772 $12,521,544
Accounts receivable............................................. 5,333,775 6,133,733
Inventories..................................................... 16,257,356 19,263,323
Prepaid expenses and other current assets....................... 828,111 979,426
Due from affiliate.............................................. 3,086,561 1,848,199
Deferred tax asset.............................................. 840,000 840,000
-------------------------------
Total current assets....................................... 33,857,575 41,586,225
Property and equipment, net.......................................... 10,583,397 11,482,583
Debt issue costs and other assets.................................... 10,423,837 10,155,967
Goodwill and other intangibles, net ................................. 56,142,894 55,004,715
Deferred tax asset .................................................. 91,925,000 90,343,325
-------------------------------
Total assets............................................... $202,932,703 $208,572,815
===============================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt............................... $ 267,755 $ 165,151
Accounts payable................................................ 17,067,993 25,323,920
Accrued expenses................................................ 19,403,490 18,896,591
-------------------------------
Total current liabilities.................................. 36,739,238 44,385,662
Long-term debt, excluding current portion............................ 133,373,541 133,727,062
Other noncurrent liabilities ........................................ 4,421,813 3,939,358
-------------------------------
Total liabilities.......................................... 174,534,592 182,052,082
--------------- -----------
Stockholder's equity:
Common stock.................................................... 1 1
Additional paid-in capital...................................... 29,845,297 27,014,046
Accumulated deficit............................................. (1,447,187) (493,314)
-------------------------------
Total stockholder's equity 28,398,111 26,520,733
-------------------------------
Total liabilities and stockholder's equity................. $202,932,703 $208,572,815
===============================
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended
September 30, 1999 and 2000
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
------------------ ------------------ ----------------- -----------------
September 30, 1999 September 30, 2000 September 30, 1999 September 30, 2000
------------------ ------------------ ------------------ ------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales................................... $ 72,143,250 $ 72,775,670 $ 201,203,707 $ 210,802,611
Cost of sales............................... 46,717,964 44,976,531 131,142,016 133,324,762
-------------------------------------------------------------------------------
Gross profit.............................. 25,425,286 27,799,139 70,061,691 77,477,849
General and administrative expenses......... 19,300,188 20,016,618 52,969,812 60,423,214
Other operating expenses.................... 4,653,813 --- 4,653,813 ---
-------------------------------------------------------------------------------
Income from operations.................... 1,471,285 7,782,521 12,438,066 17,054,635
Other income (expense):
Interest income......................... 73,614 171,697 117,390 489,089
Interest expense........................ (3,142,783) (4,996,166) (3,173,983) (15,008,176)
-------------------------------------------------------------------------------
Income (loss) before provision for (1,597,884) 2,958,052 9,381,473 2,535,548
(benefit from) income taxes...............
Provision for (benefit from) income taxes... (813,318) 1,830,361 4,577,928 1,581,675
-------------------------------------------------------------------------------
Net income (loss)......................... $ (784,566) $ 1,127,691 $ 4,803,545 $ 953,873
============ ============ ============= =============
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and 2000
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
------------------ ------------------
September 30, 1999 September 30, 2000
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 4,803,545 $ 953,873
Compensation expense in connection with the Recapitalization.... 3,825,000 ---
Depreciation and amortization................................... 3,699,778 3,542,442
Accretion of discount on Senior Notes........................... 136,466
427,088
Amortization of debt issue costs................................ 196,977 1,017,384
Deferred income taxes........................................... (159,112) 1,581,675
Loss (gain) on disposition of property and equipment............ 43,219 (23,196)
Changes in operating assets and liabilities:
Accounts receivable....................................... (5,470,441) (799,958)
Inventories............................................... (1,550,999) (3,005,967)
Prepaid expenses and other current assets................. (1,399) (151,315)
Due from affiliate........................................ 670,069 1,238,362
Accounts payable.......................................... 3,212,199 8,255,927
Accrued expenses.......................................... 3,218,800 (506,901)
Other noncurrent liabilities.............................. 79,992 (482,455)
------------- -------------
Net cash provided by operating activities......... 12,704,094 12,046,959
Cash flows from investing activities:
Property and equipment expenditures.................................. (2,358,513) (3,328,507)
Expenditures for intangible assets................................... (310,881) (304)
Due to/from parent/affiliate......................................... (741,661) ---
Other................................................................ 2,284 23,639
------------- -------------
Net cash used in investing activities............. (3,408,771) (3,305,172)
Cash flows from financing activities:
Payments on long-term debt and capital lease obligations............. (204,568) (176,171)
Long-term borrowings................................................. 132,727,800 ---
Revolving line of credit borrowings.................................. 5,204,900 ---
Payments on revolving line of credit borrowings...................... (5,204,900) ---
Payment of debt issue costs.......................................... (9,964,998) (724,593)
Dividend to Holdings................................................. (130,001,035) ---
Capital contributions from Holdings.................................. 2,200,000 ---
Repurchase of stock options.......................................... --- (2,831,251)
Other, net........................................................... (11,969) ---
------------- -------------
Net cash used in financing activities............. (6,930,357) (3,732,015)
------------- -------------
Net increase in cash and cash equivalents................................. 2,364,966 5,009,772
Cash and cash equivalents, beginning of period............................ (1,271,425) 7,511,772
------------- -------------
Cash and cash equivalents, end of period.................................. $ 1,093,541 $ 12,521,544
============= =============
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
For the Nine Months Ended September 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Additional Total
Common Paid-In Accumulated Stockholder's
Stock Capital Deficit Equity
------ ----------- ------------ -------------
<S> <C> <C> <C> <C>
Balances as of January 1, 2000.............. $ 1 $29,845,297 $ (1,447,187) $ 28,398,111
Repurchase of stock options................. (2,831,251) (2,831,251)
Net loss.................................... 953,873 953,873
----- ----------- ------------- -------------
Balances as of September 30, 2000........... $ 1 $27,014,046 $ (493,314) $ 26,520,733
===== =========== =========== =============
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Financial Statement Presentation
Mattress Discounters Corporation and subsidiaries are engaged in the
manufacture and retail sale of mattresses and bedding products, in various
markets throughout the United States. The accompanying consolidated financial
statements at September 30, 2000, and the periods presented herein include the
accounts of Mattress Discounters Corporation ("Mattress Discounters"), and its
wholly owned subsidiaries T.J.B., Inc. ("T.J.B."), and The Bedding Experts, Inc.
("Bedding Experts") (collectively referred to as the "Company"). All significant
intercompany accounts and transactions of the Company have been eliminated. The
financial position and operating results of the entities for periods prior to
August 5, 1999, were combined in the financial statements as each entity was
under common ownership and control by Heilig-Meyers Company ("Heilig-Meyers")
through August 5, 1999. Immediately prior to the closing of the recapitalization
of the Company's parent on August 6, 1999, Heilig-Meyers contributed all of the
issued and outstanding stock of Mattress Discounters, T.J.B. and Bedding Experts
to the capital of Heilig-Meyers Associates, Inc., a Virginia corporation
("HMA"). Immediately after this capital contribution, Mattress Discounters,
T.J.B. and Bedding Experts became wholly owned subsidiaries of HMA. Immediately
after the recapitalization of the Company's parent, the issued and outstanding
stock of T.J.B. and Bedding Experts was contributed to the capital of Mattress
Discounters. Accordingly, subsequent to August 6, 1999, the financial statements
have been consolidated. For consistency of presentation, the combined financial
statements throughout this quarterly report are referred to as consolidated,
rather than combined financial statements. However, the existence of common
ownership and control of the entities through August 5, 1999, could have
resulted in operating results or financial position of the entities that would
be significantly different from those that would have been achieved if the
enterprises were autonomous.
The accompanying unaudited consolidated financial statements should be read
together with the audited consolidated financial statements for the ten-month
period ended January 1, 2000.
The accompanying unaudited consolidated financial statements contain all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position of the Company at September 30, 2000, and its results of
operations and cash flows for the periods presented herein. All adjustments in
the periods presented herein are normal and recurring in nature.
On November 5, 1999, the Company elected to change its fiscal year end from
the last day of February to the closest Saturday to December 31, beginning with
the year ended January 1, 2000.
On July 28, 2000, the Company entered into 15 leases in the Chicago market.
2. Severance Expense
During the nine-months ended September 30, 2000, the Company entered
into separation agreements with certain of the Company's executives, in
connection with the resignations of those executives. The Company has paid
and recorded severance expense of approximately $2.0 million during the
first nine months of calendar 2000, including $90,000 from the repurchase
of Holdings' stock options, and paid approximately $2.8 million to
repurchase the Holdings' stock options granted to these executives in
connection with the Recapitalization. The repurchase of stock options has
been recorded as a reduction of additional paid-in capital.
-7-
<PAGE>
3. Inventories
Inventories are summarized as follows, as of January 1, 2000 and
September 30, 2000:
January 1, 2000 September 30, 2000
(Unaudited)
Finished Goods $ 14,291,184 $17,798,268
Work in Process 175,876 214,470
Raw Materials 1,790,296 1,250,585
-------------- -----------
$ 16,257,356 $19,263,323
============== ===========
4. Income Taxes
The provision for income taxes in the consolidated financial statements for
periods prior to August 6, 1999, reflect tax calculations on a stand-alone basis
and do not reflect actual taxes owed by the Company on the Heilig-Meyers Company
consolidated tax return through August 5, 1999.
The effective rate for income taxes for the nine months ended September 30,
2000 was 62.4%, compared to 48.8% for the nine months ended September 30, 1999,
due to nondeductible goodwill and state income taxes. The increase in the
effective income tax rate during the nine months ended September 30, 2000, is a
result of increased nondeductible expenses relative to pretax income.
5. Segment Information
Retail--Sale of mattresses and bedding products through 283 and 248
retail locations as of September 30, 2000 and 1999, respectively.
Manufacturing--Manufacture and sale of mattresses, box springs and
foundations to the retail segment and to Heilig-Meyers and affiliates at
current market prices.
The accounting policies of these segments are the same as those described
in the summary of significant accounting policies. All intersegment sales prices
are market-based. The Company evaluates performance based on the operating
earnings of the respective business units.
Summarized unaudited financial information concerning the Company's
reportable segments is shown in the following table (amounts in thousands):
<TABLE>
<CAPTION>
Period Retail Manufacturing Elim. Consolidated
------ ------ ---------------------------------- ----- ------------
Retail
------
Segment Affiliates Total
-------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues... 3 months ended 9/30/00 $ 71,384 $ 11,075 $ 1,392 $ 12,467 $ 11,075 $ 72,776
3 months ended 9/30/99 69,611 11,745 2,532 14,277 11,745 72,143
9 months ended 9/30/00 196,957 30,639 13,846 44,485 30,639 210,803
9 months ended 9/30/99 187,103 30,637 14,101 44,738 30,637 201,204
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Corporate/
---------
Period Retail Manufacturing Other Consolidated
------ ------ ------------- ----- ------------
<S> <C> <C> <C> <C> <C>
Segment profit/(1)/............... 3 months ended 9/30/00 $ 5,063 $ 2,720 $ -- $ 7,783
3 months ended 9/30/99 (1,884) 3,355 -- 1,471
9 months ended 9/30/00 7,809 9,246 -- 17,055
9 months ended 9/30/99 3,607 8,831 -- 12,438
Depreciation and.................. 3 months ended 9/30/00 951 227 -- 1,178
Amortization.................. 3 months ended 9/30/99 973 257 -- 1,230
9 months ended 9/30/00 2,820 722 -- 3,542
9 months ended 9/30/99 2,906 794 -- 3,700
Capital expenditures.............. 3 months ended 9/30/00 1,799 6 -- 1,805
3 months ended 9/30/99 537 18 -- 555
9 months ended 9/30/00 3,174 155 -- 3,329
9 months ended 9/30/99 2,840 419 -- 2,359
Identifiable assets/(2)/.......... 9/30/2000 27,099 3,647 177,827 208,573
9/30/1999 25,357 3,594 170,738 199,689
</TABLE>
___________
(1) Segment profit represents earnings before interest and the provision for
income taxes.
(2) Identifiable assets represent only inventories and net property and
equipment in the retail and manufacturing segments. All other assets are
included in Corporate/Other. For management purposes, depreciation and
amortization of corporate identifiable assets are allocated to the retail
and manufacturing segments.
6. Summarized Financial Information
The Company's Senior Credit Facility and Senior Notes are guaranteed,
fully, jointly and severally, and unconditionally by all of the Mattress
Discounters' current and future, direct and indirect subsidiaries. Each of
Mattress Discounters' current subsidiaries is wholly owned. The following table
sets forth the "summarized financial information" of Mattress Discounters
("Parent").
<TABLE>
<CAPTION>
January 1, 2000 September 30, 2000
--------------- ------------------
(unaudited)
(in thousands) (in thousands)
<S> <C> <C>
Balance Sheet Data:
Current assets $ 25,872 $ 32,286
Noncurrent assets 164,681 164,043
Current liabilities 26,723 34,224
Noncurrent liabilities 135,432 135,584
Total stockholder's equity 28,398 26,521
</TABLE>
<TABLE>
<CAPTION>
Three-months Three-months Nine-months Nine-months
ended ended ended ended
September 30, 1999 September 30, 2000 September 30, 1999 September 30, 2000
------------------ ------------------ ------------------ ------------------
(unaudited) (unaudited) (unaudited) (unaudited)
(in thousands) (in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C>
Operating Data:
Net sales $ 42,759 $ 45,336 $ 120,389 $ 133,714
Gross profit 17,032 18,479 44,555 51,241
Net income (loss) (1,158) 1,128 2,625 954
</TABLE>
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Mattress Discounters Corporation (MDC) operates in two segments: mattress
retailing and mattress manufacturing. We currently operate our retail business
through a nationwide network of 283 stores in 15 markets. Our manufacturing
segment consists of three manufacturing facilities that produce mattresses for
sale in our retail stores under the Comfort Source brand and for third parties
under separate brands. During the nine months ended September 30, 2000, our
manufacturing facilities provided 29% of the cost of our retail purchases.
On August 6, 1999, our parent company, Mattress Holding Corporation or
Holdings, consummated a merger and recapitalization pursuant to a transaction
agreement, dated as of May 28, 1999, among Heilig-Meyers, Heilig-Meyers
Associates, Inc. and MD Acquisition Corporation, a Virginia corporation owned by
various Bain Capital investment funds and affiliates and other institutional
investors.
A portion of the following discussion and analysis of financial condition
and results of operations relates to periods prior to the completion of the
transactions contemplated by the transaction agreement. As a result of
consummating a merger and recapitalization of our parent, we entered into a
financing arrangement and accordingly, have a different capital structure.
Accordingly, the results of operations subsequent to the consummation of the
transactions contemplated by the transaction agreement will not necessarily be
comparable to prior periods.
The financial position and operating results of the entities as of dates
and for periods ended subsequent to January 3, 1998, but prior to August 5,
1999, were combined in the financial statements as each entity was under common
ownership and control by Heilig-Meyers through August 5, 1999. Effective August
6, 1999, the financial statements have been prepared on a consolidated basis
pursuant to the transactions discussed elsewhere in this quarterly report.
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Net sales: The Company's net sales for the three months ended September 30,
2000 increased $0.6 million or 0.9% to $72.8 million from $72.1 million for the
three months ended September 30, 1999. The increase represents an increase in
our retail net sales of $1.8 million and a decrease of $1.1 in the external net
sales of our manufacturing operation. Our net sales from retail operations,
manufacturing sales to our retail operations, and manufacturing sales to
external retailers were $71.4 million, $11.1 million, and $1.4 million,
respectively, in the three months ended September 30, 2000, and $69.6 million,
$11.8 million and $2.5 million, respectively, in the three months ended
September 30, 1999.
Overall, MDC's retail sales for the three months ended September 30, 2000
increased $1.8 million or 2.5%. The increase in retail sales for the three
months ended September 30, 2000 is attributable to (1) a $2.1 million net
increase resulting from net store openings since September 30, 1999, and (2) a
$0.4 million decrease in comparable store sales. The decrease in comparable
store sales is comprised of a 1.2% increase in our markets excluding Chicago for
the three months ended September 30, 2000, offset by a 13.9% decrease in
comparable store sales in Chicago for the three months ended September 30, 2000.
Most of the decline in Chicago's sales occurred in July and September, when the
Company chose not to run a low margin promotion that had been utilized in the
prior year. In August, Chicago's comparable store sales increased 0.4%.
Management continues to drive key initiatives to improve Chicago's operating
performance.
Net sales generated by the Company's manufacturing operations during the
three months ended September 30, 2000, decreased $1.8 million to $12.5 million
from $14.3 million for the three months ended September 30, 1999. Substantially
all of manufacturing output is consumed by our retail operations. The output
related to retail sales
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<PAGE>
decreased by $0.7 million due primarily to a shift in mix from Comfort Source to
Sealy products. Sales to external retailers decreased $1.1 million to $1.4
million from $2.5 million.
Gross profit: Gross profit for the three months ended September 30, 2000
increased $2.4 million or 9.3% to $27.8 million from $25.4 million for the three
months ended September 30, 1999. As a percentage of net sales, gross profit was
38.2% in the three months ended September 30, 2000, compared to 35.2% in the
three months ended September 30, 1999. Retail gross profit for the three months
ended September 30, 2000 was $24.8 million, an increase of $3.0 million or
13.9%, while manufacturing gross profit was $3.0 million, a decrease of $0.6
million or 17.5% over last year.
Retail gross profit expressed as a percentage of net retail sales was 34.3%
in the three months ended September 30, 2000, compared to 31.2% in the three
months ended September 30, 1999. The increase in the gross profit percentage is
primarily due to a shift in mix to higher margin bedding products and improved
margins on the new product line-up.
Manufacturing gross profit expressed as a percentage of manufacturing sales
was 24.3% in the three months ended September 30, 2000, compared to 25.8% in the
three months ended September 30, 1999. This decrease in gross profit percentage
is primarily due to the decline in our external net sales and the resulting loss
of some economies of scale during the three months ended September 30, 2000,
compared to the three months ended September 30, 1999.
General and administrative expenses: General and administrative expenses
for the three months ended September 30, 2000 increased $0.7 million or 3.7% to
$20.0 million from $19.3 million for the three months ended September 30, 1999.
As a percentage of net sales, general and administrative expenses were 27.5% in
the three months ended September 30, 2000, compared to 26.8% in the three months
ended September 30, 1999. The increase is a result of increased payroll expense
largely from $0.2 million in severance costs and $0.8 million in increased sales
commissions due to higher overall sales and improved margins.
Other operating expenses: Other operating expenses for the three months
ended September 30, 1999 was $4.7 million. This expense was primarily the result
of a $3.8 million non-cash charge for the intrinsic value of the in-the-money
stock options granted and deferred compensation for management in connection
with the Transaction Agreement, a $0.4 million write-off of future operating
lease payments associated with obsolete POS system hardware, a $0.2 million
reserve established for expected losses on three subleased properties given that
future lease costs would not be fully recovered, and $0.1 million for a one-time
expense for D&O insurance purchased for prior period coverage related to the
consummation of the transactions contemplated by the Transaction Agreement.
Interest expense: Interest expense for the three months ended September 30,
2000 increased to $1.9 million due to interest expense on the Senior Notes.
Provision for (benefit from) income taxes: The effective income tax rate
for the three months ended September 30, 2000, was 61.9% compared to 50.9% for
the three months ended September 30, 1999. The Company's effective tax rate
differs from the federal statutory rate primarily as a result of non-deductible
goodwill. The increase in the effective income tax rate during the three months
ended September 30, 2000, is a result of increased nondeductible expenses
relative to pretax income (loss).
Net income (loss): Primarily as a result of the reasons discussed above,
net income (loss) increased to $1.1 million or 1.5% of net sales in the three
months ended September 30, 2000, from ($0.8) million or (1.1%) of net sales in
the three months ended September 30, 1999.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Net sales: Net sales for the nine months ended September 30, 2000 increased
$9.6 million or 4.8% to $210.8 million from $201.2 million for the nine months
ended September 30, 1999. The increase is comprised of greater retail net sales
of $9.9 million and an decrease of $0.3 million in the external net sales of our
manufacturing operation. Net sales from retail operations, manufacturing sales
to our retail operations, and manufacturing sales to
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<PAGE>
external retailers were $197.0 million, $30.7 million, and $13.8 million,
respectively, in the nine months ended September 30, 2000, and $187.1 million,
$30.7 million and $14.1 million, respectively, in the nine months ended
September 30, 1999.
Overall, retail sales for the nine months ended September 30, 2000
increased $9.9 million or 5.3%. The increase in retail sales for the nine months
ended September 30, 2000 is attributable to (1) a $8.9 million net increase
resulting from net store openings since September 30, 1999, and (2) a $0.9
million increase in comparable store sales. The increase in comparable store
sales is comprised of a 3.4% increase in our markets excluding Chicago for the
nine months ended September 30, 2000, offset by a 17.5% decrease in comparable
store sales in Chicago for the nine months ended September 30, 2000. Management
continues to drive key initiatives to improve Chicago's operating performance.
Net sales generated by manufacturing operations during the nine months
ended September 30, 2000 decreased $0.2 million to $44.5 million from $44.7
million for the nine months ended September 30, 1999. Substantially all of our
manufacturing output is consumed by our retail operations. The output related to
retail sales remained consistent at $30.7 million due to overall growth in
retail sales, which was offset by a shift in mix from Comfort Source to Sealy
products. Sales to external retailers decreased $0.3 million to $13.8 from $14.1
million.
Gross profit: Gross profit for the nine months ended September 30, 2000
increased $7.4 million or 10.6% to $77.5 million from $70.1 million for the nine
months ended September 30, 1999. As a percentage of net sales, gross profit was
36.8% in the nine months ended September 30, 2000, compared to 34.8% in the nine
months ended September 30, 1999. Retail gross profit for the nine months ended
September 30, 2000 was $66.9 million, an increase of $6.7 million or 11.2%,
while manufacturing gross profit was $10.5 million, an increase of $0.7 million
or 6.8% over last year.
Retail gross profit expressed as a percentage of net retail sales was 33.8%
in the nine months ended September 30, 2000, compared to 32.2% in the nine
months ended September 30, 1999. The increase in the gross profit percentage is
primarily due to a shift in mix to higher margin bedding products and improved
margins on the new product line-up.
Manufacturing gross profit expressed as a percentage of manufacturing sales
was 23.7% in the nine months ended September 30, 2000, compared to 22.0% in the
nine months ended September 30, 1999. This increase in gross profit percentage
is primarily due to shift to higher price point and higher margin products and
lower materials costs during the nine months ended September 30, 2000, compared
to the nine months ended September 30, 1999.
General and administrative expenses: General and administrative expenses
for the nine months ended September 30, 2000 increased $7.4 million or 14.1% to
$60.4 million from $53.0 million for the nine months ended September 30, 1999.
As a percentage of net sales, general and administrative expenses were 28.7% in
the nine months ended September 30, 2000, compared to 26.3% in the nine months
ended September 30, 1999. The increase is a result of increased payroll expense
largely from $2.0 million in severance costs and $2.8 million in increased sales
commissions due to higher overall sales and improved margins, as well as
increased consulting / management fees, and employee recruiting expenses.
Other operating expenses: Other operating expenses for the nine months
ended September 30, 1999 was $4.7 million. This expense was primarily the result
of a $3.8 million non-cash charge for the intrinsic value of the in-the-money
stock options granted and deferred compensation for management in connection
with the Transaction Agreement, a $0.4 million write-off of future operating
lease payments associated with obsolete POS system hardware, a $0.2 million
reserve established for expected losses on three subleased properties given that
future lease costs would not be fully recovered, and $0.1 million for a one-time
expense for D&O insurance purchased for prior period coverage related to the
consummation of the transactions contemplated by the Transaction Agreement.
Interest expense: Interest expense for the nine months ended September 30,
2000 increased to $15.0 million due to interest expense on the Senior Notes.
Provision for income taxes: The Company's effective income tax rate for the
nine months ended September 30, 2000, was 62.4% compared to 48.8% for the nine
months ended September 30, 1999. The effective tax rate
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differs from the federal statutory rate primarily as a result of non-deductible
goodwill. The increase in the effective income tax rate during the nine months
ended September 30, 2000, is a result of increased nondeductible expenses
relative to pretax income.
Net income (loss): Primarily as a result of the reasons discussed above,
net income decreased to $1.0 million or 0.5% of net sales in the nine months
ended September 30, 2000 from $4.8 million or 2.4% of net sales in the nine
months ended September 30, 1999.
Liquidity and Capital Resources
Prior to the leveraged recapitalization, MDC's principal source of funds
had been cash flows from operations and the use of funds consisted primarily of
capital expenditures for new store openings and, a significant use of our funds
was the funding of accounts receivable to Heilig-Meyers and non-interest bearing
loans to Heilig-Meyers. Cash and cash equivalents at September 30, 2000 and
January 1, 2000 were approximately $12.5 million and $7.5 million, respectively.
In connection with the leveraged recapitalization, the Company incurred
significant amounts of debt requiring interest payments on the senior notes and
interest payments and principal payments under the senior credit facility. Our
liquidity needs relate to working capital, capital expenditures and potential
acquisitions.
We intend to fund our working capital, capital expenditures and debt
service requirements through cash flow generated from operations and borrowings
under the senior credit facility.
In addition, the senior credit facility requires that we maintain specified
financial ratios. At September 30, 2000, we were in full compliance with the
financial covenants in the senior credit facility and we expect to remain in
compliance for the foreseeable future.
We believe that cash from operating activities, together with available
revolving credit borrowings under the senior credit facility, will be sufficient
to permit us to meet our financial obligations and fund our operations for the
foreseeable future. As of November 7, 2000, we had $20.0 million of availability
under our senior credit facility.
Net cash provided by operating activities for the nine months ended
September 30, 2000 was $12.0 million, a $0.7 million decrease from the $12.7
million of cash provided by operating activities for the nine months ended
September 30, 1999. The key driver of increased cash flow was reduced working
capital.
Our principal use of cash for investing activities has historically been
capital expenditures for new store openings. Total capital expenditures for each
of the nine months ended September 30, 2000 and 1999 were $3.3 million and $2.4
million, respectively.
Net cash used for financing activities was $3.7 million for the nine months
ended September 30, 2000, and $6.9 million for the nine months ended September
30, 1999. Cash used in financing activities primarily relates to the repurchase
of stock options for $2.8 million.
Seasonality
The Company's operations are not seasonal in nature. In the twelve months
ended January 1, 2000 MDC generated 23.2%, 24.5%, 28.1% and 24.2% of our retail
net sales in the first through the fourth quarter, respectively.
Management
Subsequent to the end of the second quarter, there have been changes to the
management team of Mattress Discounters. Anne Pepper has recently joined the
company as Vice President of Human Resources.
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Forward-Looking Statements
This document includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. Although we believe that our assumptions made in connection with
the forward-looking statements are reasonable, we cannot assure you that our
assumptions and expectations will prove to have been correct. These forward-
looking statements are subject to various risks, uncertainties and assumptions
about us, including, among other things:
. anticipated growth strategies and pursuit of potential acquisition
opportunities
. dependence upon our senior management team
. increased future competition
. possibility of fluctuations in the cost of raw materials and loss
of suppliers
. changes in economic and market conditions
. dependence on Sealy
. the transactions may result in the termination of some of our
leases
. reliance on certain trademarks and other intellectual property
. ability to return our stores in the Chicago market to
profitability.
MDC undertakes no obligation to publicly update or review any forward-
looking statements, whether as a result of new information, future events or
otherwise. In light of these risks, uncertainties and assumptions, the forward-
looking events discussed in this prospectus might not occur.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We do not believe that we have material quantitative or qualitative market
risk exposures.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(3) Exhibits
--------
27.1 Financial Data Schedule.
(4) Reports on Form 8K
------------------
None.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATTRESS DISCOUNTERS CORPORATION
/s/ Bryan J. Flanagan
--------------------------------
November 14, 2000 Name: Bryan J. Flanagan
Title: Chief Financial Officer
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