<PAGE>
As filed with the Securities and Exchange Commission on May 23, 2000
Registration No. 333-95945
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 2
to the
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
MATTRESS DISCOUNTERS CORPORATION
(Exact name of Registrant as specified in charter)
<TABLE>
<S> <C> <C>
Delaware 5712 52-1710722
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
9822 Fallard Court
Upper Marlboro, MD 20772
(301) 856-6755
(Name, address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
----------------
c/o Stephen A. Walker
Chief Executive Officer
9822 Fallard Court
Upper Marlboro, MD 20772
(301) 856-6755
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------
Copy to:
Lance C. Balk
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022-4675
Telephone: (212) 446-4800
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
----------------
The Registrant hereby amends this Registration Statement on any date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on the date as the Commission, acting under
the said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
T.J.B., INC.
(Exact name of Registrant as specified in charter)
<TABLE>
<S> <C> <C>
Maryland 5712 52-1127365
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
9822 Fallard Court
Upper Marlboro, MD 20772
(301) 856-6755
(Name, address, including zip code, and telephone number, including
area code, of the Guarantor's principal executive offices)
----------------
c/o Stephen A. Walker
Chief Executive Officer
9822 Fallard Court
Upper Marlboro, MD 20772
(301) 856-6755
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
THE BEDDING EXPERTS, INC.
(Exact name of Registrant as specified in charter)
Illinois 5712 36-3392513
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
9822 Fallard Court
Upper Marlboro, MD 20772
(301) 856-6755
(Name, address, including zip code, and telephone number, including
area code, of the Guarantor's principal executive offices)
----------------
c/o Stephen A. Walker
Chief Executive Officer
9822 Fallard Court
Upper Marlboro, MD 20772
(301) 856-6755
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any State where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated , 2000
Prospectus
, 2000
Mattress Discounters Corporation
Exchange Offer for $140,000,000
12 5/8% Series A Senior Notes due 2007 in exchange for
$140,000,000 12 5/8% Series B Senior Notes due 2007.
. The exchange offer expires at 5:00 p.m. New York City time on , 2000,
unless we extend this date.
. If you decide to participate in this exchange offer, the exchange notes you
receive will be the same as old notes, except the exchange notes will be
registered with the Securities and Exchange Commission and you will be able
to offer and sell them freely to any potential buyer. This is beneficial to
you since your old notes are not registered with the Securities and Exchange
Commission and may not be offered or sold without registration or an
exemption from registration under federal securities laws.
. There is no public market for the old notes or the exchange notes. However,
the old notes and the exchange notes can be traded in the Portal Market.
This investment involves risk. See "Risk Factors" beginning on page 11.
Neither the Securities and Exchange Commission nor
any state securities commission has approved or
disapproved of the exchange notes or determined if
this prospectus is truthful or complete. Any
representation to the contrary is a criminal
offense.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................ 1
Risk Factors...................... 11
Use of Proceeds................... 18
Capitalization.................... 18
Unaudited Pro Forma Financial
Data............................. 19
Selected Historical Financial
Data............................. 22
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 24
Business.......................... 35
Management........................ 45
Principal Shareholders............ 49
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Relationships and Related
Transactions...................... 51
Description of Capital Stock of
Mattress Holding Corporation...... 53
Description of Senior Credit
Facility.......................... 55
Description of the Notes........... 57
Exchange Offer..................... 92
Federal Income Tax Considerations.. 100
Plan of Distribution............... 101
Legal Matters...................... 102
Experts............................ 102
Change in Independent Accountants.. 103
Available Information.............. 103
Index to Financial Statements...... F-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
The following summary contains basic information about this exchange offer
and highlights the most important features of this exchange offer. For a more
complete understanding of this exchange offer, we encourage you to read this
entire document and the documents we have referred you to.
In addition, our management has estimated the market share percentages
provided in this prospectus. We believe these estimates to be reliable, but
these numbers have not been verified by an independent source.
The Old Note Offering
<TABLE>
<S> <C>
Old Notes........................ We sold the old notes and warrants to purchase common
stock of our parent to Chase Securities, Inc., CIBC
World Markets Corp. and BancBoston Robertson Stephens
Inc., the initial purchasers, on August 6, 1999. They
subsequently resold the old notes and warrants to
qualified institutional buyers under Rule 144A of the
Securities Act of 1933. The price to the public of the
old notes and warrants was 96.377% of the principal
amount of the old notes.
Exchange and Registration Rights
Agreement....................... We, Chase Securities, Inc., CIBC World Markets Corp.
and BancBoston Robertson Stephens Inc., entered into a
registration rights agreement on August 6, 1999. The
registration rights agreement granted Chase Securities,
Inc., CIBC World Markets Corp. and BancBoston Robertson
Stephens Inc. and any subsequent holders of the old
notes exchange and registration rights. We intend that
the exchange offer satisfy those exchange and
registration rights. The exchange and registration
rights we granted will terminate upon the consummation
of our exchange offer.
The Exchange Offer
Securities Offered............... Up to $140,000,000 of 12 5/8% series B senior notes due
2007. The terms of the exchange notes and old notes are
identical in all material respects, except for transfer
restrictions and registration rights relating to the
old notes.
The Exchange Offer............... We are offering to exchange the old notes for a
principal amount equal to the principal amount of
exchange notes. Old notes may be exchanged only in
integral principal multiples of $1,000.
Expiration Date; Withdrawal of
Tender.......................... Our exchange offer will expire 5:00 p.m. New York City
time, on , 2000, or a later date and time if we
choose to extend this exchange offer. You may withdraw
your tender of old notes at any time prior to the
expiration date. We will return any old notes not
accepted by us for exchange for any reason at our
expense as promptly as possible after the expiration or
termination of our exchange offer.
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
Resales of the Exchange Notes.... Based on an interpretation by the staff of the
Securities and Exchange Commission in no-action letters
issued to third parties, we believe that you may offer
for resale, resell or otherwise transfer the exchange
notes without complying with the registration and
prospectus delivery provisions of the Securities Act of
1933, provided that:
. the exchange notes are acquired in the ordinary
course of your business,
. you do not intend to participate and have no
arrangement or understanding with any person to
participate in the distribution of the exchange
notes and
. you are not our "affiliate" within the meaning of
Rule 405 under the Securities Act of 1933.
Conditions to the Exchange Offer.. Our obligation to accept for exchange, or to issue the
exchange notes in exchange for, any old notes is
subject to:
. customary conditions relating to compliance with any
applicable law,
. any applicable interpretation by any staff of the
Securities and Exchange Commission, or
. any order of any governmental agency or court of
law.
We currently expect that each of the conditions will be
satisfied and that no waivers will be necessary. See
"The Exchange Offer--Conditions."
Procedures for Tendering Old
Notes........................... Each holder of old notes wishing to accept the exchange
offer must complete, sign and date the Letter of
Transmittal, or a facsimile. The holder must mail or
otherwise deliver the Letter of Transmittal, or
facsimile, together with the old notes and any other
required documentation, to the exchange agent at the
address in the section "The Exchange Offer" under the
heading "Procedures for Tendering Old Notes."
Use of Proceeds.................. We will not receive any proceeds from the exchange of
notes according to the terms of our exchange offer.
Exchange Agent................... State Street Bank and Trust Company is serving as the
exchange agent in connection with our exchange offer.
Federal Income Tax Consequences.. We have received an opinion from Kirkland & Ellis that
exchange of old notes in accordance with the terms of
this exchange offer will not be a taxable event to you
for federal income tax purposes. See "Federal Income
Tax Considerations."
</TABLE>
2
<PAGE>
The Exchange Notes
The following is a brief summary of the terms of the exchange notes. The
terms of the exchange notes are identical to the terms of the old notes, except
that the old notes offered differed with respect to their transfer restrictions
and their registration rights. For a more complete description of the terms of
the exchange notes, see "Description of the Notes" in this prospectus.
Notes
<TABLE>
<S> <C>
Total Amount of Exchange Notes
Offered......................... Up to $140,000,000 aggregate principal amount of 12
5/8% Series B Senior Notes due 2007.
Maturity......................... July 15, 2007.
Interest Payment Dates........... January 15 and July 15 of each year, commencing January
15, 2000.
Sinking Fund..................... None.
Note Guarantees.................. The notes will be guaranteed on a senior unsecured
basis by our existing and future restricted
subsidiaries.
Optional Redemption.............. Except as discussed below, we may not redeem the
exchange notes prior to July 15, 2004. We may redeem
the exchange notes, in whole or in part, on or after
July 15, 2004, at the redemption prices set out in this
prospectus, plus accrued and unpaid interest, if any,
to the date of repurchase. In addition, any time prior
to July 15, 2002, we may redeem up to 35% of the notes
at a redemption price equal to 112.625% of the
principal amount, plus accrued and unpaid interest,
with the net proceeds of equity issuances; provided
that at least 65% of the aggregate principal amount of
the notes originally issued remains outstanding
immediately after each optional redemption. See
"Description of the Notes--Optional Redemption."
Ranking.......................... The exchange notes will be senior unsecured obligations
and will rank:
. equally with all of our senior unsecured indebtedness
. senior to all of our subordinated indebtedness
. effectively subordinated to our secured indebtedness
to the extent of the value of the assets securing
that indebtedness.
As of May 22, 2000, we had secured indebtedness
outstanding of $0.4 million. This indebtedness is
primarily collateralized by our property and equipment.
See "Description of the Notes--Ranking."
Change of Control................ Upon the occurrence of a "Change of Control," we will
be required to make an offer to repurchase each
holder's Notes at a price equal to 101% of the
principal amount thereof, plus
</TABLE>
3
<PAGE>
accrued and unpaid interest, if any, to the date
of repurchase. In addition, upon the occurrence
of a "Change of Control" occurring prior to July
15, 2004, we may redeem all of the exchange notes
at the redemption price set forth in this
prospectus, plus accrued and unpaid interest, if
any, to the date of repurchase. See "Description
of the Notes--Change of Control" and "--Optional
Redemption."
Restrictive Covenants....... The indenture relating to the exchange notes
contains specific covenants, including, but not
limited to, covenants with respect to the
following matters:
. limitation on additional indebtedness and
preferred stock
. limitation on restricted payments
. limitation on transactions with affiliates
. limitation on liens
. limitation on dividends and other payment
restrictions affecting subsidiaries
. restrictions on consolidations, mergers and the
sale of assets.
These covenants are subject to a number of
important exceptions. See "Description of the
Notes--Covenants."
Risk Factors
See "Risk Factors" beginning on page 11 and the other information in this
prospectus prior to deciding to invest in the exchange notes. In particular
investing in the notes and the exchange notes is subject to the following
risks:
. our anticipated growth strategies and pursuit of potential acquisition
opportunities
. our 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
. our dependence on Sealy
. our reliance on certain trademarks and other intellectual property
. our ability to return our stores in the Chicago market to profitability.
4
<PAGE>
Mattress Discounters Corporation
We believe we are one of the largest retailers of mattresses (i.e.
conventional mattresses, box springs and foundations) in the United States.
Retailers of mattresses include retail furniture stores, department store
chains, sleep shops and other regional and local specialty retailers of
bedding. Founded in 1978, we are considered the pioneers of the "specialty
sleep shop" mattress retailing concept. Since our founding, we have grown our
business into a nationwide network of 256 stores in 15 markets. We believe that
we hold the leading market position in nine of these markets. Of the top 15
markets in the United States, which accounted for approximately 33% of 1998
mattress sales, we believe we are one of the largest mattress retailers in six
of these markets. For the twelve months ended April 1, 2000, we generated net
sales of $269.4 million.
Through our exclusive purchase contract with Sealy Mattress Company, we are
the largest retailer of Sealy products. According to International Sleep
Products Association, Sealy is the largest manufacturer of mattresses in North
America, with a 22% U.S. market share. Sealy products accounted for
approximately 71% of our retail mattress sales for the three months ended April
1, 2000 and include well-known brand names Sealy(R), Sealy Posturepedic(R),
Sealy Posturepedic Crown Jewel(R), Sealy Correct Comfort(R) and Stearns &
Foster(R).
In addition to selling Sealy mattresses, we sell Comfort Source(R) brand
mattresses that are produced at our three manufacturing facilities. We believe
that we are the only conventional mattress retailer with significant captive
manufacturing capacity. This vertical integration allows us to execute a
private brand strategy with attractive retail selling margins. Sales of our
Comfort Source brand mattresses accounted for 29% of our retail mattress sales
for the three months ended April 1, 2000.
The Transactions
Through a series of transactions that closed on August 6, 1999, Bain
Capital, Inc., its affiliates and other institutional investors, referred to as
the equity investors, and some members of our management acquired approximately
93% of outstanding shares of common stock of Mattress Holding Corporation. The
consideration for these transactions, together with the payment of fees and
expenses, totalled approximately $239.8 million. The transactions involved the
following steps:
. a contribution by Heilig-Meyers of all the issued and outstanding capital
stock of Mattress Discounters Corporation, T.J.B., Inc. and The Bedding
Experts, Inc., comprising the sleep shop business of Heilig-Meyers, to
Heilig-Meyers Associates, Inc., or HMA, a wholly owned subsidiary of
Heilig-Meyers
. an equity investment made by the equity investors in Mattress Discounters
Holding, LLC, a limited liability company that owns 100% of the stock of
MD Acquisition Corporation, totaling approximately $76.2 million in cash
. the merger of MD Acquisition Corporation into HMA, with HMA surviving and
changing its name to Mattress Holding
. a rollover of equity by Heilig-Meyers of approximately $6.0 million,
consisting of a portion of the existing common stock that was converted
into new Holdings common stock
. the establishment of T.J.B. and Bedding Experts as wholly owned
subsidiaries of Mattress Discounters Corporation
. the borrowing by us of approximately $5.2 million under a new $20.0
million senior revolving credit facility
. the issuance by Mattress Holding of a $10.0 million principal amount 10%
junior subordinated promissory note and a $7.5 million principal amount
12% junior subordinated promissory note to Heilig-Meyers
5
<PAGE>
. the granting by Mattress Holding of immediately exercisable stock options
to some members of management that represented 4.2% of its fully diluted
common stock immediately following the transactions
. the issuance by us of 140,000 units consisting of $140,000,000 12 5/8%
senior notes due 2007 and warrants to purchase 679,000 shares of class A
of our common stock and 75,460 shares of class L of our common stock.
Subsequent to the closing of the transactions, Mattress Holding submitted
its claim for a working capital adjustment to Heilig-Meyers under the
transaction agreement. In connection with the working capital adjustment, on
December 22, 1999, Heilig-Meyers agreed to pay to Mattress Holding $1,953,135.
In addition, Heilig-Meyers agreed to reduce the outstanding principal amount of
its $7.5 million 12% junior subordinated promissory note of Mattress Holding to
$5.875 million, and to discharge some lease obligations of Mattress Discounters
aggregating approximately $42,000.
The effect of the transactions described above were that the equity
investors acquired approximately a 93% interest in our company, Heilig-Meyers'
ownership of our company was reduced to approximately 7%, a number of our
management were granted immediately exercisable stock options and we incurred
significant amounts of indebtedness.
In accordance with generally accepted accounting principles, the merger was
accounted for as a leveraged recapitalization of HMA.
The Sponsor
Bain Capital, Inc., the financial sponsor of the transactions and provider
of most of the equity capital in the recapitalization, is one of the most
experienced and successful private equity investors in the United States. Bain
Capital's principals have extensive experience working with companies on a wide
range of strategic and operational challenges across many industries. Bain
Capital maintains specific operational experience in the mattress industry,
having been the largest shareholder of Sealy since December 1997. Bain Capital
also maintains extensive experience in the retail industry, with investments
including Staples, The Sports Authority, Brookstone, Duane Reade, Stage Stores
and Domino's. Bain Capital's investment strategy is to seek to acquire
businesses in partnership with exceptional management teams and improve the
long-term value of those businesses. The firm typically seeks to identify
companies with strong strategic positions and significant opportunities for
growth. Since its founding, Bain Capital has invested in more than 120
companies and currently manages more than $4 billion of capital.
6
<PAGE>
Sources and Uses
The following table shows the sources and uses of funds at the closing of
the transactions.
<TABLE>
<CAPTION>
(dollars in millions)
<S> <C>
Sources of Funds:
Senior credit facility(/1/)............................. $ 5.2
Units, including the old notes.......................... 134.9
Mattress Holding junior subordinated notes(/2/)(/5/).... 17.5
New equity investment in Mattress Discounters Holding,
LLC..................................................... 76.2
Heilig-Meyers' rollover equity in Mattress Hold-
ing(/3/)................................................ 6.0
------
Total................................................... $239.8
======
Uses of Funds:
Cash merger consideration(/4/)(/5/)..................... $204.2
Heilig-Meyers' rollover equity in Mattress Hold-
ing(/3/)................................................ 6.0
Holdings junior subordinated notes(/2/)(/5/)............ 17.5
Estimated fees and expenses............................. 12.1
------
Total................................................... $239.8
======
</TABLE>
- --------
(1) The senior credit facility has total availability of $20.0 million, of
which $5.2 million was borrowed at closing (excluding the rollover of
outstanding letters of credit totaling approximately $1.7 million). See
"Description of Senior Credit Facility."
(2) The Mattress Holding junior subordinated notes were issued to Heilig-Meyers
by Mattress Holding as a non-cash portion of the consideration due to
Heilig-Meyers at closing. See "Relationships and Related Transactions."
(3) Represents common stock held by Heilig-Meyers before the transactions that
was exchanged in a non-cash transaction for new common stock after the
transactions. Heilig-Meyers' retained equity investment represented
approximately 7% of the outstanding Mattress Holding common stock.
(4) Represents the cash portion of the consideration paid by Holdings to
Heilig-Meyers in the transactions.
(5) In December 1999, under the transaction agreement, Heilig-Meyers agreed to
pay to Mattress Holding approximately $2.0 million. In addition, Heilig-
Meyers agreed to reduce the outstanding principal amount of its $7.5
million 12% junior subordinated promissory note from Holdings to $5.875
million. These transactions were accounted for by Mattress Holding as a
reduction of the merger consideration.
7
<PAGE>
Summary Unaudited Pro Forma Financial Data
Our summary unaudited pro forma financial data set out below give effect in
the manner described under "Unaudited Pro Forma Financial Data" and the
accompanying notes to the transactions as if they occurred on March 1, 1999.
The unaudited pro forma statements of operations do not purport to represent
what our results of operations would have been if the transactions had occurred
as of the date indicated or what the results will be for future periods. The
information contained in this table should be read in conjunction with
"Unaudited Pro Forma Financial Data," "Selected Historical Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our audited financial statements and the accompanying notes, and
our unaudited interim financial statements and the accompanying notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Pro Forma
----------------------
Ten Months Ended
----------------------
January 1, 2000
----------------------
(dollars in thousands)
<S> <C>
Operating Data:
Net sales................................................ $218,768
Gross profit............................................. 77,915
Income from operations................................... 16,117
Interest expense, net.................................... (16,443)
Loss before provision for income taxes................... (326)
Net loss................................................. (663)
Other Financial Data:
Depreciation and amortization............................ $ 4,063
Capital expenditures..................................... 2,615
Cash interest expense(/1/) .............................. 14,714
Ratio of earnings to fixed charges(/2/).................. 0.99x
</TABLE>
- --------
(1) Excludes amortization of deferred financing fees and original issue
discount.
(2) For purposes of calculating the pro forma ratio of earnings to fixed
charges, earnings represent pro forma income before income taxes plus pro
forma fixed charges. Fixed charges consist of pro forma interest expense
(net), and the portion of operating rental expense which our management
believes is representative of the interest component of rental expense.
Fixed charges exclude common area maintenance costs related to our lease
agreements.
8
<PAGE>
Summary Historical Financial Data
Below is our summary historical financial data at the dates and for the
periods indicated. The financial position and operating results of the entities
as of dates and for periods ended subsequent to July 2, 1997, 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 under the transactions discussed elsewhere in this
prospectus. Our summary historical consolidated balance sheet and consolidated
statements of operations data as of and for the three months ended April 1,
2000 and March 31, 1999, were derived from our unaudited interim financial
statements that are included elsewhere in this prospectus. Management believes
the interim financial statements include all adjustments necessary for a fair
presentation. Our summary historical consolidated statement of operations data
for the ten month period ended January 1, 2000, and the historical consolidated
balance sheet data as of January 1, 2000, were derived from our audited
consolidated financial statements that are included elsewhere in this
prospectus. Our summary historical combined statements of operations data for
the fiscal year ended February 28, 1999 and for the eight-month period ended
February 28, 1998, and the summary historical combined balance sheet data as of
February 28, 1998 and February 28, 1999 were derived from our audited combined
financial statements that are included elsewhere in this prospectus. The
summary historical combined statements of operations data of MDC for the year
ended December 28, 1996 and for the six month period ended July 1, 1997, and
the summary historical combined balance sheet data as of December 28, 1996 and
July 1, 1997, were derived from audited combined financial statements. As
described in the notes to the financial statements, amounts included in the
financial statements have been retroactively restated. Amounts presented below
reflect the restatements. Our summary historical combined financial data as of
and for the ten months ended December 31, 1998, are derived from our unaudited
condensed combined interim financial statements which, in the opinion of our
management, include all adjustments necessary for a fair presentation.
We have presented summary historical combined financial data for MDC for the
year ended December 28, 1996 because MDC currently constitutes a major portion
of our business and our assets and is our most substantive business entity. We
believe the inclusion of summary historical combined financial data for MDC is
a more informative presentation.
Heilig-Meyers employed the purchase method of accounting for its July 2,
1997 acquisition of MDC. Accordingly, historical financial and other data for
the year ended December 28, 1996 may not be comparable to the data for
subsequent periods. The primary differences result from the amortization of
goodwill recorded by Heilig-Meyers as a result of the purchase on July 2, 1997
and the provision for income taxes.
9
<PAGE>
On November 5, 1999, Mattress Discounters 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.
The summary historical financial data set forth below should be read in
conjunction with, and is qualified by reference to, "Selected Historical
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," our audited financial statements and accompanying
notes, and our unaudited interim financial statements and accompanying notes
included elsewhere in this prospectus.
Summary Historical Financial Data
(dollars in thousands)
<TABLE>
<CAPTION>
MDC
-----------------------------
Year Ended
December 28, Six months ended
1996 July 1, 1997
------------ ----------------
<S> <C> <C>
Operating Data:
Net sales....... $169,020 $83,714
Gross profit.... 56,285 27,433
General and
administrative
expenses....... 51,940 27,683
Other operating
expenses....... -- --
Income (loss)
from
operations..... 4,345 (250)
Interest income
(expense),
net............ 548 328
Other income
(expense),
net............ (471) 8
Income (loss)
before
provision for
(benefit from)
income taxes... 4,422 85
Net income
(loss)(/1/).... $ 4,422 $ 85
Other Financial
Data:
Depreciation and
amortization... $ 2,214 $ 1,007
Capital
expenditures... 1,823 1,592
Balance Sheet
Data (end of
period):
Working capital
(deficit)...... 517 (14,242)
Total assets.... 36,180 24,546
Other Data (end
of period):
Number of
stores......... 162 170
Same store sales
growth......... (3.4%) --
<CAPTION>
Company
----------------------------------------------------------------------------------------------
Fiscal Year
Ended Ten Months Ended Three Months Ended
Eight months ended February 28, --------------------------------- ----------------------------
February 28, 1998 1999 December 31, 1998 January 1, 2000 March 31, 1999 April 1, 2000
------------------ ------------ ----------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Net sales....... $159,752 $245,461 $201,183 $218,768 $65,368 $71,830
Gross profit.... 55,886 88,863 74,669 77,670 21,711 24,907
General and
administrative
expenses....... 40,627 67,261 55,742 60,895 17,404 21,132
Other operating
expenses....... -- -- -- 4,556 -- --
Income (loss)
from
operations..... 15,259 21,601 18,927 12,219 4,308 3,775
Interest income
(expense),
net............ 88 128 126 (7,836) 3 (4,845)
Other income
(expense),
net............ (532) 322 450 (97) -- --
Income (loss)
before
provision for
(benefit from)
income taxes... 14,815 22,052 19,504 4,286 4,311 (1,070)
Net income
(loss)(/1/).... $ 9,418 $ 12,690 $ 11,238 $ 2,104 $ 2,318 (475)
Other Financial
Data:
Depreciation and
amortization... $ 2,648 $ 4,541 $ 3,771 $ 4,063 $ 1,236 $ 1,205
Capital
expenditures... 2,122 5,162 4,297 2,615 1,213 470
Balance Sheet
Data (end of
period):
Working capital
(deficit)...... (9,372) 1,137 (9,372) (2,882) 1,769 (5,302)
Total assets.... 93,346 101,488 93,346 202,933 100,037 203,034
Other Data (end
of period):
Number of
stores......... 227 236 231 252 238 256
Same store sales
growth......... -- 1.5% 3.8% (0.0%) (0.1%) 5.3%
</TABLE>
- --------
(1) Prior to its acquisition on July 2, 1997, MDC filed as an "S" Corporation
for federal and state income tax purposes. Accordingly, no provision for
federal income taxes is included in the statement of operations for the
year ended December 28, 1996, and the six months ended July 1, 1997.
Provisions were made for state income taxes in those states which do not
recognize "S" Corporation elections. These provisions have been included in
general and administrative expenses for the periods referred to above.
10
<PAGE>
RISK FACTORS
You should carefully consider the following factors in addition to the
other information in this prospectus before making an investment in the
exchange notes.
Substantial Leverage--Our substantial indebtedness could make it more
difficult to pay our debts, including the exchange notes, divert our cash flow
from operations for debt payments, limit our ability to borrow funds and
increase our vulnerability to general adverse economic and industry
conditions.
We have a significant amount of indebtedness as shown in the following
chart:
<TABLE>
<CAPTION>
At
April 1, 2000
---------------------
(dollars in millions)
<S> <C>
Total debt, including the exchange notes and capital
lease obligations.................................. $133.7
Total stockholder's equity.......................... 25.6
</TABLE>
Our substantial indebtedness could have important consequences to you. For
example, it could:
. make it more difficult to pay our debts, including the exchange notes
. increase our vulnerability to general adverse economic and industry
conditions
. require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures and other general corporate purposes
. limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate
. place us at a competitive disadvantage compared to our competitors that
have less debt
. limit our ability to borrow additional funds.
Possible Additional Borrowings--Despite current indebtedness levels, we may
still be able to incur more debt under the senior credit facility and the
indenture governing the notes. This could further exacerbate the risks
described above.
We may be able to incur additional indebtedness in the future. The terms of
the senior credit facility and the indenture governing the notes do not fully
prohibit us from doing so. Under some conditions, the senior credit facility
permits borrowings of up to $20.0 million to fund operations and to finance
the cost of future expansion after completion of this offering. All of the
borrowings under the senior credit facility are secured by substantially all
of our assets and the assets of our domestic subsidiaries. See "Description of
Senior Credit Facility" and "Description of the Notes."
Subordination--Your claims are effectively subordinated.
As of April 1, 2000, we and the guarantors have outstanding approximately
$133.7 million of indebtedness. This amount excludes unused commitments under
the senior credit facility and the rollover of letters of credit, together
totaling $20.0 million. Substantially all of our and the guarantors' assets
have collateralized the senior credit facility. Under some circumstances, for
example where we satisfy the debt tests and baskets under the indenture and
the senior credit facility, we may incur additional secured debt in the
future. Secured debt effectively ranks senior to the notes to the extent of
the value of the collateral. Therefore, if we default on the notes, become
bankrupt, liquidate or reorganize, our secured creditors could foreclose on
the collateral to satisfy the secured debt before
11
<PAGE>
you would receive any payment on the notes. If the value of the collateral is
insufficient to pay all of the secured debt, our secured creditors would share
equally in the value of our other assets, if any, with you and any other
creditors whose claims against us rank equally with the notes.
Original Issue Discount--The notes will be considered to be issued with
original issue discount.
The exchange notes will be considered to be issued with original issue
discount. Holders of the notes will be required to include the accretion of
the original issue discount in gross income for U.S. federal income tax
purposes in advance of receipt of the cash payments to which such income is
attributable. If a bankruptcy case is commenced by or against us under the
United States Bankruptcy Code after the issuance of the notes, the claim of a
holder of notes with respect to the principal amount of the notes may be
limited to an amount equal to the sum of (1) the purchase price, and (2) that
portion of the original issue discount which has been amortized as of the date
of any such bankruptcy filing.
Ability to Service Debt--We require a significant amount of cash to service
our indebtedness. Our ability to generate cash depends on many factors beyond
our control.
Our ability to make interest and principal payments on our indebtedness,
including the exchange notes, and to fund planned capital expenditures depends
on our ability to generate cash in the future and our ability to refinance our
indebtedness when necessary. This, to some extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors
that are beyond our control. We cannot assure you that our business will
generate sufficient cash flow from operations or that future borrowings will
be available to us under the senior credit facility in an amount sufficient to
enable us to make scheduled payments on our indebtedness, including the notes.
If we do not generate sufficient cash, we may be required to refinance all or
a part of our existing indebtedness, reduce or delay capital expenditures,
sell assets or borrow additional funds. We cannot assure you that we will be
able to refinance any of our indebtedness, including the senior credit
facility and the notes, sell assets or borrow additional funds on commercially
reasonable terms or at all.
Our cash flow, and consequently our ability to service our debt, including
our obligations under the indenture governing the notes, is dependent in part
upon the cash flows of our subsidiaries and the payment of funds by our
subsidiaries to us in the form of loans, distributions or otherwise. Our
subsidiaries are separate legal entities that have no obligation to pay any
amounts due under to the notes other than through the note guarantees or to
make any funds available for that purpose, whether by dividends, interest,
loans, advances or other payments. In addition, their ability to pay dividends
and make loans, advances and other payments to us depends on any statutory or
contractual restrictions, which may include requirements to maintain minimum
levels of working capital and other assets.
Restrictive Covenants--The senior credit facility and the indenture governing
the notes contain various covenants which limit our management's discretion in
the operations of our business.
The senior credit facility and the indenture governing the exchange notes
contain various provisions that limit our management's discretion by
restricting our and our subsidiaries' ability to among other things:
. incur additional debt and issue preferred stock
. pay dividends and make other distributions
. prepay subordinated debt, including the exchange notes
. make investments and other restricted payments
. enter into sale and leaseback transactions
12
<PAGE>
. create liens
. sell assets
. enter into transactions with affiliates.
In addition, the senior credit facility requires us to meet financial tests
which include a maximum total debt ratio and a minimum interest coverage
ratio.
If we fail to comply with the restrictions of the senior credit facility or
the indenture governing the notes or any other subsequent financing
agreements, a default may occur. This default may allow the creditors to
accelerate the related indebtedness. An acceleration under the senior credit
facility or the indenture could also result in an acceleration under the
financing agreements related to our other indebtedness which have a cross-
acceleration or cross-default provision. In addition, the lenders under our
financing agreements (including the senior credit facility) may be able to
terminate any commitments they had made to supply us with further funds upon
an event of default. See "Description of Senior Credit Facility" and
"Description of the Notes."
Lease Consents--The transactions may result in termination of leases.
In connection with the transactions which resulted in a change of control,
we are required to obtain consents from approximately 49% of our landlords. We
have already obtained consents from approximately 53% of those landlords whose
consent we require and we intend to seek consents from some or all of the
remaining landlords. If we seek these further consents, we may be required to
make payments to obtain those consents. If landlord consents are not obtained,
the landlords may terminate some of those leases or seek to increase the rents
they charge. If landlords terminate our leases or increase our rents on a
large number of stores or on stores in key areas and if we are unable to
relocate these stores on attractive terms, our business, financial condition
and results of operations could be materially and adversely affected.
Dependence on Sealy--We depend upon one supplier for a significant percentage
of our business.
We maintain an exclusive purchase agreement with Sealy whereby Sealy is our
exclusive third-party supplier of mattresses, box springs and foundations. The
agreement is scheduled to expire on June 30, 2004. Although this agreement
does not provide for its termination before June 30, 2004, we cannot assure
you that Sealy will not attempt to terminate the contract before that date.
Approximately 64% of our total retail purchases during the ten months ended
January 1, 2000, were sourced from Sealy. If this agreement is terminated for
any reason, or if it is not renewed, we cannot assure you that we could
replace these products on equally favorable terms. A failure to do so would
have a material adverse effect on our profitability.
Future Transactions--We may engage in transactions which could subject us and
you to a number of risks.
In order to grow our business and maintain our competitive position, we may
acquire other businesses in the future. We cannot predict whether or when any
acquisitions will occur. We cannot assure you that we will make any
acquisitions or that any acquired business will be successfully integrated
into our operations or will perform as expected. Our ability to finance any
acquisition may be constrained by our high leverage. We may also enter into
joint venture transactions. Joint ventures have the added risk that the other
joint venture partners may have economic, business or legal interests or
objectives that are inconsistent with our interests and objectives. We may
also have to fulfill our joint venture partners' economic or other obligations
if they fail to do so.
In addition, the equity investors, the indirect beneficial owners of
approximately 93% of our parents' common stock, may have an interest in
pursuing acquisitions, divestitures or other
13
<PAGE>
transactions that, in their judgment, could enhance their equity investment,
even though these transactions might involve risks to the holders of the
exchange notes.
Competition--Our business is very competitive and increased competition could
make it difficult for us to generate sufficient cash flow to service our debt.
The mattress industry in the United States is very competitive. Our retail
competitors include a variety of national and regional chains of retail
furniture stores, for example, Jordan's Furniture in Massachusetts, department
store chains with bedding departments, for example, The May Company and the
Macy's and Bloomingdale's stores of Federated Department Stores, Inc., sleep
shops, for example, Sleepy's and Mattress Giant, regional and local
independent furniture stores carrying bedding and other regional and local
specialty retailers of bedding. Some of our competitors have substantially
greater financial and other resources than we have and may be less leveraged
than us and accordingly may be better able to withstand a change of market
conditions in the bedding industry. We may face periods of intense competition
in the future that could negatively affect our profitability. See "Business--
Competition."
Possible Fluctuations in the Cost of Raw Materials; Possible Loss of
Suppliers--Our future financial condition and results may be affected by
fluctuations in the cost of raw materials and the loss of suppliers.
The major raw materials that we purchase for production of our private-
brand bedding products are cotton, insulator pads, innersprings, fabrics and
roll goods consisting of foam, fiber and non-wovens. The price and
availability of these raw materials are subject to market conditions affecting
supply and demand. Our profitability may be negatively affected by increases
in raw material costs to the extent we are unable to pass on the higher costs
of raw materials to our customers.
Leggett & Platt is our primary vendor, supplying us with approximately 35%
of our raw materials in fiscal 1999. If Leggett & Platt or any other supplier
were to discontinue or delay supplying our raw materials for any reason, the
discontinuance or delay would impair our ability to manufacture mattresses and
box springs. See "Business--Manufacturing."
Dependence on Senior Key Management--The loss of key members of our management
team and or failure to identify and recruit highly qualified management
personnel could make it more difficult for us to generate cash flow from
operations and service our debt.
Our success depends in large part on the continued services of our senior
management team. The loss of any of our key executives, including Stephen
Walker, James Hirshorn, Michael Mauler, Stephen Newton and Wayne Schuchart
could harm our business and many of our client relationships, and thus our
sales. Although we believe we could replace key employees in an orderly
fashion should the need arise, the loss of key personnel could materially
adversely affect us and seriously impair our ability to implement our
strategy. Our success also depends in part on our ability to manage, attract
and retain qualified sales personnel. Competition for key personnel is
intense. We cannot assure you that we will be successful in attracting and
retaining the personnel we require to conduct our operations successfully. If
we were unable to attract, manage and retain these personnel it could have a
significant negative affect on our profitability and ability to successfully
compete in our industry. See "Management--Directors and Executive Officers."
Reliance on Trademarks and Other Intellectual Property--Our inability to
protect our trademarks, service marks and trade names could make it more
difficult to compete in the mattress industry.
We own trademark registrations in the U.S. with respect to many of our
products and have numerous trademark applications pending in the U.S. and
common law rights for a number of
14
<PAGE>
unregistered trademarks that are used in our business. We cannot assure you
that the actions we have taken to protect our trademarks, service marks and
trade names will be adequate to protect their value or prevent imitation by
others. Moreover, others may assert rights in, or claim ownership of, these
marks and names, and we may not be able to successfully resolve conflicts over
our trademarks, service marks or trade names. The loss or limitation of our
right to use these marks and names could significantly negatively affect our
ability to compete effectively with other companies in the mattress industry.
See "Business--Trademarks, Trade Names and Copyrights."
Potential Conflict of Interest--The outside interests of our principal
stockholders could lead to conflicts of interest.
The equity investors are the indirect beneficial owners of approximately
93% of Mattress Holding's common stock. The equity investors or related
parties are also the beneficial owners of approximately 93% of the voting
common stock of the mattress manufacturer Sealy Mattress Company and
effectively control both companies. Accordingly, there is a potential for a
conflict of interests. If we are presented with a business opportunity that
could also be of interest to Sealy, we may not be able to take advantage of
that opportunity. In their own interests, the equity investors could favor one
company to the detriment of the other. For example, the equity investors could
influence the terms of our supply contract to benefit Sealy at our expense.
Economic and Market Conditions--Our business depends on the local economic
conditions and consumer spending levels.
The retail business is dependent upon the level of consumer spending, which
may be adversely affected by an economic downturn or a decline in consumer
confidence. An economic downturn could significantly negatively affect our
profitability.
Government Regulation--We are subject to extensive government regulation.
Our operations are subject to state and local consumer protection and other
regulation relating to the mattress industry. These regulations vary among the
states in which we do business. The regulations generally impose requirements
as to the proper labeling of bedding merchandise, restrictions regarding the
identification of merchandise as "new" or otherwise, controls as to hygiene
and other aspects of product handling and sale and penalties for violations.
Although we believe that we are in substantial compliance with these
regulations and currently are implementing a variety of measures to promote
continuing compliance, we cannot assure you that we will not be required in
the future to incur expense and/or modify our operations in order to ensure
compliance with these regulations which could negatively affect our
profitability.
Fraudulent Conveyance Matters--Federal and state laws allow courts, under
specific circumstances, to void guarantees, subordinate claims in respect of
the exchange notes and require exchange noteholders to return payments
received from guarantors.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, the guarantees of our subsidiary guarantors could be
voided, or claims in respect of the exchange notes or the subsidiary
guarantees could be junior to all of our other debts or the debts of our
subsidiary guarantors if, among other things:
. we incurred indebtedness with the intent of hindering, delaying or
defrauding current or future creditors; or
. we received less than reasonably equivalent value or fair consideration
for incurring indebtedness and, at the time of the incurrence of the
indebtedness, we:
. were insolvent or rendered insolvent by reason of any of the
transactions;
15
<PAGE>
. were engaged, or about to engage, in a business or transaction for which
the assets remaining with our subsidiary guarantors entity constituted
unreasonably small capital to carry on its business; or
. intended to incur, or believed that we would incur, debts beyond our
ability to pay debts as they matured.
In addition, any payment by us or that subsidiary guarantor under its
subsidiary guarantee could be voided and required to be returned to us or the
subsidiary guarantor, or to a fund for the benefit of our creditors or the
creditors of the subsidiary guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine
whether a fraudulent transfer has occurred. Generally, however, we or a
subsidiary guarantor would be considered insolvent if:
. the sum of our or its debts, including contingent liabilities, were
greater than the fair saleable value of all of our or its assets; or
. the present fair saleable value of our or its assets were less than the
amount that would be required to pay our or its probable liability on
existing debts, including contingent liabilities, as they become absolute
and mature.
Based on historical financial information, recent operating history and
other factors, we believe that neither we nor any of the subsidiary
guarantors, after giving effect to the indebtedness incurred in connection
with the transactions, will be insolvent, will have unreasonably small capital
for the business in which we or it is engaged or will have incurred debts
beyond our or their ability to pay debts as they mature. We cannot assure you,
however, as to what standard a court would apply in making those
determinations or that a court would agree with our conclusions in this
regard. In addition, we have received a solvency opinion from an independent
third party that the redemption of our common stock will not render us
insolvent, leave us with inadequate or unreasonably small capital or result in
the incurrence of debt beyond our ability to repay such debt as it matures.
There can be no assurance, however, that a court considering such issues would
agree with such conclusions or opinions.
To the extent the note guarantee was voided as a fraudulent conveyance or
held unenforceable for any other reason, holders of notes would cease to have
any claim in respect of the guarantors and would be solely our creditors. In
addition, the claims of holders of notes against the guarantors would be
subject to the prior payment of all liabilities and preferred stock claims of
the guarantors. There can be no assurance that, after providing for all prior
claims and preferred stock interests, if any, there would be sufficient assets
to satisfy the claims of holders of notes relating to any voided portions of
the note guarantees.
Change of Control--We may not have the ability to raise the funds necessary to
finance the repurchase offer contained in the indenture.
Upon the occurrence of specific kinds of change of control events described
in "Description of the Notes--Change of Control", we must offer to repurchase
all outstanding exchange notes for a price equal to 101% of the notes'
principal amount, plus any interest which has accrued and remains unpaid as of
the repurchase date. We cannot assure you that there will be sufficient funds
available for any required repurchases of the exchange notes when a change of
control occurs. In addition, the occurrence of a change of control will result
in an event of default under the senior credit facility, which will also
prohibit us from repurchasing the exchange notes after a change of control
until we first repay our indebtedness under the senior credit facility in
full. If a change of control occurs, we cannot assure
16
<PAGE>
you that we will have sufficient funds to satisfy all of our indebtedness.
These repurchase requirements may also delay or make it harder for others to
obtain control of us. In addition, important corporate events, for example
leveraged recapitalizations that would increase the level of our indebtedness,
would not necessarily constitute a change of control under the indenture. See
"Description of Senior Credit Facility" and "Description of the Notes--Change
of Control."
No Prior Market for Exchange Notes--An active trading market for the exchange
notes may not develop which could limit the liquidity of the exchange notes.
Prior to this offering, there was no public market for these exchange
notes. The initial purchasers have informed us that they currently intend to
make a market in the exchange notes after this offering is completed. However,
the initial purchasers are not obligated to do so and any market-making may be
discontinued at any time without notice, at the sole discretion of the initial
purchasers. In addition, there can be no assurance as to the development or
liquidity of any market for the exchange notes.
----------------
This prospectus 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:
. our anticipated growth strategies and pursuit of potential acquisition
opportunities
. our 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
. our dependence on Sealy
. the transactions may result in the termination of some of our leases
. our reliance on trademarks and other intellectual property
. our ability to return our stores in the Chicago market to profitability.
We undertake no obligation to publicly update or revise 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.
17
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from this exchange offer. The net proceeds
from the offering of the units, including the old notes, was $134.9 million,
after deducting discounts to the initial purchases and expenses payable by us
in connection with that offering. The net proceeds from the issuance of the
units, together with borrowings under the senior credit facility and proceeds
from the equity investors, was used to complete the transactions and are set
out on page 7.
CAPITALIZATION
The following table sets forth our capitalization as of April 1, 2000. The
information in the following table should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our audited consolidated financial statements and the
accompanying notes and our unaudited interim financial statements and the
accompanying notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of
April 1, 2000
---------------------
(dollars in millions)
<S> <C>
Cash and cash equivalents................................. $ 8.4
======
Debt:
Old notes(/1/).......................................... $133.1
Senior credit facility(/2/)............................. --
Other debt and obligations, including current portion... 0.6
------
Total debt............................................ 133.7
Stockholder's equity...................................... 25.6
------
Total capitalization.................................. $159.3
======
</TABLE>
- --------
(1) Net of unamortized discount of $6.9 million.
(2) The senior credit facility has total availability of $20.0 million,
(excluding the rollover of outstanding letters of credit totaling
approximately $1.8 million). See "Description of Senior Credit Facility."
18
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The unaudited pro forma financial data at the date and for the period
indicated are based on our historical consolidated financial statements
appearing elsewhere in this prospectus and adjustments described in the
accompanying notes.
The following unaudited pro forma statement of operations for the ten
months ended January 1, 2000 gives effect to the transactions as if they had
occurred on March 1, 1999. The historical financial position and operating
results of the entities as of dates and for periods ended subsequent to July
2, 1997, but prior to August 5, 1999 were combined in the historical 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 under the transactions
described on page 5 of this prospectus.
The unaudited pro forma financial data and accompanying notes are provided
for informational purposes only and do not purport to represent what our
results of operations would have been if these transactions had occurred as of
the date indicated nor are they necessarily considered indicative of our
future results of operations.
The pro forma adjustments are described in the accompanying notes and are
based upon the available information and upon the assumptions that our
management believes are reasonable. The unaudited pro forma financial data and
accompanying notes should be read in conjunction with our audited financial
statements and related notes, and our unaudited interim financial statements
and the accompanying notes, and other financial information pertaining to us,
including "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.
19
<PAGE>
Unaudited Pro Forma Consolidated Statement of Operations
For the Ten Months Ended January 1, 2000
(dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Net sales................................... $218,768 $ -- $218,768
Cost of sales............................... 141,098 (245)(a) 140,853
-------- ------- --------
Gross profit.............................. 77,670 245 77,915
General and administrative expenses......... 60,895 (262)(b) 61,067
434 (c)
Other operating expenses.................... 4,556 (3,825)(d) 731
-------- ------- --------
Income from operations.................... 12,219 3,898 16,117
Interest income (expense), net.............. (7,836) (8,607)(e) (16,443)
Other income (expense), net................. (97) 97 (f) --
-------- ------- --------
Income (loss) before provision for income
taxes.................................... 4,286 (4,612) (326)
Provision for income taxes.................. 2,182 (1,845)(g) 337
-------- ------- --------
Net income (loss) ........................ $ 2,104 $(2,767) $ (663)
======== ======= ========
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations.
20
<PAGE>
Notes to Unaudited Pro Forma Statements of Operations
For the Ten Months Ended January 1, 2000
(dollars in thousands)
(a) In conjunction with the transactions, we obtained an agreement from a key
supplier to secure a purchase discount on particular material purchases of
4.5%, consistent with a discount arrangement the supplier has with an
affiliated company. The adjustment reflects the 4.5% discount applied to
purchases made from the supplier during the period March 1, 1999 through
August 5, 1999.
(b) Reflects the elimination of corporate overhead expense allocations from
Heilig-Meyers representing general corporate overhead and other fees which
relate to Heilig-Meyers' operations and corporate oversight costs which
are being replaced by the shareholder advisory fee as discussed in note
(c).
(c) Reflects the annual shareholder advisory fee payable by us to Bain Capital
for management and advisory services.
(d) Reflects the elimination of compensation expense of $3,825 associated with
the granting of "in-the-money" stock options of Mattress Holding amounting
to $2,869 and deferred compensation benefits of $956, which were provided
at the closing of the transaction to certain members of our management.
(e) The increase in pro forma interest expense as a result of the transactions
is as follows:
<TABLE>
<CAPTION>
Ten
Months
Ended
January 1, 2000(/2/)
--------------------
<S> <C>
Elimination of historical interest income, net......... $ 199
------
Interest on new borrowings:
Senior credit facility--unused commitment fee at 0.50%
on $20,000........................................... 43
Old notes--$140,000 at 12.625% fixed.................. 7,603
------
Cash interest expense................................. 7,646
Amortization of discount on notes offered hereby (using
an effective rate of 13.714%)......................... 226
Amortization of deferred financing costs(/1/).......... 536
------
Total interest from the debt requirements of the
transactions........................................ 8,408
------
Net increase in interest expense..................... $8,607
======
</TABLE>
--------
(1) Represents annual amortization expense utilizing a weighted average
maturity on all borrowings of 7.91 years.
(2) Represents pro forma adjustments to interest expense for the period
prior to the consummation of the transactions.
(f) Reflects the elimination of directors and officers insurance premiums for
prior periods, that were incurred as a direct result of the transaction.
(g) Represents the income tax adjustment required to result in a pro forma
income tax provision based on: (1) our historical tax provision using
historical amounts and (2) the direct tax effects of the pro forma
adjustments described above at an estimated 40% effective tax rate.
21
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
Set forth below are our selected historical consolidated and combined
financial data of Bedding Experts and of MDC (Mattress Discounters Corporation
and T.J.B.) at the dates and for the periods indicated (some periods of which
are less than one year due to accounting requirements for acquisition
transactions). The financial position and operating results of the entities as
of dates and for periods ended subsequent to July 2, 1997, 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 under the transactions discussed elsewhere in this
prospectus. Our summary historical consolidated balance sheet and consolidated
statements of operations data as of and for the three months ended April 1,
2000 and March 31, 1999 were derived from our unaudited interim financial
statements that are included elsewhere in this prospectus. Management believes
the interim financial statements include all adjustments necessary for a fair
presentation. Our summary historical consolidated statement of operations data
for the ten month period ended January 1, 2000, and the historical
consolidated balance sheet data as of January 1, 2000, were derived from our
audited consolidated financial statements that are included elsewhere in this
prospectus. The selected historical combined statement of operations data of
Bedding Experts for the six months ended July 1, 1997, and our selected
historical combined statements of operations data for the eight months ended
February 28, 1998, and the fiscal year ended February 28, 1999, and the
selected historical combined balance sheet data as of February 28, 1998, and
February 28, 1999, were derived from our audited combined financial statements
that are included elsewhere in this prospectus. The selected historical
combined statement of operations data of MDC for the six months ended July 1,
1997, and the selected combined historical balance sheet data as of July 1,
1997, were derived from the audited combined financial statements of MDC that
are included elsewhere in this prospectus. As described in the notes to the
financial statements, there are amounts included in the financial statements
that have been retroactively restated. Amounts presented below reflect the
restatements. The selected historical combined financial data of MDC for the
years December 30, 1995, and December 28, 1996, are derived audited combined
financial statements of MDC. The selected historical combined financial data
for the ten months ended December 31, 1998 were derived from our unaudited
condensed combined interim financial statements which, in the opinion of our
management, include all adjustments necessary for a fair presentation.
On July 2, 1997, Heilig-Meyers acquired MDC in a business combination
accounted for as a purchase. On January 3, 1998, Heilig-Meyers acquired
Bedding Experts in a business combination accounted for as a pooling of
interests. Bedding Experts historical financial data has been presented
consistent with a business combination accounted for as a pooling of
interests. We have presented the selected historical combined financial data
for MDC for the years ended December 28, 1996 and December 30, 1995 because
MDC currently constitutes a major portion of our business and our assets and
is our most substantive business entity. We believe the inclusion of
historical combined financial data for MDC is a more informative presentation
of our historical combined financial data. Due to the required purchase
accounting adjustments relating to the MDC acquisition, the selected
historical combined financial data reflected in the following table prior to
July 2, 1997 are stated using its predecessor basis of accounting and may not
be comparable to the data for subsequent periods.
Heilig-Meyers employed the purchase method of accounting for its July 2,
1997 acquisition of MDC. Accordingly, historical financial and other data for
the years ended December 30, 1995 and December 28, 1996 and the six months
ended July 1, 1997, may not be comparable to the data for subsequent periods.
The primary differences result from the amortization of goodwill recorded by
Heilig-Meyers as a result of the purchase on July 2, 1997 and the provision
for income taxes.
22
<PAGE>
On November 5, 1999, we elected to change our fiscal year end from the last
day of February to the closest Saturday to December 31, beginning with the
year ended January 1, 2000.
The selected historical financial data set forth below should be read in
conjunction with, and is qualified by reference to, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our audited
financial statements and accompanying notes and our unaudited interim
financial statements and accompanying notes included elsewhere in this
prospectus.
Selected Historical Financial Data
(dollars in thousands)
<TABLE>
<CAPTION>
Bedding
MDC Experts
----------------------------------- -------------
Years Ended
------------------- Six Months Six Months
December December Ended July 1, Ended July 1,
30, 1995 28, 1996 1997 1997
-------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Operating Data:
Net sales....... $170,261 $169,020 $ 83,714 $20,738
Gross profit.... 57,830 56,285 27,433 8,195
General and
administrative
expenses....... 53,581 51,940 27,683 5,292
Other operating
expenses....... -- -- -- --
Income (loss)
from
operations..... 4,249 4,345 (250) 2,903
Interest income
(expense),
net............ 624 548 328 9
Other income
(expense),
net............ (1,262) (471) 8 2
Income (loss)
before
provision for
(benefit from)
income taxes... 3,611 4,422 85 2,914
Net income
(loss)(/1/).... 3,611 4,422 85 2,914
Other Financial
Data:
Depreciation and
amortization... $ 2,003 $ 2,214 $ 1,007 $ 108
Capital
expenditures... 3,038 1,823 1,592 424
Ratio of
earnings to
fixed
charges(/2/)... 1.83x 1.92x 1.04x 7.24x
Balance Sheet
Data (end of
period):
Working capital
(deficit)...... $ (1,156) $ 517 $(14,242) $ (972)
Total assets.... 30,772 36,180 24,546 3,694
Long-term debt
and capital
lease
obligations.... 2,220 363 268 29
Total debt and
capital lease
obligations.... 2,378 543 453 119
Other Data (end
of period):
Number of
stores......... 150 162 170 53
Same store sales
growth......... (3.8%) (3.4%) --(/3/) --(/3/)
<CAPTION>
Company
----------------------------------------------------------------------
Eight Fiscal
Months Year Ten Months Ended Three Months Ended
Ended Ended ------------------------ ---------------------
Feb. 28, Feb. 28, December 31, January 1, March 31, April 1,
1998 1999 1998 2000 1999 2000
------------- --------- ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Net sales....... $159,752 $245,461 $201,183 $218,768 $ 65,368 $ 71,830
Gross profit.... 55,886 88,863 74,669 77,670 21,711 24,907
General and
administrative
expenses....... 40,627 67,261 55,742 60,895 17,404 21,132
Other operating
expenses....... -- -- -- 4,556 -- --
Income (loss)
from
operations..... 15,259 21,601 18,927 12,219 4,308 3,775
Interest income
(expense),
net............ 88 128 126 (7,836) 3 (4,845)
Other income
(expense),
net............ (532) 322 450 (97) -- --
Income (loss)
before
provision for
(benefit from)
income taxes... 14,815 22,052 19,504 4,286 4,311 (1,070)
Net income
(loss)(/1/).... 9,418 12,690 11,238 2,104 2,318 (475)
Other Financial
Data:
Depreciation and
amortization... $ 2,648 $ 4,541 $ 3,771 $ 4,063 $ 1,236 $ 1,205
Capital
expenditures... 2,122 5,162 4,297 2,615 1,213 470
Ratio of
earnings to
fixed
charges(/2/)... 4.36x 4.62x 4.95x 1.32x 3.69x 0.84x
Balance Sheet
Data (end of
period):
Working capital
(deficit)...... $ (9,372) $ 1,137 $ (8,492) $ (2,882) $ 1,769 $ (5,302)
Total assets.... 93,346 101,488 91,776 202,933 100,037 203,034
Long-term debt
and capital
lease
obligations.... 629 426 448 133,374 14,276 133,482
Total debt and
capital lease
obligations.... 920 656 697 133,641 14,686 133,678
Other Data (end
of period):
Number of
stores......... 227 236 231 252 238 256
Same store sales
growth......... --(/3/) 1.5% 3.8% (0.0%) (0.1%) 5.3%
</TABLE>
- -------
(1) Prior to their acquisitions by Heilig-Meyers, MDC and Bedding Experts
filed as "S" Corporations for federal and state income tax purposes.
Accordingly, no provision for federal income taxes is included in the
statement of operations for the years ended December 30, 1995 and December
28, 1996 and the six months ended July 1, 1997. Provisions were made for
state income taxes in those states which do not recognize "S" Corporation
elections. These provisions have been included in general and
administrative expenses.
(2) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income before income taxes plus fixed charges. Fixed
charges consist of interest income (expense), net, and the portion of
operating rental expense which our management believes is representative
of the interest component of rental expense. Fixed charges exclude common
area maintenance costs related to our lease agreements.
(3) Our same store sales growth when aggregated with MDC for the 12 months
ended February 28, 1998 was 2.0%.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We believe we are one of the largest retailers of mattresses in the United
States. We operate in two segments: mattress retailing and mattress
manufacturing. We currently operate our retail business through a nationwide
network of 256 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 Heilig-Meyers under separate
brands. In the first calendar quarter of 2000, and for the ten-months ended
January 1, 2000, our manufacturing facilities provided product accounting for
29% and 30%, respectively, of the cost of our retail purchases. The sales from
our manufacturing segment to our retail operation are eliminated in our
consolidated and combined results of operations. Our business is currently
conducted through three legal entities: Mattress Discounters Corporation,
consisting of retail and manufacturing operations; Bedding Experts, our retail
store operations in the Chicago metropolitan area; and T.J.B., our retail
store operations in Washington, D.C., Virginia, and Maryland. Bedding Experts
and T.J.B. became wholly owned subsidiaries of Mattress Discounters
Corporation, effective August 6, 1999 under the transactions discussed
elsewhere in this prospectus.
MDC (Mattress Discounters Corporation and T.J.B.) was acquired by Heilig-
Meyers on July 2, 1997 in a business combination accounted for as a purchase.
Bedding Experts was acquired by Heilig-Meyers on January 3, 1998 in a business
combination accounted for as a pooling of interests.
On August 6, 1999, our parent company, Mattress Holding Corporation,
consummated a merger and recapitalization under 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.
The following discussion and analysis of financial condition and results of
operations relates substantially 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.
Results of Operations
The financial position and operating results of the entities as of dates
and for periods ended subsequent to July 2, 1997, 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 under the transactions discussed elsewhere in this prospectus. The
following discussion compares our results of operations for the three months
ended April 1, 2000, to the three months ended March 31, 1999, and the ten
months ended January 1, 2000, to the ten months ended December 31, 1999.
The following discussion also compares our combined results of operations
and financial condition for the fiscal year ended February 28, 1999 with the
eight months ended February 28, 1998.
24
<PAGE>
Our results of operations for the eight-months ended February 28, 1998 are
then compared to the combined results of operations of MDC (using its
predecessor basis of accounting) and Bedding Experts for the six months ended
July 1, 1997. Subsequent to Heilig-Meyers' acquisition of MDC on July 2, 1997,
MDC changed its financial year end to February 28. The principal differences
between MDC's predecessor basis of accounting and the basis of accounting
following Heilig-Meyers' acquisition of MDC are goodwill amortization and
provisions for income taxes.
As described in note 2 to the financial statements, which relates to
revenue and cost of goods sold, there are amounts included in the financial
statements that have been retroactively restated. The amounts included in the
following discussion reflect the restatements.
The following table sets forth our statement of operations line items as a
percentage of net sales for the periods indicated and should be read in
conjunction with the "Summary Historical Financial Data," the "Selected
Historical Financial Data," and the audited consolidated and combined
financial statements and unaudited interim financial statements and the
accompanying notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Bedding
MDC Experts Company
------- ------- -------------------------------------------------------------------------
Six Six Fiscal Ten Months Three Months
Months Months Eight Months Year Ended Ended
Ended Ended Ended Ended ----------------------- ------------------
July 1, July 1, February 28, February 28, December 31, January 1, March 31, April 1,
1997 1997 1998 1999 1998 2000 1999 2000
------- ------- ------------ ------------ ------------ ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit............ 32.8 39.5 35.0 36.2 37.1 35.5 33.2 34.7
General and
administrative
expenses............... 33.1 25.5 25.4 27.4 27.7 27.8 26.6 29.4
Other operating
expenses............... -- -- -- -- -- 2.1 -- --
----- ----- ----- ----- ----- ----- ----- -----
Income from operations.. (0.3) 14.0 9.6 8.8 9.4 5.6 6.6 5.3
Interest income
(expense), net......... 0.4 -- -- 0.1 0.1 (3.6) -- (6.7)
Other income (expense),
net.................... -- 0.1 (0.3) 0.1 0.2 -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Income before provision
for income taxes....... 0.1 14.1 9.3 9.0 9.7 2.0 6.6 (1.5)
Provision for income
taxes.................. -- -- 3.4 3.8 4.1 1.0 3.0 (0.8)
----- ----- ----- ----- ----- ----- ----- -----
Net income.............. 0.1% 14.1% 5.9% 5.2% 5.6% 1.0% 3.6% (0.7)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Three Months Ended April 1, 2000 Compared to Three Months Ended March 31, 1999
Net sales: Our net sales for the three months ended April 1, 2000 increased
$6.5 million or 9.9% to $71.8 million from $65.3 million for the three months
ended March 31, 1999. The increase represents an increase in our retail net
sales of $6.5 million with no changes in the external net sales of our
manufacturing operation. Our net sales from retail operations, our
manufacturing sales to our retail operations, and our manufacturing sales to
external retailers were $63.2 million, $9.6 million, and $8.7 million,
respectively, in the three months ended April 1, 2000, and $56.7 million, $8.8
million and $8.7 million, respectively, in the three months ended March 31,
1999.
25
<PAGE>
Overall, our retail sales for the three months ended April 1, 2000
increased $6.5 million of 11.5%. Excluding the Chicago market, our retail
sales for the three months ended April 1, 2000 increased $7.7 million or
16.0%. We have experienced significant sales and operational issues in the
Chicago market after the business was acquired in January 1998.
The increase in our retail sales for the three months ended April 1, 2000
is attributable to (1) a $3.1 million net increase resulting from net store
openings since March 31, 1999, and (2) a $3.4 million increase in comparable
store sales. The increase in comparable store sales is comprised of a 9.0%
increase in our markets excluding Chicago for the three months ended April 1,
2000, offset by a 15.0% decrease in comparable store sales in Chicago for the
three months ended April 1, 2000. Management continues to drive key
initiatives to improve Chicago's operating performance.
Net sales generated by our manufacturing operations during the three months
ended April 1, 2000 increased $0.8 million to $18.3 million from $17.5 million
for the three months ended March 31, 1999. The majority of our manufacturing
output is consumed by our retail operations. The output related to our retail
sales increased by $0.8 million due primarily to overall growth in our retail
sales, which was offset by a shift in mix from Comfort Source to Sealy
products. Our sales to external retailers remained consistent at $8.7 million.
Gross profit: Gross profit for the three months ended April 1, 2000
increased $3.2 million or 14.7% to $24.9 million from $21.7 million for the
three months ended March 31, 1999. As a percentage of net sales, gross profit
was 34.7% in the three months ended April 1, 2000, compared to 33.2% in the
three months ended March 31, 1999. Our retail gross profit for the three
months ended April 1, 2000 was $20.5 million, an increase of $2.2 million or
12.0%, while our manufacturing gross profit was $4.4 million, an increase of
$1.0 million or 29.2% over last year.
Our retail gross profit expressed as a percentage of net retail sales was
32.4% in the three months ended April 1, 2000, compared to 32.2% in the three
months ended March 31, 1999. The increase in the gross profit percentage is
primarily due to improved product mix and promotional activity.
Our manufacturing gross profit expressed as a percentage of manufacturing
sales was 24.3% in the three months ended April 1, 2000, compared to 19.7% in
the three months ended March 31, 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 three months ended April 1,
2000, compared to the three months ended March 31, 1999.
General and administrative expenses: General and administrative expenses
for the three months ended April 1, 2000 increased $3.7 million or 21.4% to
$21.1 million from $17.4 million for the three months ended March 31, 1999. As
a percentage of net sales, general and administrative expenses were 29.4% in
the three months ended April 1, 2000, compared to 26.6% in the three months
ended March 31, 1999. The increase is a result of increased payroll expense
largely from $1.4 million in severance costs, as well as increased
consulting/management fees, and employee recruiting expenses, offset by a
reduction in our net advertising expense as a percent of net sales.
Interest expense: Interest expense for the three months ended April 1, 2000
increased to $5.0 million due to interest expense on the senior notes.
Provision for (benefit from) income taxes: Our effective income tax rate
for the three months ended April 1, 2000 was 55.6% compared to 46.2% for the
three months ended March 31, 1999. Our effective tax rate differs from the
federal statutory rate primarily as a result of non-deductible goodwill and
state income taxes. The increase in the effective income tax rate during the
three months ended April 1, 2000, is a result of the pretax loss before the
provision for income taxes.
26
<PAGE>
Net income (loss): Primarily as a result of the reasons discussed above,
net income (loss) decreased to ($.5) million or (0.7%) of net sales in the
three months ended April 1, 2000 from $2.3 million or 3.6 % of net sales in
the three months ended March 31, 1999.
Ten Months Ended January 1, 2000 Compared to Ten Months Ended December 31,
1998
Net Sales: Our net sales for the ten months ended January 1, 2000 increased
$17.6 million or 8.7% to $218.8 million from $201.2 million for the ten months
ended December 31, 1998. The increase represents an increase in our retail net
sales of $10.0 million and an increase in the external net sales of our
manufacturing operation of $7.6 million. Our net sales from retail operations,
our manufacturing sales to our retail operations, and our manufacturing sales
to external retailers were $209.2 million, $34.3 million, and $9.6 million,
respectively, in the ten months ended January 1, 2000, and $199.2 million,
$32.6 million and $2.0 million, respectively, in the ten months ended December
31, 1998.
Overall, our retail sales for the ten months ended January 1, 2000
increased $10.0 million or 5.0%. Excluding the New Jersey and Chicago markets,
our retail sales for the ten months ended January 1, 2000 increased $22.8
million or 14.4%. We have experienced significant sales and operational issues
in the Chicago market after the business was acquired in January, 1998 and we
exited the New Jersey market in 1998 as a result of our decision to
discontinue an unprofitable strategy of operating significantly larger stores.
The increase in our retail sales for the ten months ended January 1, 2000
is attributable to (1) a $8.8 million net increase resulting from net store
openings since December 31, 1998 (2) a $1.1 million increase resulting from an
additional day of sales from the change in fiscal year end and (3) a $0.1
million increase in comparable store sales. The increase in comparable store
sales is comprised of a 5.6% increase in our markets excluding Chicago for the
ten months ended January 1, 2000, offset by a 24.2% decrease in comparable
store sales in Chicago for the ten months ended January 1, 2000. The decline
in Chicago was primarily attributable to high sales force and management
turnover at these stores, changes in commission and management compensation
plans and the putting in place of new management to stabilize the operation.
The sales force and management turnover is expected to decrease in subsequent
periods. Management continues to drive key initiatives to improve Chicago's
operating performance, including adding key management and support staff to
the region, hiring new salestaff and deploying additional training personnel.
The increase in our retail net sales for the ten months ended January 1,
2000 was partially offset by a $4.0 million decrease in net sales due to the
closure of our stores in, and exit from, the New Jersey market in September
1998.
Net sales generated by our manufacturing operations during the ten months
ended January 1, 2000 increased $9.3 million to $43.9 million from $34.6
million for the ten months ended December 31, 1998. The majority of our
manufacturing output is consumed by our retail operations. The output related
to our retail sales increased by $1.6 million due primarily to overall growth
in our retail sales, which was offset by a $3.2 million shift in mix from
Comfort Source to Sealy products driven by the introduction of a new product
line-up from Sealy. We also increased our net sales to external retailers by
$7.6 million to $9.6 million due to supplier relationships with Heilig-Meyers
and another party.
Gross Profit: Gross profit for the ten months ended January 1, 2000
increased $3.0 million or 4.0% to $77.7 million from $74.7 million for the ten
months ended December 31, 1998. As a percentage of net sales, gross profit was
35.5% in the ten months January 1, 2000, compared to 37.1% in the ten months
ended December 31, 1998. Our retail gross profit for the ten months ended
January 1, 2000 was $66.7 million, a decrease of $1.0 million or 0.5%, while
our manufacturing gross profit was $10.9 million, an increase of $4.0 million
or 55.9% over last year.
27
<PAGE>
Our retail gross profit expressed as a percentage of net retail sales was
31.9% in the ten months ended January 1, 2000, compared to 34.0% in the ten
months ended December 31, 1998. The decrease in the gross profit percentage is
primarily due to inventory shrinkage, the write-off of obsolete/slow moving
inventory during the second quarter ended August 31, 1999, and lower margins
in the Chicago market due to sales of a less favorable product mix, inventory
shrinkage, and negative leverage of our occupancy expense due to lower sales
versus the ten month period ended December 31, 1998. The inventory shrink of
$1.1 million in the second quarter of 1999 was due to physical control issues,
primarily in the Chicago market. The write-off of obsolete/slow moving
inventory of $0.4 million relates to a reassessment of our products and an
effort to segregate and move obsolete/slow moving inventory. We have made
management changes and instituted improved controls which should mitigate this
exposure in 2000. In markets other than Chicago, our retail margins as a
percentage of sales were 33.4% in the ten months ended January 1, 2000,
compared to 34.0% in the ten months ended December 31, 1998.
Our manufacturing gross profit expressed as a percentage of manufacturing
sales was 24.9% in the ten months ended January 1, 2000 compared to 20.2% in
the ten months ended December 31, 1998. This increase in gross profit
percentage is primarily due to a more favorable product mix with a shift to a
higher price point product that carries a higher gross profit percentage, to
lower materials costs and to greater overhead absorption due to higher
production volume during the ten months ended January 1, 2000 compared to the
ten months ended December 31, 1998.
General and administrative expenses: General and administrative expenses
for the ten months ended January 1, 2000 increased $5.2 million or 9.2% to
$60.9 million from $55.7 million for the ten months ended December 31, 1998.
As a percentage of net sales, general and administrative expenses were 27.8%
in the ten months ended January 1, 2000 compared to 27.7% in the ten months
ended December 31, 1998. The increase in expenses is partially a result of
consulting and other resources focusing primarily on Year 2000 issues and the
operational redesign in preparation for the POS rollout. The increase is also
a result of a second quarter reevaluation and write-off of accounts
receivable, an increase in workers compensation reserves and increased payroll
expense, offset by a reduction in our net advertising expense as a percent of
net sales due to a shift in mix in the Sealy vs. Comfort Source product line.
The write-off of accounts receivable resulted in a $0.8 million charge related
primarily to our reevaluation of certain customer deductions, chargebacks from
credit card companies, and unrecoverable funds from providers of third party
finance. The uncollectibility of a portion of these receivables was a result
of final resolution of disputes with the Company's customers. The Company has
instituted additional processes to mitigate this exposure during the last
calendar quarter of 1999. The increase in workers compensation liabilities of
$0.5 million was the result of a change in the estimated liability due to the
utilization of actuarial methods used to calculate the liability. Prior to
August 6, 1999, the Company had estimated its workers compensation liability
based on claims history and the Company's best estimate of ultimate
settlement. The Company believes the utilization of the actuarial method is a
more appropriate methodology to estimate the accrual.
Other Operating Expenses: Other operating expenses, for the ten months
ended January 1, 2000 was $4.6 million. This expense is primarily a result of
a $3.8 million non-cash charge for the intrinsic value of 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 and a $0.2 million
reserve established for expected losses on three subleased properties given
that future lease costs will not be fully recovered.
Other Income (Expense), net: Other income (expense), net, for the ten
months ended January 1, 2000 decreased $0.6 million to a net expense of ($0.1)
million, from $0.5 million other income, net, for the ten months ended
December 31, 1998. The primary reason for this decrease was 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 Income (Expense): Interest expense for the ten months ended
January 1, 2000 increased to ($8.0) million from $0.1 million for the ten
months ended December 31, 1998, due to interest expense on the Senior Notes.
28
<PAGE>
Provision for Income Taxes: Our effective income tax rate for the ten
months ended January 1, 2000 was 50.8%, compared to 42.4% for the ten months
ended December 31, 1998. Our effective tax rate differs from the federal
statutory corporate rate primarily as a result of non-deductible goodwill and
state income taxes. The increase in the effective income tax rate during the
ten months ended January 1, 2000, resulted from increased nondeductible
expenses as a percentage of income before the provision for income taxes.
Net Income: Primarily as a result of the reasons discussed above, net
income decreased to $2.1 million or 1.0% of net sales in the ten months ended
January 1, 2000 from $11.2 million or 5.6% of net sales in the ten months
ended December 31, 1998.
Fiscal Year Ended February 28, 1999 Compared to the Period from July 2, 1997
to February 28, 1998 (the "eight-months ended February 28, 1998")
Net Sales: Our net sales for fiscal 1999 increased $85.7 million or 53.7%
to $245.5 million, from $159.8 million for the eight-months ended February 28,
1998. The increase represents an increase in our retail net sales of $79.9
million and an increase in the external net sales of our manufacturing
operation of $5.8 million. Our net sales from retail operations, our
manufacturing sales to our retail operations, and our manufacturing sales to
external retailers were $237.1 million, $38.1 million, and $8.4 million,
respectively, for fiscal 1999 and $157.2 million, $20.7 million and $2.6
million, respectively, for the eight-months ended February 28, 1998.
Manufacturing sales to our retail operations are eliminated in the
consolidation of our segments.
The increase in our retail net sales is attributable to (1) 4 additional
months of sales of $74.3 million, (2) a $5.6 million increase resulting from
net store openings during fiscal 1999 and (3) from having a full year's worth
of sales during fiscal 1999 for stores that we opened during fiscal 1998.
The increase in our retail net sales was partially offset by a $2.6 million
decrease in net sales due to the closure of our stores in the New Jersey
market. Excluding the effect of the New Jersey market closing, we increased
our retail net sales in fiscal 1999 by $82.5 million or 52.5%.
Sales generated by our manufacturing operation during fiscal 1999 increased
$23.3 million or 99.8%, to $46.6 million. Sales to our retail operations
increased by $17.5 million to $38.1 million from $20.7 million, primarily due
to (1) 4 additional months of sales, (2) the introduction of our Comfort
Source branded products into Bedding Experts stores during fiscal 1999, (3)
the impact of expanding retail sales and (4) an expansion in our product
offering to include higher priced mattresses. Net sales to external retailers
increased by $5.8 million to $8.4 million from $2.6 million due to new supply
arrangements with Heilig-Meyers and its affiliates. See "Business--Supply
Contract with Heilig-Meyers."
Gross Profit: Gross profit for fiscal 1999 increased $33.0 million or 59%
to $88.9 million from $55.9 million in the eight-months ended February 28,
1998. As a percentage of net sales, gross profit was 36.2% in fiscal 1999
compared to 35.0% in the eight-months ended February 28, 1998. Our retail
gross profit for fiscal 1999 was $79.6 million, an increase of $28.2 million
or 54.9% from the eight-months ended February 28, 1998, while our
manufacturing gross profit was $9.3 million, an increase of $4.8 million or
107% from $4.5 million in the eight-months ended February 28, 1998.
Our retail gross profit expressed as a percentage of net retail sales was
33.6% in fiscal 1999 compared to 32.7% in the eight-months ended February 28,
1998. This increase in gross profit percentage is due primarily to a reduction
in our occupancy expense in both dollars and as a percentage of net retail
sales between fiscal 1999 and the eight-months ended February 28, 1998.
Occupancy expense dropped primarily due to exiting the high cost New Jersey
market.
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Our manufacturing gross profit expressed as a percentage of manufacturing
sales was 19.9% in fiscal 1999 compared to 17.19% in the eight-months ended
February 28, 1998. This increase in gross profit percentage is primarily due
to reduced material costs, more favorable product mix and greater overhead
absorption due to higher production volumes.
General and Administrative Expenses: General and administrative expenses
for fiscal 1999 increased $26.7 million or 65.8% to $67.3 million from $40.6
million in the eight-months ended February 28, 1998. As a percentage of net
sales, general and administrative expenses were 27.4% in fiscal 1999 compared
to 25.4% in the eight-months ended February 28, 1998. This increase was
partially due to the corporate overhead allocations from Heilig-Meyers in
fiscal 1999 of $1.9 million. No allocations of this type occurred in the
eight-months ended February 28, 1998. General and administrative expenses
would have decreased as a percentage of net sales to 26.6% in fiscal 1999,
excluding corporate overhead allocations. This increase was offset by a
reduction in our net advertising costs largely resulting from the inclusion of
Bedding Experts under our existing co-operative advertising arrangements and
the full year benefit of the cooperative advertising agreement with Sealy
Mattress Company.
Other Income (Expense), Net: Other income (expense), net, for fiscal 1999
increased $0.8 million to $0.3 million of other income, net from $(0.5)
million of other expense, net for the eight-months ended February 28, 1998.
Other expense in the eight-months ended February 28, 1998 consisted primarily
of losses on abandonment of leased property and fees related to the January 3,
1998 acquisition of Bedding Experts.
Provision for Income Taxes: Our effective income tax rate was 42.5% in
fiscal 1999 as compared to 36.4% in the eight-months ended February 28, 1998.
Our effective tax rate in fiscal 1999 differs from the federal statutory
corporate rate primarily as a result of non-deductible goodwill and state
income taxes.
Net Income: Primarily as a result of the reasons discussed above, net
income increased to $12.7 million or 5.2% of net sales in fiscal 1999 from
$9.4 million, or 5.9% of net sales in the eight-months ended February 28,
1998.
Eight-months Ended February 28, 1998 Compared to the Period from December 28,
1996 through July 1, 1997
Net Sales: Our net sales for the eight-months ended February 28, 1998
increased $55.3 million or 52.9% to $159.8 million from $104.5 million in the
period from December 28, 1996 through July 1, 1997. The increase represents an
increase in our retail net sales of $52.7 million and an increase in the
external net sales of our manufacturing operation of $2.6 million. Our net
sales from retail operations, our manufacturing sales to our retail
operations, and our manufacturing sales to external retailers were $157.2
million, $20.7 million, and $2.6 million, respectively in the eight-months
ended February 29, 1998 and $104.5 million, $13.4 million, and $0 million,
respectively, in the period from December 28, 1996 through July 1, 1997.
Manufacturing sales to our retail operations are eliminated in the
consolidation of our financial statements.
The increase in our retail net sales is attributable to the following
factors: (1) the impact of 2 additional months of sales of $37.1 million; (2)
an increase in comparable store sales of 2.0%; (3) an additional $5.2 million
of net sales resulting from the net 11 stores opened during fiscal 1998; and
(4) an additional $2.8 million due to net sales from stores opened in 1996.
Net sales generated by our manufacturing operation during the eight-months
ended February 28, 1998 were $23.3 million, an increase of $9.9 million or
73.9% from the period from December 28, 1996
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through July 1, 1997. This increase in manufacturing sales is attributable to
(1) an increase of $7.3 million in sales to our retail operations driven by
overall retail sales growth from new stores, two additional months of sales
and comparable store sales growth and (2) $2.6 million of net sales to Heilig-
Meyers during the eight-months ended February 28, 1998. Prior to the eight-
months ended February 28, 1998 we generated no manufacturing sales to external
retailers.
Gross Profit: Gross profit in the eight-months ended February 28, 1998
increased $20.3 million or 57.0% to $55.9 million from $35.6 million in the
period from December 28, 1996 through July 1, 1997. As a percentage of net
sales gross profit was 35.0% in the eight-months ended February 28, 1998
compared to 34.1% in the period from December 28, 1996 through July 1, 1997.
Our retail gross profit for the eight-months ended February 28, 1998 was $51.4
million, an increase of $17.5 million or 51.5% from the period from December
28, 1996 through July 1, 1997, while our manufacturing gross profit was $4.5
million, an increase of $2.7 million or 161.0% over the prior period.
Our retail gross profit expressed as a percentage of net retail sales was
32.7% in the eight-months ended February 28, 1998 compared to 32.5% in the
period from December 28, 1996 through July 1, 1997. This decrease in gross
profit percentage is due primarily to (1) improved mix/pricing due in part to
a new incentive pay program for store managers and sales personnel, and (2) a
one-time payment received from a vendor related to the signing of a new supply
contract during the period December 28, 1996 through July 1, 1997.
Our manufacturing gross profit expressed as a percentage of manufacturing
sales was 19.1% in the eight-months ended February 28, 1998 compared to 12.8%
in the period from December 28, 1996 through July 1, 1997. This increase in
gross profit percentage is primarily due to reduced material costs, more
favorable product mix and greater overhead absorption due to higher production
volumes.
General and Administrative Expenses: General and administrative expenses
for the eight-months ended February 28, 1998 increased $7.6 million or 23.0%
to $40.6 million from $33.0 million for the period from December 28, 1996
through July 1, 1997. As a percentage of net sales, general and administrative
expenses were 25.4% in the eight-months ended February 28, 1998, compared to
31.6% in the period from December 28, 1996 through July 1, 1997. This decrease
in general and administrative expenses, as a percentage of net sales, is
primarily attributable to a reduction in our net advertising costs. Although
gross advertising spending increased in the eight-months ended February 28,
1998 from the period from December 28, 1996 through July 1, 1997, it was more
than offset by increased cooperative advertising benefits from a new supply
agreement entered into with Sealy Mattress Company in the eight-months ended
February 28, 1998. This reduction in net advertising costs was offset by (1)
goodwill amortization of $0.9 recorded in the eight-months ended February 28,
1998, as a result of the acquisition of MDC by Heilig-Meyers; and (2) an
increase in payroll costs as a percent of net sales due to a new incentive pay
program implemented for store managers and sales personnel in early 1997.
Other Income (Expense), Net: Other income (expense), net, for the eight-
months ended February 28, 1998 increased to $0.5 million.
Provision for Income Taxes: Our effective income tax rate was 36.4% in the
eight-months ended February 28, 1998 as compared to zero in the period from
December 28, 1996 through July 1, 1997. The increase in effective income tax
rate was attributable to the change in tax status of MDC and Bedding Experts
upon their acquisition by Heilig-Meyers. Prior to the acquisitions, both
entities filed as "S" Corporations for both federal and state income tax
purposes.
Net Income: Primarily as a result of the reasons discussed above, net
income increased to $9.4 million, or 5.9% of net sales in the eight-months
ended February 28, 1998 from $3.0 million, or 2.9% of net sales in the period
from December 28, 1996 through July 1, 1997.
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Liquidity and Capital Resources
Prior to the leveraged recapitalization, our principal source of funds had
been cash flows from operations and our use of funds primarily consisted 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. Our cash and cash equivalents at April 1, 2000
and January 1, 2000 were approximately $8.4 million and $7.5 million,
respectively.
In connection with the leveraged recapitalization, we incurred significant
amounts of debt requiring interest payments on the 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 April 1, 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.
Net cash provided by operating activities for the three months ended April
1, 2000 was $3.9 million, a $0.2 million decrease from the $4.1 million of cash
provided by operating activities for the three months ended March 31, 1999. The
key drivers of decreased cash flow were $7.8 million interest paid during the
quarter offset by reduced working capital.
Net cash provided by operating activities for the ten months ended January
1, 2000 was $16.5 million, a $18.5 million increase from the ($2.0) million of
cash used in operating activities for the ten months ended December 31, 1998.
The net income component of cash flows from operating activities was $2.1
million for the ten months ended January 1, 2000, and $11.2 million for the ten
months ended December 31, 1998. Significant components of cash flows from
operating activities during the ten months ended January 1, 2000 included non-
cash charges for stock option grants and deferred compensation of $3.8 million
and increases in accrued expenses because of accrued interest on the Senior
Notes. Whereas the significant component of cash flows from operating
activities during the ten month period ended December 31, 1998 included net
advances to Heilig-Meyers of $10.5 million.
Net cash provided by operating activities for fiscal 1998 was $1.8 million,
a $2.8 million decline from the $4.6 million generated in the eight months
ended February 28, 1998. This decrease resulted primarily from an increase in
accounts receivable from Heilig-Meyers for the sale of mattresses and the
funding of non-interest bearing loans, net of settlement of income taxes, to
Heilig-Meyers; of approximately $13.7 million, and (2) a decrease in deferred
cooperative advertising funds resulting from the timing of the receipt of
initial cooperative advertising funds from a new vendor arrangement during
fiscal 1998, offset by a reduction in the absolute rate of working capital
growth in fiscal 1999 versus the eight months ended February 28, 1998.
Net cash provided by operations for the eight months ended February 28, 1998
decreased by $7.8 million to $4.6 million from $12.2 million in 1996. This
decrease is primarily the result of an increase in net income less reductions
in working capital balances during the eight months ended February 28, 1998.
Our principal use of cash for investing activities has historically been
capital expenditures for new store openings. The initial capital investment to
open a new store is approximately seventy thousand
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dollars, which includes leasehold improvements, furniture, fixtures, and point
of sale computer equipment. Total capital expenditures for each of the three
months ended April 1, 2000 and March 31, 1999 were $0.5 million and $1.2
million, respectively.
Our principal use of cash for investing activities has historically been
capital expenditures for new store openings. The initial capital investment to
open a new store is approximately seventy thousand dollars, which includes
leasehold improvements, furniture, fixtures, and point of sale computer
equipment. Total capital expenditures for each of the ten months ended January
1, 2000 and december 31, 1998 were $2.6 million and $4.3 million,
respectively. During the ten months ended January 1, 2000, capital
expenditures included approximately $1.9 million for leasehold improvements,
furniture and fixtures for new and existing stores, and $0.7 million for
corporate, MIS and manufacturing additions.
During Fiscal 1999, cash capital expenditures were approximately $5.2
million, including approximately $2.3 million for leasehold improvements,
furniture and fixtures for new and existing stores, $0.8 million for
manufacturing machinery and equipment, $0.8 million for land, building and
equipment for a new manufacturing plant, and $1.3 million for corporate
additions.
During the eight months ended February 28, 1998 our capital expenditures
were $2.1 million. The increase in capital expenditures in fiscal 1998 is
primarily attributable to the net increase in retail stores and purchase of
land and buildings for approximately $0.6 million.
Net cash used for financing activities was $2.5 million for the three
months ended April 1, 2000, and $0.1 million for the three months ended March
31, 1999. Cash used in financing activities primarily relates to the
repurchase of stock options for $2.4 million.
Net cash used for financing activities for the ten months ended January 1,
2000 increased $6.8 million to $7.0 million from $0.2 million for the ten
months ended December 31, 1998. The cash used by financing activities
primarily related to the recapitalization as described in detail in Note 1 of
the financial statements for the ten months ended January 1, 2000. The
principle components of the recapitalization included;
. the deemed settlement and contribution to capital of the note receivable
from Heilig-Meyers of approximately $8.0 million, the elimination and
distribution of current taxes payable to Heilig-Meyers of approximately
$4.3 million and the distribution of excess cash at the closing date of
approximately $1.7 million to Heilig-Meyers;
. the payment of deferred financing fees of approximately $10 million,
which have been deferred in the consolidated balance sheet;
. the contribution of capital from Holdings representing the granting of
the Management Stock Options and the Warrants in Holdings' common stock;
and
. the dividend distribution of approximately $130.0 million from Mattress
Discounters to Holdings to partially fund the Recapitalization of
Holdings.
In December 1999, pursuant to the transaction agreement, Heilig-Meyers
agreed to pay to Holdings approximately $2.0 million. For fiscal 1999, net
cash used by financing activities was $0.3 million compared to $19.4 million
and $4.2 million in fiscal 1998 and 1996, respectively. The significant cash
used by financing activities in fiscal 1998 and 1996 relate to distributions
paid to "S" Corporation shareholders. No such distributions were made after
July 2, 1997 when MDC was acquired by Heilig-Meyers.
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Year 2000
During the fiscal year 2000, we established a team to oversee our Year 2000
date conversion project. The project was comprised of the following stages:
(1) assessment of our Year 2000 compliance, (2) prioritization of systems, (3)
remediation activities, and (4) compliance testing. A plan of corrective
action using both internal and external resources to enhance or replace our
systems for Year 2000 compliance was developed during fiscal year 2000 and
completed by December 31, 1999.
We incurred approximately $0.9 million of expenses in addressing the Year
2000 issue. We have not experienced any significant Year 2000 issues from the
change in the calendar year from 1999 to 2000.
Seasonality
Our operations are not seasonal in nature. In the twelve months ended
January 1, 2000 we generated 23.2%, 24.5%, 28.1% and 24.2% of our retail net
sales in the first through the fourth quarter, respectively.
Impact of Recently Issued Accounting Standards
In March 1998 the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," which we adopted
on March 1, 1999. SOP 98-1 requires some software development costs to be
capitalized. The adoption of this SOP has not had a material effect on our
consolidated financial position, results of operations, or cash flows.
In April 1998 the AICPA issued SOP 98-5, "Reporting on the Costs of Start-
Up Activities," which we adopted on March 1, 1999. SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. The
adoption of this SOP has not had a material effect on our consolidated
financial position, results of operations, or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition. The Company has
determined that the provisions of SAB No. 101 did not have an impact on the
financial statements.
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BUSINESS
Our Company
We believe we are one of the largest retailers of mattresses (i.e.
conventional mattresses, box springs and foundations) in the United States.
Retailers of mattresses include retail furniture stores, department store
chains, sleep shops and other regional and local specialty retailers of
bedding. Founded in 1978, we are considered the pioneers of the "specialty
sleep shop" mattress retailing concept. Specialty sleep shops are stores
focused exclusively on selling mattresses and are one of the mattress
industry's fastest growing retail distribution channels. Since our founding,
we have grown our business into a nationwide network of 256 stores in 15
markets. We believe that we hold the leading market position in nine of these
markets. Of the top 15 markets in the United States, which accounted for
approximately 33% of 1998 mattress sales, we believe we are one of the largest
mattress retailers in six of these markets. For the twelve months ended April
1, 2000, we generated net sales of $269.4 million.
Our stores generate average annual sales of approximately $1.0 million, and
average approximately 4,000 square feet in size. In fiscal 1999, our stores
derived 90.2% of their revenue from the sale of mattresses and 9.8% from the
sale of bedding accessories (e.g., headboards and frames). Through our
exclusive purchase contract with Sealy Mattress Company, we are the largest
retailer of Sealy products. According to International Sleep Products
Association, Sealy is the largest manufacturer of mattresses in North America,
with a 22% U.S. market share. Sealy products accounted for approximately 71%
and 64% of our retail mattress sales for the three months ended April 1, 2000,
and the ten months ended January 1, 2000, respectively, and include well-known
brand names Sealy(R), Sealy Posturepedic(R), Sealy Posturepedic Crown
Jewel(R), Sealy Correct Comfort(R) and Stearns & Foster(R).
In addition to selling Sealy mattresses, we sell Comfort Source(R) brand
mattresses that are produced at our three manufacturing facilities. We believe
that we are the only conventional mattress retailer with significant captive
manufacturing capacity. This vertical integration allows us to execute a
private brand strategy with attractive retail selling margins. Sales of our
Comfort Source brand mattresses accounted for 29% and 36% of our retail
mattress sales for the three months ended April 1, 2000 and the ten-months
ended January 1, 2000, respectively.
We have expanded rapidly through organic growth and one strategic
acquisition. Since 1995, we have added 90 stores to our retail network,
including the 1998 acquisition of Bedding Experts, the leading sleep shop in
the Chicago metropolitan area. Our disciplined approach to new store openings,
coupled with this acquisition, has resulted in strong financial performance.
Since 1993, our net sales and EBITDA have grown at compound annual rates of
13.3% and 33.2%, respectively.
Industry Overview
The mattress industry is a mature and stable industry that has grown
consistently at a compound annual rate of approximately 6.6% over the past
five years. 1998 retail mattress sales were approximately $6.9 billion.
Industry dollar sales have declined only once during the past 20 years (1.9%
in 1982). The market is highly fragmented, with the top ten retailers only
accounting for approximately 20% of total sales.
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The following chart illustrates the historical growth in the domestic
bedding industry:
Domestic Wholesale Bedding Sales
($ in billions)
[BAR CHART]
YEAR SALES
---- -----
1978 $1.1
1979 $1.2
1980 $1.3
1981 $1.4
1982 $1.4
1983 $1.6
1984 $1.7
1985 $1.8
1986 $1.9
1987 $2.1
1988 $2.3
1989 $2.3
1990 $2.3
1991 $2.4
1992 $2.6
1993 $2.8
1994 $3.0
1995 $3.2
1996 $3.3
1997 $3.6
1998 $3.8
--------
Source: International Sleep Products Association
Industry Growth
The market for mattresses has consistently grown in both units and average
selling prices over the last 20 years. The growth in unit sales is primarily
due to population growth, an increase in the number of homes, and an increase
in the number of beds per home. The growth in average selling prices is a
result of a shift to both larger and more expensive beds. This is caused by a
demographic shift to an older population that spends more per bedding unit
than younger consumers, an increase in the product and merchandising education
level among retailers and industry advertising efforts relating to the health
benefits of more supportive bedding.
Industry Stability
Over the last 20 years, the mattress industry has been relatively insulated
from cyclical swings. In the same period, the industry has experienced only
one year of declining sales, when according to International Sleep Products
Association, in 1982, sales decreased by 1.9%. The industry has remained
stable largely due to the following characteristics:
. replacement sales account for approximately 70% of mattress sales, as the
average household replaces a mattress every eleven years
. low inventory levels, given that mattresses are generally manufactured
and distributed based on customer orders, mitigate the cyclical swings
experienced by furniture and appliance industries
. mattress manufacturing costs are largely variable, which limits the
impact of economic downturns on margins
. mattress manufacturers fund a substantial portion of co-operative
advertising expenditures, which allows retailers to continue to advertise
mattresses during weak economic periods.
Retail Channel Overview
Mattresses are sold to consumers through a variety of channels including
furniture stores, specialty sleep shops, department stores and mass merchants.
Historically, furniture stores, department stores and mass merchants have
accounted for the largest share of mattress sales. These retailers typically
carry mattresses in order to offer a broad line of products to their customers
and capture joint purchases of mattresses, frames, bedding accessories,
furniture and other products. Over
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the last five years, these retailers have lost significant market share to
specialty sleep shops and other distribution channels, for example factory
direct outlets and warehouse clubs. Retail mattress sales between 1993 to 1998
at furniture stores, department stores and mass merchants grew at compound
annual rates of 0.6%, 2.4% and -7.2%, respectively.
Specialty sleep shops are 3,000 to 6,000 square feet in size and focus
exclusively on selling mattresses. Sleep shops are one of the mattress
industry's fastest-growing retail distribution channels having grown,
according to Furniture Today, at a compound annual rate of 16.0% from 1993 to
1998 versus the overall market growth rate of 6.6%. In 1998, the specialty
sleep shop channel generated $2.0 billion of retail sales, representing 29% of
total industry sales. The dramatic growth of this channel is a result of
specialty sleep shops taking significant market share from traditional
channels.
The sleep shop's market share gains are due to the numerous advantages this
channel offers to consumers versus traditional mattress retailers, including:
. specialized sales force with improved mattress knowledge and customer
service levels
. wide selection of mattress styles and price ranges
. more convenient locations compared to furniture and department stores
. lower prices.
Competitive Strengths
We have built our business based on the following consumer purchasing
patterns we believe fundamental to selling mattresses:
. consumers replace a mattress once every 11 years
. the typical consumer is in the market for only 30 days
. over 60% of consumers purchase a mattress at the first or second store
they visit.
Our competitive strengths allow us to capitalize on these industry
fundamentals.
Leading Market Share. We are one of the largest specialty sleep shop in the
United States, and we believe we are one of the largest retailers of
mattresses in the United States. In addition, according to Furniture Today we
have a 10.6% share of total 1998 specialty sleep shop sales and are
approximately 55% larger than our nearest specialty sleep shop competitor. We
believe that we are one of the leading mattress retailers in nine of our 15
markets, and have an average market share that is almost twice that of our
next largest competitor in these nine markets. Our size and leading market
positions offer several advantages, including (1) higher levels of consumer
awareness, (2) the ability to leverage local advertising, distribution and
corporate overhead expenses, and (3) the ability to negotiate favorable vendor
supply agreements that include attractive co-operative advertising support.
Strong Brand Recognition. We have a well-established and widely recognized
brand name. We believe that brand recognition and promotion are critical
drivers of store traffic. As a result, we aggressively market our brand using
newspaper, radio and television advertising in order to maintain high consumer
awareness, reinforce our value pricing image and promote the name brand Sealy
mattresses offered in our stores. Our jingle, "Have a Good Night's Sleep On
Us!"(R), is a widely recognized and powerful tool in the markets in which we
operate.
Retailer of Sealy Products. The strength of the Sealy, Sealy Posturepedic
and Stearns & Foster brands is an important part of our retailing business, as
customers are more inclined to visit stores that carry well-recognized brand
names. Sealy is the most recognized mattress brand,
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according to American Research Group, and is the largest manufacturer of
mattresses in North America. Through our exclusive purchase contract with
Sealy, we offer a broad line of Sealy products, from Sealy promotional
mattresses that sell for less than $200 per set to Sealy premium products, for
example the Stearns & Foster brand, that sell for over $3,000 per set. As part
of our relationship with Sealy, we receive significant co-operative
advertising funds to support our marketing program. Our contract with Sealy
expires on June 30, 2004.
Vertical Integration. We believe that we are the only conventional mattress
retailer with significant captive manufacturing capacity. Our vertical
integration enables us to pursue a private brand strategy with attractive
margins and helps to ensure a consistent product supply at low to medium price
points. This private brand capability is a significant strength as it allows
us to offer a unique product not found in our competitors' stores. Comfort
Source mattresses produced in our three manufacturing facilities accounted for
approximately 29% and 36% of our retail mattress sales for the three months
ended April 1, 2000, and the ten months ended January 1, 2000, respectively.
Attractive Retail Locations. Our stores are strategically located to
capture consumer traffic due to their convenient and highly visible locations
and attractive store fronts. We follow a disciplined approach to selecting our
store locations and employ an analytical site selection process to maximize
the likelihood of successfully introducing new stores. Our store-opening
protocols have been instrumental to our organic growth in recent years and we
expect them to support our continued expansion in the future.
Experienced Management Team and Strong Sponsorship. We believe that we have
one of the most experienced management teams in the bedding industry, with an
average of 13 years of industry experience among our top nine executives. Bain
Capital, our largest shareholder, also maintains extensive experience in the
mattress and retail industries, having been the largest shareholder of Sealy
since December 1997 and having invested in numerous retailers including
Staples, The Sports Authority, Brookstone, Duane Reade, Stage Stores and
Domino's. Going forward, our management team own new stock and options
together representing up to approximately 5.5% of Holdings' fully diluted
common stock.
Business Strategy
Our business model is focused on maximizing market share in local markets.
We believe maximizing local market share enables us to drive revenue and
profitability in those markets for several reasons. Maximizing local market
share enables us to:
. generate higher traffic per store
. convert more shoppers into buyers
. leverage local operating expenses over a greater number of stores.
Operating Strategy
Increase Store Traffic. We attempt to maintain and increase store traffic
by:
Creating top-of-mind awareness. We use a mix of print, radio and TV
advertising to create top-of-mind brand awareness so that we are the first
mattress retailer chosen by consumers. We seek to establish leading market
positions that allow us to conduct extensive advertising programs cost
efficiently.
Advertising the Sealy brand name. Customers are more likely to visit a
store that carries brand name mattresses, and Sealy is the most recognized
brand name in the mattress industry. We prominently position the Sealy brand
in our advertising and intend to continue to leverage the strength of the
Sealy brand.
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Offering convenient locations. Customers' desire for convenient store
locations is one of the driving forces behind the growth of the sleep shop
channel. We have strategically located an average of 17 stores in each of our
markets in convenient and highly visible locations.
Convert Traffic into Sales. We seek to maintain high sales closing ratios
by:
Maintaining a highly effective sales organization. We believe that we
maintain, and will continue to develop, the most sales-oriented business
practices in the mattress retailing industry. Sales associates use our eight-
step selling process to close sales and are compensated entirely on
commission. We maintain high staffing levels in our stores to maximize sales-
oriented contact with our customers.
Offering differentiated merchandise and pricing. Our product merchandising
is designed to offer customers a broad product mix along a wide-range of price
points that differentiate us from our competitors. By offering 22 different
Sealy models, many of which have features not found in other stores, along
with our Comfort Source brand, we believe we are able to meet the needs of a
broad range of customers. Additionally, given our scale, we can position
ourselves as the most price-competitive mattress retailer in the industry and
offer customers the lowest prices in our markets.
Providing convenient delivery. We are one of the few specialty shops to
offer customers the option of take home purchases of popular mattresses. We
also offer one to three day home delivery, free removal of old mattresses and
free mattress set-up at customers' homes.
Leverage Local and National Scale. We seek to generate cost efficiencies on
a local and national level by:
Clustering stores in local markets. Our store clustering strategy is
designed to maximize local market penetration and generate cost efficiencies
in each of our local markets. Cost efficiencies are created by leveraging
local advertising, distribution and overhead expenses across a large number of
stores in a given market.
Leveraging national purchasing. We have chosen to source our branded
products from one manufacturer. This arrangement has enabled us to leverage
our buying power and receive attractive co-operative advertising support.
Additionally, our single vendor focus simplifies our distribution process and
minimizes our inventory requirements.
Growth Strategy
Continue Organic Growth. We will continue to strategically open new stores
in existing markets to establish or expand a leadership position. We believe
that local market leadership, and well-positioned stores create strong brand
awareness and significantly influence both customer visits and purchase
decisions. There are also significant opportunities to expand our store base
into new markets. We believe that opening new stores in new markets typically
increases the overall awareness and market share of the sleep shop channel. We
have identified a number of markets within the top 30 U.S. markets in which we
believe the sleep shop channel is under-represented. We believe that our
disciplined approach to new store openings will enable us to profitably pursue
growth in new markets.
Pursue Strategic Acquisitions. We will selectively pursue strategic
acquisitions in new and overlapping markets. The economics of acquisitions can
be very attractive for us given the incremental profit generated in our
manufacturing facilities and the benefit of shifting additional volume to our
mattress purchase agreement with Sealy, which provides favorable cooperative
advertising terms. We intend to pursue acquisitions selectively and prudently.
Evaluate E-Commerce. We continue to explore the potential for internet-
based mattress sales. There are currently limited mattress sales over the
internet given the significant complexities of
39
<PAGE>
shipping a mattress and the desire of customers to touch and feel the product
prior to making a purchase. However, we are currently developing a website
that will allow us to process customer orders over the internet and are
positioning ourselves to capture future mattress sales from this channel
should it become a significant means of distribution.
Store Locations and Development
We currently operate 256 stores in 15 markets. Our average store is
approximately 4,000 square feet. Our stores are generally located in highly
visible, high-traffic commercial areas, including strip shopping centers,
major regional shopping areas and freestanding sites. Each store typically has
at least 40 feet of readily identifiable signage/frontage, easy access from
major roads and adequate customer parking.
The following table sets forth our store count by market as of April 1,
2000:
<TABLE>
<CAPTION>
Market Stores Year Entered
------ ------ ------------
<S> <C> <C>
Chicago, IL....................... 55 1998(/1/)
Washington, DC.................... 33 1978
Los Angeles, CA................... 30 1994
San Francisco, CA................. 26 1992
Boston, MA........................ 22 1989
Detroit, MI....................... 15 1994
Baltimore, MD..................... 12 1981
San Diego, CA..................... 12 1994
Denver, CO........................ 10 1998
Miami, FL......................... 9 1998
Pittsburgh, PA.................... 9 1994
Sacramento, CA.................... 8 1997
Richmond, VA...................... 7 1983
Tampa, FL......................... 5 1998
Orlando, FL....................... 3 1999
---
Total........................... 256
===
</TABLE>
- --------
(1) This market was entered in connection with Heilig-Meyers' acquisition of
Bedding Experts.
Our store clustering strategy is designed to maximize local market
penetration and generate cost efficiencies in each of our local markets. The
clustering concept enables us to leverage local advertising, distribution and
overhead expenses across a large number of stores in a given market. We follow
a disciplined approach to store selection, employing analytical criteria to
maximize the likelihood of introducing new stores successfully. We use scoring
techniques, drive time studies, existing store penetration analysis and other
quantitative tools to identify and evaluate new store opportunities.
The initial capital expenditure to open a new store is approximately
$70,000, which includes the cost of leasehold improvements, furniture,
fixtures and point-of-sale computer equipment. The average initial inventory
investment, which is financed primarily through vendor payables, is
approximately $30,000 per store. Store revenue increases quickly, with a new
store typically generating 70% of the net monthly sales of our average store
within three months.
Products and Pricing
Mattress sales currently account for approximately 90% of our store
revenues. Our stores offer an average of 32 SKUs of Sealy and Comfort Source
mattresses. We also offer a variety of other bedding products, including brass
and iron beds, futons, headboards, footboards, bed frames and related items.
40
<PAGE>
We offer a broad selection of brand name products from our exclusive third
party manufacturer, Sealy. These brands include Sealy, Sealy Posturepedic,
Sealy Posturepedic Crown Jewel, Sealy Correct Comfort and Stearns & Foster.
These Sealy brands each offer distinct product characteristics and are
marketed to, and perceived by, consumers as separate brands at a broad range
of price points. These products, along with the Comfort Source brand, satisfy
the consumer's desire to see a wide range of models before making a purchase.
We offer several features on our Sealy products that are unique to us,
including a proprietary cover selection on all Sealy Posturepedic and Sealy
Correct Comfort models, and "Edge Guard Plus" in our Sealy Posturepedic models
except Crown Jewel. These differentiated product features allow us to compete
effectively with retailers who offer similar products at these price points.
The Comfort Source product line produced in our manufacturing factories
complements the Sealy products at mid-price ranges and satisfies customer
needs at lower price points, name brand products typically do not meet our
gross margin targets at the lower price points. Our vertical integration
allows us to offer more product features and quality at lower prices, while
maintaining attractive margins.
We merchandise products at a broad range of retail price points, with
mattresses that sell for less than $200 per set to our premium products that
sell for over $3,000 per set. We have a flexible pricing structure that allows
our store managers and sales associates to meet most customers' price demands
by matching or beating any competitor's price. This structure is designed with
a multi-tier selling commission rate on each product that takes into account
our realized gross margins and selling commissions. Our buying power and
vertical integration enable us to offer competitive pricing on all of our
products while protecting our gross margins.
Sales Force and Training
Company studies show that over 60% of mattress consumers visit only one to
two stores before making a purchase. Our strategy is to convert as many of our
store shoppers into customers as possible. To do so, we employ an eight-step
sales approach designed to ascertain bedding preferences and price sensitivity
by directing the customer through a series of questions and bed tests. We
average over 2.5 sales personnel per store, including the store manager. We
believe our staffing levels are higher than our competitors, and when combined
with our extensive sales training, generate superior closing ratios. Sales
associates are compensated entirely on commission and have discretion to lower
price, within pre-set parameters, in return for a lower commission. Managers
are compensated with a base salary and incentive payments based on gross
margin and other store performance criteria.
Our sales personnel receive extensive sales and product training prior to
assignment and receive continuing education. We maintain an in-house training
program conducted by experienced sales personnel and management dedicated to
the sales training process. Sealy representatives also participate in the
product-oriented portion of the program. Our initial two-week sales training
includes extensive education regarding the mattress market and our merchandise
offering. At the end of initial training, each sales associate is required to
pass a sales and product knowledge test to ensure maximum retention of
information and to standardize our level of interaction with customers. After
initial training, each sales associate is assigned a mentor to facilitate
further training while on the sales floors.
Marketing and Advertising
Our marketing program is designed to generate high store traffic, maintain
high consumer awareness of our name, reinforce our value-pricing image and
promote our name brand mattresses. We believe that consumer awareness and
brand name recognition are critical to mattress retailing, as
41
<PAGE>
over 60% of consumers purchase a mattress at the first or second store they
visit. Our marketing message emphasizes our position as the lowest price and
best value in our markets, the largest bedding retailer in the United States,
and the world's largest Sealy retailer.
All of our advertising is created by an in-house, full-service advertising
department. We manage the entire marketing process from layout through
production and placement. Our in-house capability gives us a competitive
advantage because we are more focused on the industry than an outside agency
would be, have the ability to react quickly to changing market conditions or
sales trends, and operate more economically because we only have to pay net
media rates and avoid outside agency commissions.
Our advertising program uses a multimedia approach. While print ads and
inserts in Sunday newspapers constitute a large portion of our advertising
spending, we have recently devoted an increasing percentage of our marketing
expenditures to radio and television advertising. Our jingle, "Have a Good
Night's Sleep On Us!", has been cited as the most recognizable in the
Washington, DC area in a marketing survey conducted by an independent firm.
Distribution
We operate ten sales support centers, each of which services an average of
25 stores. Merchandise flows through these centers from Sealy and our
manufacturing facilities on a daily basis before going to our stores or our
customers. Customers receive their products either through home delivery,
approximately 60% of total fiscal 1999 retail sales volume, or take home,
approximately 40% of total fiscal 1999 retail sales volume. Merchandise is
delivered from our sales support centers to our customers' homes five days a
week, and to our stores once or twice a week. We currently operate over 82
home delivery trucks. Most customer deliveries are made on a three-day lead-
time, with next day delivery available upon request.
The following sets forth our sales support centers, all of which are
leased:
<TABLE>
<CAPTION>
Square
Location Footage
-------- -------
<S> <C>
Upper Marlboro, MD................... 88,304
Carol Stream, IL..................... 47,218
Anaheim, CA.......................... 44,700
Hayward, CA.......................... 43,580
Sharon, MA........................... 42,000
Taylor, MI........................... 39,215
Pittsburgh, PA....................... 33,000
Miami, FL............................ 24,140
Denver, CO........................... 13,136
Lakeland, FL......................... 10,200
-------
Total.............................. 385,493
=======
</TABLE>
Manufacturing
Our manufacturing operations consist of three factories, located in
Maryland, California and Alabama. Mattress manufacturing is largely an
assembly operation with minimal fixed costs. We believe we have achieved high
productivity and efficiencies due to a relatively small SKU base. We produce
57 SKUs compared to an estimated SKU base of over 1,000 for other major
mattress manufacturers. We believe our manufacturing operations achieve
production rates that are twice the industry average. Our ability to
manufacture long runs of a single product minimizes down time and
42
<PAGE>
change-over costs. We believe we maintain sufficient capacity to increase our
manufacturing capabilities as product demand from our store base grows.
The following sets forth our manufacturing facilities:
<TABLE>
<CAPTION>
Square
Location Footage Ownership Status
-------- ------- ----------------
<S> <C> <C>
Upper Marlboro, MD...................... 108,000 Leased--expires 1/31/2012
Montgomery, AL.......................... 72,000 Owned
Fontana, CA............................. 58,000 Leased--expires 11/30/2004
-------
Total................................. 238,000
=======
</TABLE>
We centrally purchase many of our raw materials and supplies for our
manufacturing operations, including spring components, wire, foam and covers
to ensure product quality and maximize volume discounts. We purchase our raw
materials and components from a variety of vendors, including Leggett & Platt,
Incorporated. Leggett & Platt is our primary vendor, supplying us with
approximately 35% of our raw materials in fiscal 1999.
Competition
The mattress industry in the United States is very competitive. Our store
competitors include a variety of national and regional chains of retail
furniture stores, for example, Jordan's Furniture in Massachusetts, department
store chains, for example, The May Company and Federated Department Stores,
Inc., and sleep shops, for example, Sleepy's and Mattress Giant.
Employees
At April 1, 2000, we employed 1,512 people, none of whom are represented by
a labor union. We employed 217 people in our three factories: 111 people in
Maryland, 55 people in California and 51 people in Alabama. We employed 1,120
people in our retail operation, including distribution and home delivery. In
addition, we employed 175 people in our corporate offices.
On July 30, 1999, the National Labor Relations Board held a union election
at our Hayward, California sales support center in which the union failed to
obtain a majority of ballots. The union challenged the results of the election
in whose favor a judgment was made and which we are currently appealing.
Trademarks, Trade Names and Copyrights
We own trademark registrations in the United States with respect to many of
our products, including our Comfort Source(R) and Royal Comfort Collection(R)
product lines, and hold various trade name and service mark registrations
including, for example, registrations of Mattress Discounters(R), The Bedding
Experts(R) and the jingle "Have a Good Night's Sleep on Us!"(R). We also have
numerous trademark applications pending in the United States and common law
rights for unregistered trademarks that are used in our business. In addition,
we own several U.S. copyright registrations.
Legal
We are a party to various legal proceedings from time to time arising in
the ordinary course of business. We do not expect that these matters,
individually or in the aggregate, will have a material adverse effect on our
business, financial condition or results of operations. We are not currently
involved in any material legal proceedings.
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<PAGE>
Supply Contract with Sealy
We are a party to a letter agreement with Sealy for the supply of Sealy and
Stearns & Foster products. Under the agreement, as amended, Sealy is our
exclusive supplier of name brand beds until June 30, 2004.
Supply Contract with Heilig-Meyers
In connection with the transactions, we entered into an agreement for the
supply of mattresses manufactured by us to Heilig-Meyers. Under this
agreement, Heilig-Meyers is required to purchase a minimum amount of
mattresses from us, which amount is based on current supply levels. This
agreement is for an initial term of three years and continues unless
terminated by either party with prior written notice of not less than six
months.
Advertising Services Agreement with Heilig-Meyers
In connection with the transactions we entered into an agreement to perform
for Heilig-Meyers advertising services. This agreement is for an initial term
of three years and continues unless terminated by either party with prior
written notice of not less than six months. Under this agreement we receive a
commission for all media time we place for Heilig-Meyers.
44
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth information about our directors and the
executive officers.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Stephen A. Walker....... 50 Chief Executive Officer and Director
James B. Hirshorn....... 34 Chief Financial Officer and Director
Stephen Newton.......... 43 Chief Operating Officer
Wayne Schuchart......... 50 Chief Information Officer
Raymond T. Bojanowski... 44 Executive Vice President
Richard L. Branch....... 43 Senior Vice President--Advertising and Marketing
Deborah Boyd............ 31 Vice President--Human Resources
Michael Eppinger........ 37 Vice President--System Implementation and Development
Robert D. Gorney........ 56 Vice President--Manufacturing
Michael Mauler.......... 38 Vice President--Operations
Josh Bekenstein......... 41 Director
Michael Krupka.......... 34 Director
Andrew S. Janower....... 30 Director
Joe L. Gonzalez......... 43 Director
</TABLE>
Stephen A. Walker has been Chief Executive Officer since December 1999.
Prior to joining Mattress Discounters, he spent most of 1999 consulting for
M.F.I. Plc, the UK's largest, vertically integrated furniture retailer. From
February 1988 to December 1998, Mr. Walker worked for WH Smith Plc. Most
recently Mr. Walker was President of WH Smith USA, a retailer specializing in
airport, hotel, resort and gaming properties. From August 1990 to November
1995, Mr. Walker was President of The Wall Music, Inc., a mall-based retailer
of music stores owned by WH Smith Plc.
James B. Hirshorn has been Chief Financial Officer since June 1999. Mr.
Hirshorn has been a Vice President at Bain Capital since 1998 working with
portfolio companies on a variety of operational and strategic issues. From
1993 to 1998, he was a Manager and Consultant at Bain & Company focusing in
the areas of consumer products and technology. From 1988 to 1991, Mr. Hirshorn
was with Procter & Gamble in their Product Development Group. He received his
MBA from the Harvard Business School in 1993.
Stephen Newton has been Chief Operating Officer since May 2000. Prior to
joining Mattress Discounters, Mr. Newton spent 1998 to 2000 as Chief Operating
Officer with WH Smith USA, an Atlanta based specialty retailer owned by WH
Smith Plc. From 1991 to 1998 Mr. Newton held the position of Vice President--
Store Operations for the Wall Music Inc., also owned by WH Smith Plc.
Wayne Schuchart has been Chief Information Officer since September 1999.
From 1994 to 1999, Mr. Schuchart was Senior Vice President-MIS of Oakwood
Homes Corporation. From 1975 to 1994 he was Vice President-MIS of Mary-go-
round Enterprises, Inc., a large national specialty retailer.
Raymond T. Bojanowski has been Executive Vice President--Sales since August
1999. Mr. Bojanowski has overall responsibility for operation of stores, sales
staff, and merchandising. From 1992 until the business was sold to Heilig-
Meyers in 1997 Mr. Bojanowski served as Executive Vice President. From 1990 to
1992 Mr. Bojanowski was General Manager of the New York/New Jersey operations.
From 1988 to 1989 he was District Manager and from 1987 to 1988 he was a sales
associate.
Richard L. Branch has been Senior Vice President--Advertising and Marketing
since 1999. From 1992 to 1999 Mr. Branch was Vice President--Advertising and
Marketing. From 1989 to 1992 he was
45
<PAGE>
Director of Advertising, and from 1986 to 1989 he was Director of Marketing at
the Maryland Science Center. From 1979 to 1986, Mr. Branch worked in various
capacities within the theme park and amusement industries.
Deborah Boyd has been Vice President--Human Resources since 1999. Ms. Boyd
joined us in 1994 as Director of Human Resources. From 1993 to 1994 she was
Assistant Director of Operations at Reliable Stores, Inc., and from 1985 to
1993 she held various Human Resources positions at both the store and
corporate levels for Woodward & Lothrop/John Wanamakers.
Michael Eppinger has been Vice President-System Implementation and
Development since April 2000. From 1998 to 2000 Mr. Eppinger served as Vice
President--Operations at Valley Media. From 1993 to 1998 he was with The Wall
Music Inc. most recently as Senior Director of Logistics and Merchandise
Planning. Prior to that, from 1985 to 1993, he held various operations
management positions with Jordan Marsh Co., a Division of Federated Department
Stores.
Robert D. Gorney has been Vice President--Manufacturing since 1991. Mr.
Gorney served in various manufacturing capacities for Simmons Mattress Company
from 1961 to 1990 including plant manager, and was Assistant General Manager
from 1985 to 1990.
Michael Mauler has been Vice President--Operations since January 2000.
Prior to joining Mattress Discounters he was the Vice President of Worldwide
Logistics for Fisher Scientific. From 1988 to 1998 Mr. Mauler held various
management positions at Dade-Berehing Inc., including Vice President--Global
Logistics.
Josh Bekenstein is a Managing Director of Bain Capital. He has been with
Bain Capital since its inception in 1984, and has been involved in numerous
investments during the past 15 years. Mr. Bekenstein serves as a director of
Sealy, Totes/Isotoner, Waters, and Bright Horizons Family Solutions. He is
also a director of the Dana Farber Cancer Institute and the Horizons
Initiative.
Michael Krupka joined Bain Capital in 1991 and has been a Managing Director
since 1997. Prior to joining Bain Capital, Mr. Krupka spent several years as a
management consultant at Bain & Company where he focused on technology and
technology-related companies. In addition, he has served in several senior
operating roles at Bain Capital portfolio companies. Mr. Krupka serves on the
Board of Directors of Sealy, J Tech, Inc., Integrated Circuit Systems, Inc.
and TravelCLICK.
Andrew S. Janower is a Vice President of Charlesbank Capital Partners, LLC,
which manages the private equity and real estate portfolios of the Harvard
University endowment fund. Prior to joining Charlesbank in July 1998, at the
time of the firm's inception, Mr. Janower was an Associate at Harvard Private
Capital Group, Inc. Mr. Janower serves on the Board of Directors of Sealy.
Joe L. Gonzalez is a Limited Partner of Chase Capital Partners. He joined
Chase Capital in 1998, and prior to that spent over twenty years in the
Mergers and Acquisitions practice of KPMG Peat Marwick. He currently serves as
a director of M2 Automotive and the United States-Mexico Chamber of Commerce.
Employment Agreements
We have entered into an employment agreement with each of the following
people: Stephen A. Walker--Chief Executive Officer, Raymond Bojanowski--
Executive Vice President and Steve Newton--Chief Operating Officer. The
agreement for Mr. Bojanowski has an initial 18 month term and perpetual 18
month terms thereafter unless terminated by either party. Mr. Walker's
agreement has an initial one year term and perpetual 12 month terms thereafter
unless terminated by either party.
46
<PAGE>
Mr. Newton's agreement has an initial one year term and perpetual terms
thereafter unless terminated by either party. Mr. Walker's agreement provides
for an annual base salary of $300,000, subject to annual increase by the board
of directors of Holdings, plus a performance bonus of up to 67% of the base
salary based upon Mr. Walker's performance and our consolidated operating
results, with financial targets to be agreed between us and Mr. Walker. Mr.
Bojanowski's agreement provides for an annual base salary of $275,000, subject
to annual increase by the board of directors of Mattress Holding, plus a
performance bonus of up to 60% of the base salary based upon an appropriate
bonus plan determined by our board. Mr. Bojanowski's agreement provides that
if we terminate his employment without cause, we will continue to pay his base
salary for a period of 18 months from termination, and in the case of Mr.
Walker and Mr. Newton we will continue to pay their base salary for a period
of 12 months from termination. Mr. Bojanowski has entered into a separation
agreement terminating his employment with us on June 9, 2000.
In addition we have entered into employment agreements with Richard
Branch--Senior Vice President--Advertising and Marketing and Michael Mauler--
Vice President--Operations. Mr. Branch and Mr. Mauler's agreements have
initial 12 month terms and perpetual 12 month terms thereafter unless
terminated by either party. Mr. Branch's agreement provides for an annual base
salary of $200,000, plus a performance bonus of a percentage of the base
salary based upon an appropriate bonus plan determined by our board. Mr.
Branch and Mr. Newton's agreement(s) provide that if we terminate Mr. Branch
or Mr. Newton's employment without cause, we will continue to pay their base
salary for a period of 12 months from termination. Mr. Mauler's agreement
provides that if we terminate Mr. Mauler's employment without cause, we will
continue to pay his base salary for a period of six months from termination.
We intend to enter into an employment agreement with Wayne Schuchart.
Management Equity Participation
To provide financial incentives for Messrs. Bojanowski, Branch and Gornery,
they have been issued options to acquire shares of Holdings' common stock.
These options are exercisable. In addition, to provide additional financial
incentives, we have granted options to purchase shares of Mattress Holding
Corporation's common stock to those employees, as well as to other key
employees. These options will vest and become exercisable (1) in increments on
certain dates or (2) upon a sale of Mattress Discounters Corporation. When an
employee's employment with us is terminated for any reason, the terminated
employee's unvested options will automatically expire, the exercise period for
the vested options will be reduced to a period ending no later than 180 days
after the date of termination. If such termination occurs prior to a qualified
initial public offering of Mattress Holding's common stock, Mattress Holding
will have the right to repurchase any of its common stock then held by the
terminated employee. Our management team owns new stock and options together
representing up to approximately 5.5% of Mattress Holding's common stock on a
fully diluted basis.
47
<PAGE>
Executive Compensation
Summary Compensation Table
The following table sets forth, for the ten month fiscal year ended January
1, 2000, the compensation paid to all individuals who performed the functions
of chief executive officer, and our next most highly compensated executive
officers during that period.
<TABLE>
<CAPTION>
Annual Compensation Number of
--------------------- Securities
Fiscal Salary Bonus Underlying
Name and Principal Position Year ($) ($) Options (#)
- --------------------------- ------ ------- ------ -----------
<S> <C> <C> <C> <C>
Steven M. Lytell(/1/)(/5/)................... 1999 416,667 -- 429,070
Executive Vice President
Stephen A. Walker............................ 1999 23,077 -- 250,000
Chief Executive Officer
Jon M. Studner(/2/)(/5/)..................... 1999 291,667 -- 429,070
Senior Vice President
Raymond T. Bojanowski(/3/)................... 1999 229,883 11,494 270,155
Senior Vice President--Sales
Richard L. Branch............................ 1999 166,667 8,333 63,566
Vice President--Advertising and Marketing
Thomas J. Budsock(/4/)(/5/) ................. 1999 125,000 -- 47,674
Vice President--Finance
</TABLE>
- --------
(1) Mr. Lytell's employment terminated on March 1, 2000.
(2) Mr. Studner's employment terminated on January 31, 2000.
(3) Mr. Bojanowski's employment will terminate on June 9, 2000.
(4) Mr. Budsock's employment terminated on January 14, 2000.
(5) Options granted to these former executive officers have lapsed under the
terms of their separation agreements.
Compensation of Directors
We reimburse directors for any out-of-pocket expenses incurred by them in
connection with services they provide in their capacities as directors. We do
not compensate, or have plans to compensate, our directors for services they
provide in their capacities as directors. We may, however, elect to do so in
the future.
Qualified 401(k) and Profit Sharing Plan
We maintain a qualified 401(k) and profit sharing plan. All employees of 21
years of age and over and employed for at least one year are eligible to
participate in the plan. Employees are permitted to contribute up to 15% of
their annual compensation, subject to the IRS limits. Under the plan, we have
discretion to make matching contributions. We currently anticipate making
matching contributions equal to 2% of gross compensation.
48
<PAGE>
PRINCIPAL SHAREHOLDERS
We are a wholly-owned subsidiary of Mattress Holding Corporation. The
outstanding equity securities of Mattress Holding consist of 12,176,250 shares
of Class A common stock and 1,369,583 shares of Class L common stock. The
Class L common stock is senior in right of payment to the Class A common
stock. The holders of Class A common stock and Class L common stock are
entitled to one vote per share on all matters to be voted upon by the
stockholders of Mattress Holding, including the election of directors.
Mattress Holding also has authorized Class B common stock and Class M common
stock.The Class B common stock and Class M common stock are identical to the
Class A common stock and Class L common stock, respectively, except that they
have no voting rights except as required by law. The Board of Directors of
Mattress Holding is authorized to issue preferred stock, par value of $0.01
per share, with such designations and other terms as may be stated in the
resolutions providing for the issue of any of our directors and executive
officers preferred stock adopted from time to time by the board of directors.
The following tables set forth information regarding the approximate
beneficial ownership of: (1) the Class A common stock and Class L common stock
by each person known to us to own more than 5% of any class of our outstanding
voting securities and (2) the Class A common stock and Class L common stock by
each of our directors and named executive officers and all of the directors
and executive officers as a group. In the table set forth below, beneficial
ownership means the sole or shared power to vote, or to direct the voting of,
a security, or the sole or shared power to dispose, or direct the disposition
of, a security and includes options exercisable within sixty days. No warrants
are exercisable within sixty days. Unless otherwise noted, to our knowledge,
each of the following shareholders have sole voting and investment power as to
the shares shown.
<TABLE>
<CAPTION>
Shares Beneficially Owned
------------------------------------------
Class A Common Stock Class L Common Stock
--------------------- --------------------
Number of Percentage Number of Percentage
Name and Address Shares of Class Shares of Class
---------------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Principal Shareholders:
Bain Funds(/1/)(/2/).............. 11,423,250 93.8% 1,269,250 92.7%
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Heilig-Meyers Company............. 903,000 7.4 100,333 7.3
12560 West Creek Parkway
Richmond, VA 23238
Directors and Executive Officers:
Stephen A. Walker................. -- -- -- --
Raymond T. Bojanowski(/3/)........ 67,500 * 7,500 *
Richard L. Branch(/3/)............ 26,250 * 2,917 *
Deborah Boyd...................... -- -- -- --
Robert D. Gorney(/3/)............. 7,500 * 833 *
Michael Mauler.................... -- -- -- --
Josh Bekenstein(/4/).............. 1,226,040 10.0 136,227 9.9
Michael Krupka(/4/)............... 1,226,040 10.0 136,227 9.9
James B. Hirshorn(/5/)............ 1,213,768 10.0 134,863 9.8
Andrew S. Janower(/6/)............ 1,827,361 15.0 203,040 14.8
Joe L. Gonzalez(/7/).............. -- -- -- --
Directors and Executive Officers
as a group (14 persons).......... 3,154,651 25.9 350,517 25.6
</TABLE>
- --------
* represents less than 1%
(1) Amount shown represents the aggregate number of shares held by Mattress
Discounters Holding L.L.C. ("Holdings LLC"). The members of Holdings LLC
are Bain Capital Fund VI, L.P. ("Bain Fund VI"), BCIP Associates II
("BCIP"), BCIP Associates II-B ("BCIP-B"), BCIP Associates II-C ("BCIP-
C"), BCIP Trust Associates II ("BCIP Trust"), BCIP Trust Associates II-B
("BCIP Trust-B" and, together with BCIP, BCIP-B, BCIP-C and BCIP Trust,
the "BCIPs"), PEP Investment PTY Ltd. ("PEP"), Harvard Private Capital
Holdings, Inc. ("HPC"), Mattress Discounters Investors 1, LLC ("MDLLC 1"),
Mattress Discounters
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Investors 2, LLC ("MDLLC 2"), Mattress Discounters Investors 3, LLC ("MDLLC
3" and collectively, with MDLLC 1 and MDLLC 2, the "LLCs"), and certain
other investors who each own less than 1% of the Class A and Class L common
stock. Bain Fund VI, PEP and the BCIPs are collectively referred to as the
"Bain Funds."
(2) The members of MDLLC 1 are Chase Equity Associates, L.P. ("Chase Equity")
and Bain Capital Partners VI, L.P. ("BCP"). The members of MDLLC 2 are
affiliates of Canadian Imperial Bank of Commerce ("CIBC"), and BCP. The
members of MDLLC 3 are BancBoston Capital Inc. ("BancBoston") and BCP. BCP
is the administrative member of each LLC and beneficially owns 1% of the
equity of each LLC. By virtue of their investment in the LLCs, Chase
Equity, CIBC and BancBoston indirectly own approximately 22.5%, 11.2% and
3.7%, respectively, of the Class A common stock and the Class L common
stock.
(3) Represents shares of Class A common stock and Class L common stock
issuable upon exercise of options exercisable within 60 days from the date
of issuance.
(4) Represents shares indirectly held by the BCIPs and PEP. Mr. Bekenstein and
Mr. Krupka are Managing Directors of Bain Capital, Inc. In addition, (i)
Bain Capital, Inc., of which each of Messrs. Bekenstein and Krupka is a
Managing Director has voting and investment power with respect to the
shares indirectly owned by PEP and (ii) Messrs. Bekenstein and Krupka (or
affiliated entities) are general partners of one or more of the BCIPs.
Accordingly, each of Mr. Bekenstein and Mr. Krupka may be deemed to
beneficially own some or all of the shares indirectly owned by the BCIPs
and PEP through their interest in Holdings LLC. Each of Mr. Bekenstein and
Mr. Krupka disclaims beneficial ownership of any such shares.
(5) Represents shares indirectly held by the BCIPs. Mr. Hirshorn is a Vice
President of Bain Capital, Inc. and he (or an affiliated entity) is a
general partner of one or more of the BCIPs. Accordingly, Mr. Hirshorn may
be deemed to own some or all of the shares indirectly owned by the BCIPs
through their interest in Holdings LLC. Mr. Hirshorn disclaims beneficial
ownership of any such shares.
(6) Mr. Janower is a Vice President of Charlesbank Capital Partners, LLC which
serves as investment adviser to HPC. Accordingly, Mr. Janower may be
deemed to beneficially own some or all of the shares indirectly owned by
HPC through its interest in Holdings LLC. Mr. Janower disclaims beneficial
ownership of any such shares.
(7) Excludes 2,769,053 shares of Class A common stock and 307,673 shares of
Class L common stock indirectly owned by MDLLC 1, which shares BCP has the
right to vote. Mr. Gonzalez is a Limited Partner of Chase Capital
Partners, an affiliate of Chase Equity.
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RELATIONSHIPS AND RELATED TRANSACTIONS
Stockholders Agreement
Mattress Holding Corporation and all holders of shares of its common stock
entered into a Stockholders Agreement on August 6, 1999.
The Stockholders Agreement provides
. that the boards of directors of Mattress Holding will consist of five
members, four of whom shall be selected by Bain Capital and one of whom
shall be selected by HPC,
. for restrictions on transfer of the common stock, including provisions
providing that other holders of common stock will have rights of first
offer and participation rights in any proposed sale of common stock,
. that if Mattress Holding authorizes the issuance or sale of any common
stock to any holder of its common stock (other than as a dividend on the
outstanding common stock), Mattress Holding will first offer to sell to
the other holders of common stock their percentage of the shares of
issued equal to the percentage of common stock held by each holder of
common stock at the time of issue,
. that upon the board of directors of Mattress Holding and holders of a
majority of outstanding shares of common stock approving a sale of
substantially all the assets of Mattress Holding or substantially all the
outstanding capital stock of Mattress Holding, each holder of common
stock will consent to this sale and sell their common stock as so
requested, and
. in the event that the board of directors of Mattress Holding and holders
of a majority of outstanding shares of common stock approves an initial
public offering, each holder of common stock will be required to take all
necessary or desirable actions in connection with the consummation of the
initial public offering, including consenting to and voting for a
recapitalization, reorganization and/or exchange of their common stock
into other securities.
Registration Rights Agreement
Mattress Holding Corporation and the holders of its common stock entered
into a Registration Rights Agreement on August 6, 1999. The Registration
Rights Agreement provides that Bain Capital has the right to three long-form
demand registrations and unlimited short-form demand registrations under the
Securities Act of shares of common stock held by them.
The Registration Rights Agreement also provides for piggyback registration
rights, allowing the holders of common stock to include their common stock in
any registration. However, if the piggyback registration is an underwritten
primary registration on behalf of Mattress Holding, and the managing
underwriters advise Mattress Holding that in their opinion the aggregate
number of shares of common stock which Mattress Holding and the holders of its
common stock elect to include in the registration offering exceeds the number
which can be sold in the offering without adversely affecting the
marketability of such offering, the number of shares to be sold in such
offering shall be allocated: (1) first, the securities Mattress Holding
proposed to sell, (2) second, the shares of common stock requested to be
included in the registration, pro rata among the holders of shares on the
basis of the number of shares owned by each holder of shares, and (3) third,
other securities requested to be included in the registration.
In addition, the holders of common stock are prohibited from selling their
shares seven days prior to and within 180 days after the effectiveness of any
demand registration or piggyback registration, except as part of an
underwritten registration, unless the underwriters managing the registered
offering otherwise agree.
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Advisory Agreement
In connection with the transactions, we entered into an advisory agreement
with Bain Capital under which it provides financial advisory and consulting
services. In exchange for these services, Bain Capital is entitled to an
aggregate annual shareholder advisory fee of $1.0 million (to be adjusted upon
the occurrence of future acquisitions) and their out-of-pocket expenses. In
addition, Bain Capital will receive an aggregate fee not to exceed 1.0% of the
aggregate value of any acquisition, divestiture or financing transaction of
Mattress Holding Corporation and all its subsidiaries (including Mattress
Discounters) in which it is involved. In connection with the transactions,
Bain Capital received a fee of approximately $2.6 million. The advisory
agreement will remain in effect for an initial term of ten years, and shall be
automatically extended thereafter on a year-to-year basis, subject to
termination by Bain Capital or us upon written notice 90 days prior to the
expiration of the initial term or any extension thereof. The advisory
agreement includes customary indemnification provisions in favor of Bain
Capital.
Mattress Holding Corporation Junior Subordinated Notes
Mattress Holding Corporation junior subordinated notes were issued to
Heilig-Meyers as a non-cash portion of the consideration due to Heilig-Meyers
at closing. The principal amount of these notes were $10.0 million and $7.5
million and interest will accrue at the rates of 10% and 12% per annum,
respectively, payable quarterly. At the option of Mattress Holding, interest
may be paid in cash or by increasing the amount of principal due under these
notes, but the indenture governing the exchange notes and the senior credit
facility limits the payment of cash interest, either directly or through the
restricted payments test. The Mattress Holding junior subordinated notes are
scheduled to mature one year after the scheduled maturity of the exchange
notes. The Mattress Holding junior subordinated notes are structurally
subordinate to the exchange notes and contractually subordinated to the
indebtedness under the senior credit facility. In connection with the
settlement of the transactions, the $7.5 million 12% junior subordinated
promissory note was reduced to $5.875 million.
Sealy Supply Contract
Sealy is our exclusive supplier of name brand beds until June 30, 2004
under an agreement with Sealy Mattress Company. The equity investors or their
related parties, who are the indirect beneficial owners of approximately 93%
of Mattress Holding, are also the beneficial owners of approximately 93% of
the voting common stock of Sealy, and effectively control both companies. For
the period March 1, 1999 to January 1, 2000 purchases by the Company from
Sealy under this agreement amounted to $65.8 million.
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DESCRIPTION OF CAPITAL STOCK OF MATTRESS HOLDING CORPORATION
Set forth below is information concerning Mattress Holding Corporation's
capital stock and all material information relating to the provisions of its
Articles of Incorporation and the Stock Corporation Act of the Commonwealth of
Virginia. This description does not purport to be complete and is qualified in
its entirety by reference to the Articles of Incorporation of Mattress Holding
(a copy of which is available from Mattress Holding) and the Virginia Act. See
"Available Information."
Common Stock
The common stock of Mattress Holding consists of four classes of shares,
par value $.01 per share: Class L Common Stock, Class M Common Stock, Class A
Common Stock and Class B Common Stock. There are 4 million authorized shares
of Class L, 2 million authorized shares of Class M, 300 million authorized
shares of Class A, and 100 million authorized shares of Class B, and 1,433,333
shares of Class L and 12,900,000 shares of Class A issued and outstanding
(including management options exercisable within 60 days of the closing of the
transactions) and no shares of Class M or Class B are issued and outstanding.
In the event of any distribution (including those made in connection with a
liquidation of Mattress Holding), holders of the Class L are entitled to first
priority with respect to distributions up to an amount which would generate an
internal rate of return on the unreturned cost of a share of Class L
(initially $54 per share) of 12% per year. After this preference has been
satisfied, holders of Class L are entitled to first priority with respect to
distributions up to an amount of the unreturned cost of the Class L. After
this preference has been satisfied, holders of Class A and Class L shares
share in any remaining amounts based on the number of shares of common stock
held by each shareholder as of the applicable record date.
Upon a public offering of shares of Class A, each share of Class L shall
automatically convert into a number of shares of Class A equal to (a) 1.0,
plus (b) the quotient obtained by dividing (x) the unreturned cost of a share
of Class L plus an amount sufficient to generate an internal rate of return on
$54 of 12% per year, by (y) the price per share received by Holdings for its
Class A issued in the public offering.
The Class L and Class A vote together as a single class on all matters,
with each share of Class L and Class A entitled to one vote. The holders of
Class L and Class A are not entitled to cumulate their votes in the election
of directors, which means that holders of more than a majority of the total
outstanding Class L and Class A can elect all the directors of Mattress
Holding.
Except as described above, the holders of shares of the common stock of
Mattress Holding are not entitled to any preemptive, subscription or
conversion rights. There are no redemption or sinking fund provisions
applicable to any of the classes of Mattress Holding common stock. The holders
of shares of common stock are not subject to further calls or assessments by
Mattress Holding.
Class B is identical in all respects to Class A, and Class M is identical
in all respects to Class L, except that Class B and Class M have no right to
vote on any matter to be voted on by holders of Mattress Holding's capital
stock, other than in limited circumstances or as required by law. At any time
and from time to time, Class B shares may be converted into Class A shares and
Class M shares may be converted into Class L shares, subject to limited
restrictions, and holders who are subject to bank holding regulations may
convert Class A shares into Class B shares and Class L shares into Class M
shares.
See "Relationships and Related Transactions--Stockholders Agreement" for a
description of certain contractual rights (including contractual preemptive
rights) and obligations (including voting obligations) of holders of Mattress
Holding's common stock and warrants.
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Preferred Stock
There are 10 million shares of preferred stock, par value $.01 per share,
of Mattress Holding authorized for issuance, and no shares of preferred stock
have been issued and are outstanding. Mattress Holding's board of directors
may issue from time to time, in one or more series, shares of preferred stock,
with those rights and preferences as permitted by law.
Warrants
In connection with the issuance of the old notes, Mattress Holding also
issued to the holders thereof warrants to acquire an aggregate of 679,000
shares of Class A common stock and 75,460 shares of Class L common stock,
representing approximately 5% of Mattress Holding's fully diluted common
stock. The warrants expire on July 15, 2007.
Each warrant entitles the holder to acquire, on or after the exercisability
date (i.e. an initial public offering of our common stock) and prior to the
expiration date, 4.850 shares of Class A common stock and 0.539 shares of
Class L common stock at a price equal to $0.01 per share, subject to
adjustment from time to time upon the occurrence of changes in the Class A
common stock and Class L common stock and issuances of Class A common stock
and Class L common stock, options or convertible securities of Mattress
Holding.
Holders of warrants do not, by virtue of being warrant holders, have any
rights of stockholders of Mattress Holding, except that holders are entitled
to receive distributions in respect of any Class A common stock or Class L
common stock of Mattress Holding as though the warrants had been exercised.
Liability and Indemnification
Mattress Holding's articles of incorporation provides that Mattress Holding
shall, to the fullest extent permitted by the provisions of the Virginia Act,
as the same may be amended and supplemented, indemnify any and all persons
whom it shall have power to indemnify under said provisions from and against
any and all of the expenses, or other matters referred to in or covered by
said provisions. The Virginia Act permits a corporation to indemnify a person
party to a proceeding by reason of him being or having been a director against
liability incurred in the proceeding if he conducted himself in good faith,
and he believed that his conduct was in its best interest. This
indemnification is not exclusive of other indemnification rights arising under
any bylaw, vote of disinterested directors or shareholders or otherwise.
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DESCRIPTION OF SENIOR CREDIT FACILITY
The senior credit facility provides for revolving loans of up to $20.0
million, including letters of credit of up to $5.0 million. Subject to
restrictions, we may use the senior credit facility for our working capital
and general corporate purposes.
Repayment of Principal. Principal amounts of revolving loans under the
senior credit facility are due by August 5, 2005 and no amounts may be
reborrowed after that date.
We may repay any of our borrowings under the senior credit facility without
paying a premium or penalty, other than payment of breakage costs and
reimbursement of the lenders' actual re-employment costs provided the
repayments are in an aggregate principal amount of $1,000,000 or a whole
multiple thereof.
Also, it is mandatory that we reduce commitments under the senior credit
facility out of net cash proceeds we receive from the following events:
. 100% of the net proceeds of any incurrence of indebtedness subject to
exceptions
. 100% of sales of assets, except for sales in the ordinary course of
business, intercompany sales, including stock, and other sales below a
specified threshold and subject to exceptions, including the right to
reinvest the proceeds to acquire assets useful in our business
. 50% of permitted equity issuances, with a smaller amount of commitment
required to be reduced when the leverage ratio is 3.5:1 or less, subject
to exceptions
We are also required to repay outstanding revolving loans with 50% of
annual excess cash flow with a reduced amount required to be repaid when the
leverage ratio is 3.5:1 or less, but these repayments do not result in
corresponding commitment reductions. Excess cash flow is defined in the senior
credit facility and measures the difference between the cash we receive and
various charges, expenses and cash payments we make.
Security; Guaranty. Each of our direct and indirect domestic subsidiaries
and Mattress Holding (and, if at some point in the future there are no adverse
tax consequences, foreign subsidiaries), guarantee our obligations under the
senior credit facility. The following secures our obligations under the senior
credit facility and each of the guarantors under the guarantee of the senior
credit facility:
. a security interest in substantially all of our assets and the assets of
the subsidiary guarantors
. a pledge of all of our capital stock and the capital stock of each our
direct and indirect domestic subsidiaries
. a pledge of 65% of the capital stock of each of our direct foreign
subsidiaries.
Interest. At our option, the interest rates under the senior credit
facility will be either: (1) the base rate, which is the higher of the prime
lending rate, 1% in excess of the secondary market rate for three-month
depository certificates or 0.5% in excess of the Federal funds effective rate,
plus a margin (currently 2%) or (2) Eurodollar rate plus a margin (currently
3%). Interest is payable quarterly or on the date of the repayment of
principal, if shorter. The margins of the loans under the senior credit
facility was initially set and will vary according to a pricing grid based
upon the achievement of performance targets and reduction of debt levels.
The pricing grid provides that:
. if the consolidated total debt ratio is greater than 4 to 1, then the
margin for the Eurodollar rate shall be 3%, the margin for the base rate
shall be 2% and the commitment fee shall be 0.5%,
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. if the consolidated total debt ratio is less than or equal to 4 to 1,
and greater than 3 to 1, then the margin for the Eurodollar rate shall
be 2.75%, the margin for the base rate shall be 1.75% and the commitment
fee shall be 0.5%, and
. if the consolidated total debt ratio is less than or equal to 3 to 1,
then the margin for the Eurodollar rate shall be 2.5%, the margin for
the base rate shall be 1.5% and the commitment fee shall be 0.375%.
For the purposes of the pricing grid, the consolidated total debt ratio is,
as of the last day of any period, the ratio of consolidated total debt to
consolidated EBITDA for that period.
Fees. We paid some fees in connection with the senior credit facility,
including: (1) letter of fees; and (2) commitment fees. Commitment fees are
payable at a rate per annum of 0.5% on the undrawn amounts of the revolving
loans but may reduce depending upon the achievement of performance targets.
Covenants. The senior credit facility requires that we meet financial tests
which include a maximum total debt ratio and a minimum interest coverage
ratio. The senior credit facility also contains covenants which, among other
things, restrict our ability, subject to exceptions, to do the following:
. incur liens
. engage in transactions with affiliates
. prepay subordinated debt and the notes
. incur indebtedness
. declare dividends or redeem or repurchase capital stock
. make loans and investments
. engage in mergers, acquisitions, consolidations and asset sales
. make capital expenditures.
The senior credit facility also requires that we satisfy customary
affirmative covenants and make customary indemnifications to our lenders and
the administrative agent under the senior credit facility.
Events of Default. The senior credit facility contains customary events of
default, including, without limitation, payment defaults, material inaccuracy
of representations and warranties, covenant defaults, events of bankruptcy and
insolvency, ERISA violations, material judgment defaults, cross-defaults to
other indebtedness and a change in control.
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DESCRIPTION OF THE NOTES
You can find the definitions of some of the capitalized terms used in this
description under the subheading "Definitions". In this description, the words
"we," "us," and "our" refer only to Mattress Discounters Corporation and not
to any of our subsidiaries.
We will issue the exchange notes under an indenture dated August 6, 1999
among Mattress Discounters Corporation, our subsidiary guarantors and State
Street Bank and Trust Company, as trustee. The terms of the exchange notes
include those stated in the indenture and those made part of the indenture by
reference to the Trust Indenture Act of 1939, as amended.
The following description is a summary of the significant provisions of the
indenture. It does not restate that agreement in its entirety, and sections of
this description which correspond to similar sections of the indenture have
been redrafted for clarity in this description in terms substantively the same
as those of indenture. We urge you to read the indenture because it, and not
this description, defines your rights as a holder of these exchange notes.
Copies of the indenture are available as set forth in the section entitled
"Additional Information."
General
The exchange notes will be issued only in registered form, without coupons,
in denominations of $1,000 and integral multiples of $1,000. We have appointed
the trustee to serve as registrar and paying agent under the indenture. No
service charge will be made for any registration of transfer or exchange of
the notes, except for any tax or other governmental charge that may be imposed
in connection therewith.
Ranking
The exchange notes will be senior unsecured obligations of Mattress
Discounters Corporation. The exchange notes will rank equally with all our
senior unsecured indebtedness, senior in right of payment to all our
subordinated indebtedness and effectively subordinated to our secured
indebtedness to the extent of the value of the assets securing such
indebtedness. At January 1, 2000, there were no amounts outstanding under the
senior credit facility. Unused commitments under the senior credit facility
and the rollover of outstanding letters of credit total $19.9 million. All
debt incurred under the senior credit facility will be secured indebtedness of
Mattress Discounters Corporation and our subsidiaries.
Maturity, Interest and Principal of the Notes
We will issue the exchange notes initially in the principal amount of
$140.0 million. We will issue the exchange notes in denominations of $1,000
and any integral multiple of $1,000. The notes will mature on July 15, 2007.
Subject to our compliance with the covenant described under the caption "--
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," we are
permitted to issue more notes under the indenture in an unlimited principal
amount. Any additional notes subsequently issued will be treated as issued and
outstanding notes for all purposes of the indenture and this "Description of
the Notes," unless the context indicates otherwise.
Cash interest on the exchange notes will accrue at a rate of 12 5/8% per
annum and will be payable semi-annually in arrears on each January 15 and July
15, commencing January 15 , 2000, to the holders of record of notes at the
close of business on January 1 and July 1, respectively, immediately preceding
the interest payment date. Cash interest will accrue from the most recent
interest payment date to which interest has been paid or, if no interest has
been paid, from August 6, 1999. Interest will be computed on the basis of a
360-day year of twelve 30-day months.
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Optional Redemption
On or after July 15, 2004 we may redeem all or a part of these exchange
notes. The exchange notes will be redeemed during the 12-month period
beginning on July 15 of the years indicated below at the redemption prices
expressed as a percentage of principal amount plus accrued and unpaid
interest:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2004............................................................ 106.313%
2005............................................................ 103.156%
2006 and thereafter............................................. 100.000%
</TABLE>
At any time prior to July 15, 2002, we may redeem in the aggregate up to
35% of the aggregate principal amount of the exchange notes originally issued,
including the original principal amount of any Additional Notes, with the net
cash proceeds of one or more Equity Offerings. The redemption price will be in
cash equal to 112.625% of the principal amount of the exchange notes, plus
accrued and unpaid interest, if any, to the date of redemption. We may only
make a redemption described above if: (1) at least 65% of the aggregate
principal amount of the exchange notes originally issued, including any
additional notes, remain outstanding immediately after giving effect to a
redemption, and (2) the redemption occurs within 60 days after the date of the
closing of the relevant Equity Offering.
At any time prior to July 15, 2004, we may redeem all or a part of these
exchange notes upon a Change of Control. We must give not less than 30 nor
more than 60 days prior notice mailed by first-class mail to each exchange
note holder's registered address. The redemption price will be equal to 100%
of the principal amount plus the Applicable Premium, and accrued and unpaid
interest, if any, to, the date of redemption.
Selection and Notice of Redemption
If less than all of the exchange notes are to be redeemed under an optional
redemption, the trustee will select the exchange notes to be redeemed in
compliance with the requirements of the principal national securities
exchange, if any, on which the exchange notes are listed. If the exchange
notes are not so listed, the trustee will select the exchange notes to be
redeemed on a pro rata basis, by lot or by another method the trustee shall
deem fair and appropriate.
No exchange notes of $1,000 or less shall be redeemed in part. If a partial
redemption is made with the net cash proceeds of an equity offering, selection
of the exchange notes for redemption shall be made by the trustee on a pro
rata basis or on as nearly a pro rata basis as is practicable, subject to the
procedures of The Depository Trust Company, unless this method is otherwise
prohibited. Notice of redemption shall be mailed by first-class mail at least
30 but not more than 60 days before the redemption date to each holder of
exchange notes to be redeemed at its registered address. A new exchange note
in principal amount equal to the unredeemed portion of the original exchange
note will be issued in the name of the holder of the exchange note upon
cancellation of the original exchange note. On and after the redemption date,
interest ceases to accrue on exchange notes or portions of them called for
redemption.
Note Guarantees
Our subsidiary guarantees will jointly and severally guarantee our
obligations under these exchange notes. The guarantees will be senior
unsecured obligations of the guarantors. The obligations of each guarantor
will rank equally with all senior unsecured debt of that subsidiary guarantor,
senior in right of payment to all subordinated debt of that subsidiary
guarantor and effectively subordinated to that subsidiary guarantor's secured
debt to the extent of the value of the
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assets securing that debt. The subsidiary guarantors are also guaranteeing all
our obligations under the senior credit facility. Each subsidiary guarantor is
also granting a security interest in all or substantially all of its assets to
secure the obligations under the senior credit facility. The obligations of
each guarantor are limited to the maximum amount which, after giving effect to
all their other contingent and fixed liabilities and to any collections from
or payments made by or on behalf of any other guarantor in respect of its
obligations under the guarantee or its contribution obligations under the
indenture, will result in the obligations of that guarantor not constituting a
fraudulent conveyance or fraudulent transfer under Federal or state law. Each
subsidiary guarantor that makes a payment or distribution under a guarantee
shall be entitled to a contribution from each other subsidiary guarantor in a
pro rata amount, based on the net assets of each guarantor determined in
accordance with GAAP.
The indenture provides that if, subject to the requirements of the first
paragraph under "--Covenants--Merger, Consolidation, or Sale of Assets," all
or substantially all of the assets of any guarantor or all of the Equity
Interests of any guarantor are sold, including by issuance or otherwise, by us
in a transaction constituting an Asset Sale, and if
(x) the Net Cash Proceeds from such Asset Sale are used in accordance
with the covenant described under "Covenants--Disposition of Proceeds of
Asset Sales" or
(y) we deliver to the trustee an officers' certificate to the effect
that the Net Cash Proceeds from such Asset Sale shall be used in accordance
with the covenant described under "Covenants--Disposition of Proceeds of
Asset Sales" and within the time limits specified under that covenant,
then such guarantor (in the event of a sale or other disposition of all of the
Equity Interests of such guarantor) or the corporation acquiring such assets
(in the event of a sale or other disposition of all or substantially all of
the assets of such guarantor) shall be released and discharged of its
guarantee obligations in respect of the indenture and the notes. The note
guarantees will also be subject to release as described under "--Covenants--
Limitation on Guarantees by Restricted Subsidiaries."
Any guarantor that is designated an unrestricted subsidiary under the terms
of the indenture shall upon such designation be released and discharged of its
guarantee obligations in respect of the indenture and the notes.
Offer to Purchase upon Change of Control
If a Change of Control occurs, each holder of exchange notes will have the
right to require us to repurchase all or any part in amounts of $1,000 or an
integral multiple of that holder's exchange notes (the "Change of Control
Offer"). Upon a Change of Control Offer, the offer price will be in cash equal
to 101% of the aggregate principal amount of exchange notes plus accrued and
unpaid interest on the exchange notes, if any, to the date of purchase. Within
30 days following any Change of Control, we will mail a notice to each holder
describing the transaction or transactions that constitute the Change of
Control and offering to repurchase exchange notes on the date specified in the
notice, which date shall be no earlier than 30 days and no later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date"),
under the procedures required by the indenture and described in the notice. We
will comply with the requirements of Rule 14e-1 under the Exchange Act and any
other securities laws and regulations under the Exchange Act to the extent
these laws and regulations are applicable in connection with the repurchase of
the exchange notes as a result of a Change of Control.
On the Change of Control Payment Date, we will, to the extent lawful,
(1) accept for payment all exchange notes or portions of exchange notes
properly tendered under the Change of Control Offer,
(2) deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all portions of exchange notes so tendered,
and
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(3) deliver or cause to be delivered to the trustee the exchange notes
so accepted together with an officers' certificate stating the aggregate
principal amount of the exchange notes or portions of exchange notes being
purchased by us.
The paying agent will promptly mail each holder of exchange notes so
tendered the Change of Control Payment for those exchange notes. The trustee
will promptly authenticate and mail, or cause to be transferred by book entry,
to each holder a new exchange note equal in principal amount to any
unpurchased portion of the exchange notes surrendered, if any; provided that
each new exchange note will be in a principal amount of $1,000 or an integral
multiple of $1,000. We will publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date.
The senior credit facility restricts our ability to prepay debt, including
the notes, and also provides that particular change of control events with
respect to us would constitute a default under the agreements governing the
senior debt. In the event a Change of Control occurs at a time when we are
prohibited from purchasing exchange notes, we could seek the consent of our
lenders under the senior credit facility to the purchase of exchange notes or
could attempt to refinance the borrowings under the senior credit facility. If
we do not obtain a consent or repay our borrowings, we will remain prohibited
from purchasing exchange notes. In such case, our failure to purchase tendered
exchange notes would constitute an event of Default under the indenture which
would, in turn, constitute a default under the senior credit facility.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the indenture are applicable. Except as
described above with respect to a Change of Control, the indenture does not
contain provisions that permit the holders of the exchange notes to require us
to repurchase or redeem the exchange notes in the event of a takeover,
recapitalization or similar transaction.
We will not be required to make a Change of Control Offer upon a Change of
Control
(1) if a third party makes the Change of Control Offer in the manner, at
the times and otherwise in compliance with the requirements set forth in
the indenture applicable to a Change of Control Offer made by us and
purchases all exchange notes validly tendered and not withdrawn under the
Change of Control Offer, or
(2) we exercise our option to purchase all the exchange notes upon a
Change of Control as described above under the caption "--Optional
Redemption."
Covenants
The indenture contains, among others, the following covenants:
Restricted Payments. We will not, and will not permit any of our restricted
subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of our Equity Interests including any payment in
connection with any merger or consolidation involving, or to the direct or
indirect holders of our Equity Interests in their capacity as such other
than dividends or distributions payable in our Qualified Capital Stock;
(2) purchase, redeem or otherwise acquire or retire for value including
in connection with any merger or consolidation, any of our Equity Interests
or any of our direct or indirect parent;
(3) purchase, repurchase, redeem, defease or otherwise acquire or retire
for value, prior to scheduled maturity, scheduled repayment or scheduled
sinking fund payment, any Subordinated Indebtedness; or
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(4) make any Restricted Investment
(all such payments and other actions described in clauses (1) through (4)
above being collectively referred to as "Restricted Payments"), unless, at the
time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(2) We would, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been made at the
beginning of the applicable Four-Quarter Period, have been permitted to
incur at least $1.00 of additional Indebtedness pursuant to the
Consolidated Fixed Charge Coverage Ratio test described in the first
paragraph of the covenant described below under caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by us and any of our restricted subsidiaries
after the date of the indenture (excluding Restricted Payments permitted by
clauses (2)(a), (3), (4), (6), (7), (8) and (9) of the next succeeding
paragraph), is less than the sum, without duplication, of
(a) 50% of our Consolidated Net Income for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the date of the indenture to the end of our most
recently ended fiscal quarter for which internal financial statements
are available at the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit, less 100% of such
deficit), plus
(b) 100% of the aggregate net proceeds (including the fair market
value of property other than cash as determined in good faith by our
board of directors that would constitute Marketable Securities or a
Permitted Business) received by us since the date of the indenture as a
contribution to our common equity capital (other than from a subsidiary
or that were financed with loans from us or any restricted subsidiary)
or from the issue or sale of our Qualified Capital Stock (including
Capital Stock issued upon the conversion of convertible Indebtedness or
in exchange for outstanding Indebtedness) (excluding any net proceeds
from an Equity Offering or capital contribution to the extent used to
redeem notes in accordance with the optional redemption provisions of
the notes) or from the issue or sale of our Disqualified Stock or debt
securities that have been converted into Qualified Capital Stock (other
than Qualified Capital Stock (or Disqualified Stock or convertible debt
securities) sold to our subsidiary), plus
(c) 100% of the aggregate net proceeds (including the fair market
value of property other than cash that would constitute Marketable
Securities or a Permitted Business) of any
(A) sale or other disposition of Restricted Investments made by
us and any of our Restricted Subsidiaries or
(B) dividend from, or the sale of the stock of, an unrestricted
subsidiary.
Notwithstanding the foregoing, the provisions described in the immediately
preceding paragraph will not prohibit:
(1) the payment of any dividend or the consummation of any irrevocable
redemption within 60 days after the date of declaration of such dividend or
notice of such redemption if the dividend or payment of the redemption
price, as the case may be, would have been permitted on the date of
declaration or notice;
(2) if no Default or Event of Default shall have occurred and be
continuing or shall occur as a consequence thereof, the acquisition of any
shares of our Capital Stock (the "Retired Capital Stock") or Subordinated
Indebtedness, either
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(a) solely in exchange for shares of our Qualified Capital Stock
(the "Refunding Capital Stock"), or
(b) through the application of the net proceeds of a substantially
concurrent sale for cash (other than to our Subsidiary) of shares of
our Qualified Capital Stock.
and, in the case of subclause (a) of this clause (2), if immediately prior
to the retirement of the Retired Capital Stock the declaration and payment
of dividends thereon was permitted under clause (3) of this paragraph, the
declaration and payment of dividends on the Refunding Capital Stock in an
aggregate amount per year no greater than the aggregate amount of dividends
per annum that was declarable and payable on such Retired Capital Stock
immediately prior to such retirement; provided that at the time of the
declaration of any such dividends on the Refunding Capital Stock, no
Default or Event of Default shall have occurred and be continuing or would
occur as a consequence thereof;
(3) if no Default or Event of Default shall have occurred and be
continuing or shall occur as a consequence thereof, any purchase,
repurchase, redemption, defeasance or other acquisition or retirement for
value of Subordinated Indebtedness, either
(a) solely in exchange for Subordinated Indebtedness which is
permitted to be incurred pursuant to the covenant described under
"Incurrence of Indebtedness and Issuance of Preferred Stock"; or
(b) through the application of the net proceeds of a substantially
current sale for cash (other than to our subsidiary) of our
Subordinated Indebtedness permitted to be incurred pursuant to the
covenant described under "'Incurrence of Indebtedness and Issuance of
Preferred Stock";
(4) if no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof, the declaration and
payment of dividends to holders of any class or series of Designated
Preferred Stock (other than Disqualified Stock) issued after the date of
the indenture (including, without limitation, the declaration and payment
of dividends on Refunding Capital Stock in excess of the dividends
declarable and payable thereon pursuant to clause (2) of this paragraph).
However, at the time of such issuance, we, after giving effect to such
issuance on a pro forma basis, must have had a Consolidated Fixed Charge
Coverage Ratio of at least 2.0 to 1.0 for the most recent Four-Quarter
Period;
(5) payments to Mattress Holding for the purpose of permitting, and in
an amount equal to the amount required to permit, Mattress Holding to
redeem or repurchase Mattress Holding's common equity or options in respect
thereof, in each case in connection with the repurchase provisions of
employee stock option or stock purchase agreements or other agreements to
compensate management employees. However, all redemptions or repurchases
under this clause (5) must not exceed $7.5 million (which amount shall be
increased by the amount of any net cash proceeds received from the sale
since the date of the indenture of Equity Interests (other than
Disqualified Stock) to our members' management team that have not otherwise
been applied to the payment of Restricted Payments pursuant to the terms of
the preceding paragraph (c) and by the cash proceeds of any "key-man" life
insurance policies which are used to make such redemptions or repurchases)
in the aggregate since the date of the indenture. The cancellation of
indebtedness owing to us from members of our management or any of our
restricted subsidiaries in connection with such a repurchase of Capital
Stock of Mattress Holding will not be deemed to constitute a Restricted
Payment under the indenture;
(6) the making of distributions, loans or advances to Mattress Holding
in an amount not to exceed $750,000 per annum in order to permit Mattress
Holding to pay the ordinary operating expenses of Mattress Holding
(including, without limitation, directors' fees, indemnification
obligations, professional fees and expenses, but excluding any payments on
or repurchases of the 12% junior subordinated promissory note of Mattress
Holding issued to Heilig-Meyers);
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(7) payments to Mattress Holding in respect of taxes under the terms of
a tax allocation agreement among Mattress Holding, Mattress Discounters and
our subsidiaries as in effect on the date of the indenture and as amended
from time to time pursuant to amendments that do not increase the amounts
payable by us or any of our restricted subsidiaries thereunder;
(8) repurchases of Capital Stock deemed to occur upon the exercise of
stock options if such Capital Stock represents a portion of the exercise
price thereof;
(9) payments in connection with the transactions made on the date of the
indenture;
(10) if no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof and we would be
permitted to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) in compliance with the covenant described below
under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock," other Restricted Payments in an aggregate amount not to exceed $5.0
million since the date of the indenture; and
(11) if no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof, payments to Mattress
Holding to allow Mattress Holding to contemporaneously redeem, repurchase
or otherwise retire the Heilig-Meyers' junior subordinated promissory note.
However, immediately after giving effect to such payment on a pro forma
basis, we must have had a Consolidated Fixed Charge Coverage Ratio of at
least 2.75 to 1.0.
In determining the aggregate amount of Restricted Payments made subsequent
to the date of the indenture in accordance with clause (c) of the immediately
preceding paragraph, (a) amounts expended in accordance with clauses (1),
(2)(b), (5), (10) and (11) shall be included in such calculation. However,
expenditures made under clause (4) shall not be included to the extent of the
cash proceeds received by us from any "key man" life insurance policies and
(b) amounts expended pursuant to clauses (2)(a), (3), (4), (6), (7), (8) and
(9) shall be excluded from this calculation.
The board of directors may designate any restricted subsidiary to be an
unrestricted subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by us and
our restricted subsidiaries (except to the extent repaid in cash) in the
subsidiary so designated will be deemed to be Restricted Payments at the time
of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Investments in an amount equal to the
fair market value of such Investments at the time of such designation. Such
designation will only be permitted if such Restricted Payment would be
permitted at such time and if such restricted subsidiary otherwise meets the
definition of an unrestricted subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by us or our restricted
subsidiary, as the case may be, under the Restricted Payment.
Incurrence of Indebtedness and Issuance of Preferred Stock. We will not,
and will not permit any of our restricted subsidiaries to, directly or
indirectly, create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any indebtedness. In addition we will not issue any
Disqualified Stock and will not permit any of our restricted subsidiaries to
issue any shares of preferred stock. However, we and any restricted subsidiary
that is a guarantor may incur Indebtedness (including Acquired Indebtedness)
and we may issue shares of Disqualified Stock if
(1) no Default or Event of Default shall have occurred and be continuing
at the time or as a consequence of the incurrence of any such Indebtedness
or the issuance of any such Disqualified Stock and
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(2) the Consolidated Fixed Charge Coverage Ratio would have been at
least 2.0 to 1.0, determined on a pro forma basis (including the pro forma
application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock had been issued,
at the beginning of such Four-Quarter Period.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Indebtedness"):
(1) the exchange notes (other than additional notes) and the guarantees
(other than in respect of additional notes) in an aggregate principal
amount not to exceed $140.0 million;
(2) Indebtedness incurred pursuant to the senior credit facility in an
aggregate principal amount at any time outstanding (with letters of credit
being deemed to have a principal amount equal to our maximum potential
liability and our subsidiaries thereunder) not to exceed $20.0 million. The
amount of Indebtedness permitted to be incurred pursuant to the senior
credit facility in accordance with this clause (2) shall be in addition to
any Indebtedness permitted to be incurred pursuant to the senior credit
facility in reliance on, and in accordance with, clauses (7), (9) and (15)
below or pursuant to the first paragraph hereof;
(3) our other Indebtedness and that of our subsidiaries outstanding on
the date of the Indenture for so long as such Indebtedness remains
outstanding;
(4) interest swap obligations covering our Indebtedness. However, any
Indebtedness to which any interest swap obligations correspond must
otherwise be permitted to be incurred under the indenture, and that such
interest swap obligations are entered into, in our judgment, to protect us
from fluctuation in interest rates on its outstanding Indebtedness;
(5) our Indebtedness under any currency agreements;
(6) the incurrence by us or any of our restricted subsidiaries of
intercompany Indebtedness between or among us and any of our restricted
subsidiaries. However,
(a) if we are the obligor on such Indebtedness, such Indebtedness
must be expressly subordinated to the prior payment in full in cash of
all Obligations with respect to the exchange notes and
(b) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than us
or our restricted subsidiary thereof and any sale or other transfer of
any such Indebtedness to a Person that is not either us or our
restricted subsidiary thereof shall be deemed, in each case, to
constitute an incurrence of such Indebtedness by us or such restricted
subsidiary, as the case may be, that was not permitted by this clause
(6);
(7) with respect to any incurrence prior to February 28, 2001.
(a) Indebtedness incurred by us or any of our restricted
subsidiaries that is a guarantor to consummate an Asset Acquisition of
a Person engaged in, or assets consisting of, a Permitted Business or
(b) the incurrence of Acquired Indebtedness by us or any of our
restricted subsidiaries in respect of a Person engaged in a permitted
business in the aggregate principal amount for (a) and (b) above not to
exceed $15.0 million, in each case so long as immediately after giving
effect to such incurrence on a pro forma basis, we would have had a
Consolidated Fixed Charge Coverage Ratio that is not less than our
Consolidated Fixed Charge Coverage Ratio immediately prior to such
incurrence. In no event can our Consolidated Fixed Charge Coverage
Ratio immediately after giving effect to such incurrence on a pro forma
basis be less than our Consolidated Fixed Charge Coverage Ratio on the
date of the indenture. However, if the Consolidated EBITDA relating to
any such Asset Acquisition for the most
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recently ended four fiscal quarters prior to the consummation of such
Asset Acquisition is in excess of $8.0 million of Consolidated EBITDA
and our Consolidated Fixed Charge Coverage Ratio immediately after
giving effect to such incurrence on a pro forma basis would have been
greater than 1.8 to 1.0, then the $15.0 million limitation above shall
not apply to such incurrence. When calculating the Consolidated Fixed
Charge Coverage Ratio for purposes of this clause (7) only, Pro Forma
Cost Savings shall only mean those cost savings that are directly
attributable to such Asset Acquisition and that are calculated on a
basis that is consistent with Regulation S-X under the Securities Act.
(8) guarantees by us and the guarantors of each other's Indebtedness.
However such Indebtedness must be permitted to be incurred under the
indenture;
(9) Indebtedness (including Capitalized Lease Obligations) incurred by
us or any of our restricted subsidiaries to finance the purchase, lease or
improvement of property (real or personal) or equipment (whether through
the direct purchase of assets or the Capital Stock of any Person owning
such assets) in an aggregate principal amount outstanding not to exceed the
greater of (a) $5.0 million or (b) 10% of Total Tangible Assets at the time
of any incurrence thereof (including any Refinancing Indebtedness with
respect thereto) (which amount may, but need not, be incurred in whole or
in part under the senior credit facility);
(10) Indebtedness incurred by us or any of our restricted subsidiaries
constituting reimbursement obligations with respect to letters of credit
issued in the ordinary course of business, including, without limitation,
letters of credit in respect of workers' compensation claims or self-
insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims;
(11) Indebtedness arising from agreements by us or a restricted
subsidiary providing for indemnification, adjustment of purchase price,
earn out or other similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or a restricted
subsidiary, other than guarantees of Indebtedness incurred by any Person
acquiring all or any portion of such business, assets or restricted
subsidiary for the purpose of financing such acquisition. The maximum
assumable liability in respect of all such Indebtedness shall at no time
exceed the gross proceeds actually received by us and our restricted
subsidiaries in connection with such disposition;
(12) obligations in respect of performance and surety bonds and
completion guarantees provided by us or any restricted subsidiary in the
ordinary course of business;
(13) any refinancing, modification, replacement, renewal, restatement,
refunding, deferral, extension, substitution, supplement, reissuance or
resale (collectively, "Refinancings" and the term "Refinanced" shall have a
correlative meaning) of existing or future Indebtedness (other than
Indebtedness incurred pursuant to clauses (2), (4), (5), (6), (8), (9),
(10), (11), (12), (14) and (15) of this paragraph), including any
additional Indebtedness incurred to pay interest or premiums required by
the instruments governing such existing or future Indebtedness as in effect
at the time of issuance thereof ("Required Premiums") and fees in
connection therewith ("Refinancing Indebtedness"). However, any such event
must not
(a) directly or indirectly result in an increase in the aggregate
principal amount of our and our restricted subsidiaries' Permitted
Indebtedness (except to the extent such increase is a result of a
simultaneous incurrence of additional Indebtedness (A) to pay Required
Premiums and related fees or (B) otherwise permitted to be incurred
under the indenture) and
(b) create Indebtedness with a Weighted Average Life to Maturity at
the time such Indebtedness is incurred that is less than the Weighted
Average Life to Maturity at such time of the Indebtedness being
refinanced, modified, replaced, renewed, restated, refunded, deferred,
extended, substituted, supplemented, reissued or resold;
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provided, that
(x) Refinancing Indebtedness shall not include
(1) Indebtedness of a restricted subsidiary that is not a
guarantor that Refinances Indebtedness of ours, or
(2) Indebtedness of us or a restricted subsidiary that Refinances
Indebtedness of an unrestricted subsidiary,
(y) if the Indebtedness being Refinanced is Subordinated
Indebtedness, then such Refinancing Indebtedness shall be at least as
subordinated in right of payment to the notes as the Indebtedness being
Refinanced, and
(z) Refinancing Indebtedness shall be secured only by assets of a
similar type and in a similar amount to those that secured the
Indebtedness so refinanced;
(14) the incurrence by a Securitization Entity of Indebtedness in a
Qualified Securitization Transaction that is Non-Recourse Debt with respect
to us and our other restricted subsidiaries (except for Standard
Securitization Undertakings); and
(15) the incurrence of additional Indebtedness by us or any of our
restricted subsidiaries and/or the issuance of permitted domestic
subsidiary Preferred Stock by our U.S. subsidiaries, which together with
the aggregate principal amount of other indebtedness incurred pursuant to
this clause (15) and the aggregate liquidation value of all other permitted
domestic subsidiary Preferred Stock issued pursuant to this clause (15),
does not exceed $10.0 million at any one time outstanding (which amount, in
the case of Indebtedness, may, but need not, be incurred in whole or in
part under the senior credit facility).
Notwithstanding the prior two paragraphs, neither we nor any of the
guarantors may incur any Indebtedness that is subordinated to any other
Indebtedness unless such Indebtedness is expressly subordinated in right of
payment to the notes and/or the guarantees, as the case may be.
For purposes of determining compliance with this covenant, in the event
that an item of indebtedness meets the criteria of more than one of the
categories of Permitted Indebtedness described in clauses (1) through (15)
above or is entitled to be incurred pursuant to the first paragraph of this
covenant, we shall, in our sole discretion, classify such item of Indebtedness
in any manner that complies with this covenant. In addition, we may, at any
time, change the classification of an item of Indebtedness (or any portion
thereof) to any other clause or to the first paragraph hereof provided that we
would be permitted to incur such item of Indebtedness (or portion thereof)
pursuant to such other clause or the first paragraph hereof, as the case may
be, at such time of reclassification. Accrual of interest, accretion or
amortization of original issue discount, the payment of interest on any
Indebtedness in the form of additional Indebtedness with the same terms and
the payment of dividends on Disqualified Stock in the form of additional
shares of the same class of Disqualified Stock will not be deemed to be an
incurrence of Indebtedness or an issuance of Disqualified Stock for purposes
of this covenant; provided, in each such case, that the amount thereof is
included in our Consolidated Fixed Charges as accrued. For purposes of
determining whether the requirement in clause (2) of the first paragraph
hereof has been met, all Indebtedness incurred or permitted to be incurred
under a revolving facility shall be deemed to have been incurred on the date
such facility becomes available and not on the date of any borrowing under
such facility.
Liens. We will not, and will not permit any of our restricted subsidiaries
to, create, incur, assume or suffer to exist any Liens of any kind against or
upon any of our property or assets, or any proceeds therefrom, unless (1) in
the case of Liens securing Indebtedness that is expressly subordinate or
junior in right of payment to the exchange notes, the notes are secured by a
Lien on such property, assets
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or proceeds that is senior in priority to such Liens and (2) in all other
cases, the notes are equally and ratably secured, except for
(A) Liens existing as of the date of the indenture and any extensions,
renewals or replacements thereof,
(B) Liens securing (x) indebtedness incurred under the senior credit
facility and (y) Hedging Obligations so long as the only assets securing
such hedging obligations are assets securing the senior credit facility,
(C) Liens securing the notes and the note guarantees,
(D) Liens securing our intercompany indebtedness or of any of our
restricted subsidiaries on assets of any of our subsidiaries,
(E) Liens securing indebtedness that is incurred to refinance
indebtedness that was secured by a Lien permitted under the indenture that
was incurred in accordance with the provisions of the indenture; provided,
however, that such Liens do not extend to or cover any of our property or
assets or any of our restricted subsidiaries not securing the Indebtedness
so refinanced, and
(F) Permitted Liens.
Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. We will not, and will not permit any of our restricted
subsidiaries to, directly or indirectly, create or otherwise cause or permit
to exist or become effective any consensual encumbrance or consensual
restriction on the ability of any restricted subsidiary to
(a) pay dividends or make any other distributions on or in respect of
our capital stock,
(b) make loans or advances or to pay any Indebtedness or other
obligation owed to us or any of our restricted subsidiaries or
(c) transfer any of its property or assets to us or any of our
restricted subsidiaries,
except for such encumbrances or restrictions existing under or by reason of:
(1) applicable law;
(2) the indenture;
(3) non-assignment provisions of any contract or any lease entered into
in the ordinary course of business;
(4) any instrument governing Acquired Indebtedness, which encumbrance or
restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person or the properties or assets of the Person
so acquired;
(5) agreements existing on the date of the indenture (including, without
limitation, the senior credit facility);
(6) restrictions on the transfer of assets subject to any Lien permitted
under the indenture imposed by the holder of such Lien;
(7) restrictions imposed by any agreement to sell assets or capital
stock permitted under the indenture to any Person pending the closing of
such sale;
(8) any agreement or instrument governing capital stock of any Person
that is in effect on the date such Person is acquired by us or any of our
restricted subsidiaries;
(9) any Purchase Money Note, or other indebtedness or other contractual
requirements of a Securitization Entity in connection with a Qualified
Securitization Transaction; provided that such restrictions apply only to
such Securitization Entity;
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(10) indebtedness incurred after the date of the indenture in accordance
with the terms of the indenture; provided that the restrictions contained
in the agreements, governing such new indebtedness are ordinary and
customary with respect to the type of indebtedness being incurred (under
the relevant circumstances);
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
(12) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions on the property so acquired of
the nature described in clause (c) above;
(13) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements and other similar agreements
entered into in the ordinary course of business;
(14) any encumbrances or restrictions imposed by any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings of the contracts, instruments or obligations
referred to in clauses (1) through (13) above; provided that such
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are, in the good faith judgment of
our board of directors, no more restrictive with respect to such dividend
and other payment restrictions than those contained in the dividend or
other payment restrictions prior to such amendment, modification,
restatement, renewal, increase, supplement, refunding, replacement or
refinancing.
Disposition of Proceeds of Asset Sales. We will not, and will not permit
any of our Restricted Subsidiaries to, consummate an Asset Sale unless:
(1) we or our applicable restricted subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the
fair market value of the assets sold or otherwise disposed of (as
determined in good faith by our board of directors);
(2) at least 75% of the consideration received by us or any of our
restricted subsidiaries, as the case may be, from such Asset Sale shall be
cash or Cash Equivalents; provided that the amount of
(a) any liabilities (as shown on our or our restricted subsidiary's
most recent balance sheet) of our or any such restricted subsidiary
(other than liabilities that are by their terms subordinated to the
notes) that are assumed by the transferee of any such assets,
(b) any notes or other obligations received by us or any of our
restricted subsidiaries from such transferee that are immediately
converted by us or any of our restricted subsidiaries into cash (to the
extent of the cash received); and
(c) any Designated Noncash Consideration received by us or any of
our restricted subsidiaries in such Asset Sale having an aggregate fair
market value, taken together with all other Designated Noncash
Consideration received pursuant to this clause (c) that is at that time
outstanding, not to exceed 10% of Total Assets at the time of the
receipt of such Designated Noncash Consideration (with the fair market
value of each item of Designated Noncash Consideration being measured
by our board of directors in good faith at the time received and
without giving effect to subsequent changes in value)
shall be deemed to be cash for the purposes of this provision; and
(3) upon the consummation of an Asset Sale, we shall apply, or cause
such restricted subsidiary to apply, the Net Cash Proceeds relating to such
Asset Sale within 365 days of receipt thereof either
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(A) to repay any Indebtedness of ours or a restricted subsidiary
(other than Disqualified Stock or Subordinated Indebtedness) and, in
the case of any indebtedness under any revolving credit facility,
effect a commitment reduction under such revolving credit facility,
(B) to reinvest in Productive Assets, or
(C) a combination of prepayment, repurchase and investment permitted
by the foregoing clauses (3)(A) and (3)(B).
Pending the final application of any such Net Cash Proceeds, we or such
restricted subsidiary may temporarily reduce Indebtedness under a revolving
credit facility, if any, or otherwise invest such Net Cash Proceeds in Cash
Equivalents. On the 366th day after an Asset Sale or such earlier date, if
any, as our board of directors or of such restricted subsidiary determines not
to apply the Net Cash Proceeds relating to such Asset Sale as set forth in
clauses (3)(A), (3)(B) or (3)(C) of the next preceding sentence (each, a "Net
Proceeds Offer Trigger Date"), the aggregate amount of Net Cash Proceeds that
have not been applied on or before such Net Proceeds Offer Trigger Date as
permitted in clauses (3)(A), (3)(B) and (3)(C) of the next preceding sentence
(each a "Net Proceeds Offer Amount") shall be applied by us or such restricted
subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date
(the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45 days
following the applicable Net Proceeds Offer Trigger Date, from all holders of
notes on a pro rata basis that amount of Notes equal to the Net Proceeds Offer
Amount at a price equal to 100% of the principal amount of the Notes to be
purchased, plus accrued and unpaid interest thereon, if any, to the date of
purchase; provided, however, that if at any time any non-cash consideration
received by us or any of our restricted subsidiaries, as the case may be, in
connection with any Asset Sale is converted into or sold or otherwise disposed
of for cash (other than interest received with respect to any such non-cash
consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant.
Notwithstanding the foregoing, if a Net Proceeds Offer Amount is less than
$10.0 million, the application of the Net Cash Proceeds constituting such Net
Proceeds Offer Amount to a Net Proceeds Offer may be deferred until such time
as such Net Proceeds Offer Amount plus the aggregate amount of all Net
Proceeds Offer Amounts arising subsequent to the Net Proceeds Offer Trigger
Date relating to such initial Net Proceeds Offer Amount from all Asset Sales
by us and any of our restricted subsidiaries aggregates at least $10.0
million, at which time we or such restricted subsidiary shall apply all Net
Cash Proceeds constituting all Net Proceeds Offer Amounts that have been so
deferred to make a Net Proceeds Offer (the first date the aggregate of all
such deferred Net Proceeds Offer Amounts is equal to $10.0 million or more
shall be deemed to be a "Net Proceeds Offer Trigger Date").
Notwithstanding the two immediately preceding paragraphs, we and any of our
restricted subsidiaries will be permitted to consummate an Asset Sale without
complying with such paragraphs to the extent
(1) at least 75% of the consideration for such Asset Sale constitutes
Productive Assets, cash, Cash Equivalents and/or Marketable Securities and
(2) such Asset Sale is for fair market value (as determined in good
faith by our board of directors);
provided that any consideration not constituting Productive Assets received by
us or any of our restricted subsidiaries in connection with any Asset Sale
permitted to be consummated under this paragraph shall be subject to the
provisions of the two preceding paragraphs.
Each Net Proceeds Offer will be mailed to the record holders of notes as
shown on the register of note holders within 25 days following the Net
Proceeds Offer Trigger Date, with a copy to the trustee, and shall comply with
the procedures set forth in the indenture. Upon receiving notice of the Net
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Proceeds Offer, holders of notes may elect to tender their notes in whole or
in part in integral multiples of $1,000 in exchange for cash. To the extent
holders of notes properly tender notes in an amount exceeding the Net Proceeds
Offer Amount, notes of tendering holders of notes will be purchased on a pro
rata basis (based on amounts tendered). A Net Proceeds Offer shall remain open
for a period of at least 20 (but not more than 30) business days or such
longer period as may be required by law. To the extent that the aggregate
amount of notes tendered under a Net Proceeds Offer is less than the Net
Proceeds Offer Amount, we may use any remaining Net Proceeds Offer Amount for
general corporate purposes. Upon completion of any such Net Proceeds Offer,
the Net Proceeds Offer Amount shall be reset at zero.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the repurchase of notes
pursuant to a Net Proceeds Offer. To the extent that the provisions of any
securities laws or regulations conflict with the Asset Sale provisions of the
indenture, we shall comply with the applicable securities laws and regulations
and shall not be deemed to have breached its obligations under the Asset Sale
provisions of the Indenture by virtue thereof.
Merger, Consolidation, or Sale of Assets. We may not consolidate or merge
with or into (whether or not we are the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to
another corporation, Person or entity unless:
(1) we are the surviving corporation or the entity or the Person formed
by or surviving any such consolidation or merger (if other than us) or to
which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia;
(2) the entity or Person formed by or surviving any such consolidation
or merger (if other than us) or the entity or Person to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have
been made assumes all our obligations under the Registration Rights
Agreement, the notes and the indenture under a supplemental indenture in a
form reasonably satisfactory to the trustee;
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) except in the case of our merger with or into our wholly owned
restricted subsidiary and except in the case of a merger entered into
solely for the purpose of reincorporating us in another jurisdiction, we or
the entity or Person formed by or surviving any such consolidation or
merger (if other than us), or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made will, at the
time of such transaction and after giving pro forma effect thereto as if
such transaction had occurred at the beginning of the applicable Four-
Quarter Period, either
(A) be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Consolidated Fixed Charge Coverage Ratio test described
in the first paragraph of the covenant above under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock" or
(B) have a Consolidated Fixed Charge Coverage Ratio that is not less
than our Consolidated Fixed Charge Coverage Ratio immediately prior to
such transaction;
provided that this clause (B) shall not apply if such Consolidated
Fixed Charge Coverage Ratio is less than our Consolidated Fixed Charge
Coverage Ratio as of the date of the indenture.
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The indenture provides that no guarantor (other than a guarantor whose note
guarantee is to be released in accordance with the terms of its note guarantee
and the indenture as provided in the third paragraph under "Note Guarantees"
above) may consolidate with or merge with or into (whether or not such
guarantor is the surviving Person) another corporation, Person or entity
whether or not affiliated with such guarantor unless:
(1) the Person formed by or surviving any such consolidation or merger
(if other than such guarantor) assumes all the obligations of such
guarantor pursuant to a supplemental indenture in form and substance
reasonably satisfactory to the trustee, under the notes, the indenture and
the Registration Rights Agreement;
(2) immediately after giving effect to such transaction, no Default or
Event of Default exists; and
(3) either (A) we would be permitted by virtue of our pro forma
Consolidated Fixed Charge Coverage Ratio, immediately after giving effect
to such transaction on a pro forma basis, to incur at least $1.00 of
additional Indebtedness pursuant to the Consolidated Fixed Charge Coverage
Ratio test described in the covenant above under the caption "--Incurrence
of Indebtedness and Issuance of Preferred Stock" or (B) we, immediately
after giving effect to such transaction on a pro forma basis, would have a
Consolidated Fixed Charge Coverage Ratio that is not less than our
Consolidated Fixed Charge Coverage Ratio immediately prior to such
transaction; provided that this clause (B) shall not apply if such
Consolidated Fixed Charge Coverage Ratio is less than our Consolidated
Fixed Charge Coverage Ratio as of the date of the indenture.
Except as described in the immediately preceding paragraph, the indenture
will not prohibit the merger of two of any of our restricted subsidiaries or
the merger of a restricted subsidiary into us.
Transactions with Affiliates. We will not, and will not permit any of our
restricted subsidiaries to, directly or indirectly, enter into or permit to
occur any transaction or series or related transactions (including, without
limitation, the purchase, sale, lease or exchange of any property or the
rendering of any service) with, or for the benefit of, any of its Affiliates
involving aggregate consideration in excess of $2.0 million (an "Affiliate
Transaction"), other than
(x) Affiliate Transactions permitted under the following paragraph and
(y) Affiliate Transactions on terms that are not materially less
favorable than those that might reasonably have been obtained in a
comparable transaction at such time on an arm's-length basis from a Person
that is not an Affiliate of ours;
provided, however, that for a transaction or series of related transactions
with an aggregate value of $5.0 million or more, at our option, either
(1) a majority of the disinterested members of our board of directors
shall determine in good faith that such Affiliate Transaction is on terms
that are not materially less favorable than those that might reasonably
have been obtained in a comparable transaction at such time on an arm's-
length basis from a Person that is not an Affiliate of ours or
(2) our board of directors or any such restricted subsidiary party to
such Affiliate Transaction shall have received an opinion from a nationally
recognized investment banking firm that such Affiliate Transaction is on
terms not materially less favorable than those that might reasonably have
been obtained in a comparable transaction at such time on an arm's-length
basis from a Person that is not an Affiliate of ours;
provided, further, that for an Affiliate Transaction or series of related
Affiliate Transactions with an aggregate value of $10.0 million or more, our
board of directors or any such restricted subsidiary party to such Affiliate
Transaction shall have received an opinion from a nationally recognized
investment
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banking firm that such Affiliate Transaction is on terms not materially less
favorable than those that might reasonably have been obtained in a comparable
transaction at such time on an arm's-length basis from a Person that is not an
Affiliate of ours.
The foregoing restrictions shall not apply to:
(1) reasonable fees and compensation paid to and indemnity provided on
behalf of our, officers, directors, employees or consultants or any
subsidiary as determined in good faith by our board of directors or senior
management;
(2) transactions exclusively between or among us and any of our
restricted subsidiaries or exclusively between or among such restricted
subsidiaries; provided such transactions are not otherwise prohibited by
the indenture;
(3) transactions effected as part of a Qualified Securitization
Transaction;
(4) any agreement as in effect as of the date of the indenture or any
amendment or replacement thereto or any transaction contemplated thereby
(including pursuant to any amendment or replacement thereto) so long as any
such amendment or replacement agreement is not more disadvantageous to the
holders of notes in any material respect than the original agreement as in
effect on the date of the indenture;
(5) Restricted Payments permitted by the indenture;
(6) the payment of customary management, consulting and advisory fees
and related expenses made pursuant to any financial advisory, financing,
underwriting or placement agreement or in respect of other investment
banking activities, including, without limitation, in connection with
acquisitions or divestitures which fees are approved by our board of
directors or such Restricted Subsidiary in good faith;
(7) payments or loans to employees or consultants that are approved by
our board of directors in good faith;
(8) the existence of, or the performance by us or any of our restricted
subsidiaries of our obligations under the terms of, any stockholders
agreement (including any registration rights agreement or purchase
agreement related thereto) to which we are a party as of the date of the
indenture and any similar agreements which we may enter into thereafter;
provided, however, that the existence of, or the performance by us or any
of our restricted subsidiaries of obligations under, any future amendment
to any such existing agreement or under any similar agreement entered into
after the date of the indenture shall only be permitted by this clause (8)
to the extent that the terms of any such amendment or new agreement are not
disadvantageous to the holders of the notes in any material respect;
(9) transactions permitted by, and complying with, the provisions of the
covenant described under "--Merger, Consolidation, or Sale of Assets";
(10) transactions with customers, clients, suppliers, joint venture
partners or purchasers or sellers of goods or services, in each case in the
ordinary course of business (including, without limitation, pursuant to
joint venture agreements) and otherwise in compliance with the terms of the
indenture which are fair to us or any of our restricted subsidiaries, in
the reasonable determination of our board of directors or our senior
management, or are on terms at least as favorable as might reasonably have
been obtained at such time from an unaffiliated party; and
(11) any transaction with Bain Capital, Inc. or its Affiliates where the
only consideration paid by us or any restricted subsidiary is our capital
stock (other than Disqualified Stock) or of the Parent.
Limitation on Guarantees by Restricted Subsidiaries. We will not cause or
permit any of our restricted subsidiaries (whether existing as of the date of
the indenture or created or acquired
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thereafter), directly or indirectly, to guarantee the payment of any
indebtedness of ours ("Other Indebtedness") or become a primary obligor under
any senior credit facility unless such restricted subsidiary
(A) is a guarantor or
(B) simultaneously executes and delivers a supplemental indenture to the
indenture pursuant to which it will become a guarantor under the indenture;
provided that if such Other Indebtedness is
(1) pari passu in right of payment with the notes, the note guarantee of
such restricted subsidiary shall be pari passu in right of payment with the
guarantee of the Other Indebtedness; or
(2) Subordinated Indebtedness, the note guarantee of such restricted
subsidiary shall be senior in right of payment to the guarantee of the Other
Indebtedness (which guarantee of such Subordinated Indebtedness shall provide
that such guarantee is subordinated to the note guarantee of such restricted
subsidiary to the same extent and in the same manner as the Other Indebtedness
is subordinated to the notes);
provided, further, that each guarantor as of the date of the indenture and
each restricted subsidiary issuing a note guarantee after the date of the
indenture will be automatically and unconditionally released and discharged
from its obligations under such note guarantee upon the release or discharge
of, in the case of guarantors as of the date of the indenture, the guarantee
of such guarantor of the senior credit facility, and in the case of any of our
restricted subsidiaries issuing a note guarantee after the date of the
indenture, the guarantee of the Other Indebtedness or the primary obligations
under any senior credit facility, as applicable, that resulted in the creation
of such note guarantee;
provided, however, that any such release of a note guarantee shall only be
effective if after giving effect to such release of a note guarantee such
restricted subsidiary will have no Indebtedness outstanding other than (1)
Indebtedness permitted to be incurred pursuant to clause (9) of the second
paragraph of the "Incurrence of Indebtedness and Issuance of Preferred Stock"
covenant and (2) other Indebtedness not to exceed $5.0 million in aggregate
principal amount outstanding. We may, at any time, cause a restricted
subsidiary to become a guarantor by executing and delivering a supplemental
indenture providing for the guarantee of payment of the notes by such
restricted subsidiary on the basis provided in the indenture.
Conduct of Business. We will not, and will not permit any of our restricted
subsidiaries to, engage in any businesses a majority of whose revenues are not
derived from the same or reasonably similar, ancillary or related to, or a
reasonable extension, development or expansion of, the businesses in which we
and our restricted subsidiaries are engaged on the date of the indenture.
Reports. Whether or not required by the rules and regulations of the
Commission, so long as any notes are outstanding, we will furnish to the
holders of notes
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if we were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
that describes our financial condition and results of operations and that
of our consolidated subsidiaries (showing in reasonable detail, either on
the face of the financial statements or in the footnotes thereto and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the financial condition and our results of operations and that
of our restricted subsidiaries separate from the financial condition and
results of operations of our unrestricted subsidiaries) and, with respect
to the annual information only, a report thereon by our certified
independent accountants and
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(2) all current reports that would be required to be filed with the
Commission on Form 8-K if we were required to file such reports, in each
case within the time periods specified in the Commission's rules and
regulations.
In addition, following the consummation of the exchange offer contemplated by
the Registration Rights Agreement, whether or not required by the rules and
regulations of the Commission, we will file a copy of all such information and
reports with the Commission for public availability within the time periods
specified in the Commission's rules and regulations (unless the Commission
will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In addition, we
and the guarantors have agreed that, for so long as any notes remain
outstanding, they will furnish to the holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Events of Default and Remedies.
The following events will be defined in the indenture as "Events of
Default":
(1) the failure to pay interest on any notes when the same becomes due
and payable if the default continues for a period of 30 days;
(2) the failure to pay the principal on any notes when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase notes tendered
pursuant to a Change of Control Offer or a Net Proceeds Offer);
(3) a default in the observance or performance of any other covenant or
agreement contained in the Indenture if the default continues for a period
of 30 days after we receive written notice specifying the default (and
demanding that such default be remedied) from the trustee or the holders of
at least 25% of the outstanding principal amount of the notes;
(4) the failure to pay at final stated maturity (giving effect to any
extensions thereof) the principal amount of any Indebtedness of us or any
restricted subsidiary (other than a Securitization Entity), which failure
continues for at least 10 days, or the acceleration of the maturity of any
such Indebtedness, which acceleration remains uncured and unrescinded for
at least 10 days, if the aggregate principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in
default for failure to pay principal at final maturity or which has been
accelerated, aggregates $5.0 million or more at any time;
(5) one or more judgments in an aggregate amount in excess $5.0 million
shall have been rendered against us or any of our Significant Subsidiaries
and such judgments remain undischarged, unpaid or unstayed for a period of
60 days after such judgment or judgments become final and non-appealable;
(6) except as permitted by the indenture, any note guarantee of a
Significant Subsidiary shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force
and effect or any guarantor that is a Significant Subsidiary, or any Person
acting on behalf of any guarantor, shall deny or disaffirm its obligations
under its note guarantee; and
(7) certain events of bankruptcy affecting us or any of our Significant
Subsidiaries.
If an Event of Default with respect to the notes (other than an Event of
Default with respect to us described in clause (7) of the preceding paragraph)
occurs and is continuing, the trustee or the holders of at least 25% in
aggregate principal amount of the outstanding notes, by notice in writing to
us, may declare the unpaid principal of (and premium, if any) and accrued
interest to the date of acceleration on all the outstanding notes to be due
and payable immediately and, upon any such declaration, such principal amount
(and premium, if any) and accrued interest, notwithstanding anything contained
in the
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indenture or the notes to the contrary, will become immediately due and
payable. If an Event or Default specified in clause (7) of the preceding
paragraph with respect to us occurs under the indenture, the notes will ipso
facto become immediately due and payable without any declaration or other act
on the part of the trustee or any holder of the notes.
Subject to the provisions of the indenture relating to the duties of the
trustee, in case an Event of Default shall occur and be continuing, the
trustee will be under no obligation to exercise any of its rights or powers
under the indenture at the request or direction of any of the holders of
notes, unless such holders shall have offered to the trustee reasonable
indemnity. Subject to such provisions for the indemnification of the trustee,
the holders of a majority in aggregate principal amount of the outstanding
notes will have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the trustee, or exercising any
trust or power conferred on the trustee.
Any such declaration with respect to the notes may be annulled by the
holders of a majority in aggregate principal amount of the outstanding notes
upon the conditions provided in the indenture. For information as to waiver of
defaults, see "Modification and Waiver" below.
The indenture provides that the trustee shall, within 30 days after the
occurrence of any Default or Event of Default with respect to the notes
outstanding, give the holders of the notes notice of all uncured Defaults or
Events of Default thereunder known to it; provided, however, that, except in
the case of a Default or an Event of Default in payment with respect to the
notes or a Default or Event of Default in complying with "--Covenants--Merger,
Consolidation, Sale of Assets" above, the trustee shall be protected in
withholding such notice if and so long as a committee of its trust officers in
good faith determines that the withholding of such notice is in the interest
of the holders of the notes.
No holder of any note will have any right to institute any proceeding with
respect to the indenture or for any remedy thereunder, unless such holder
shall have previously given to the trustee written notice of a continuing
Event of Default thereunder and unless the holders of at least 25% of the
aggregate principal amount of the outstanding notes shall have made written
request, and offered reasonable indemnity, to the trustee to institute such
proceeding as the trustee. Also the trustee must not have received from the
holders of a majority in aggregate principal amount of such outstanding notes
a direction inconsistent with such request and shall have failed to institute
such proceeding within 60 days. However, such limitations do not apply to a
suit instituted by a holder of such a note for enforcement of payment of the
principal of and premium, if any, or interest on such note on or after the
respective due dates expressed in such note.
We will be required to furnish to the trustee annually a statement as to
the performance by it of certain of its obligations under the indenture and as
to any default in such performance.
No Personal Liability of Directors, Officers, Employees, Incorporator and
Stockholders
No director, officer, employee, incorporator or stockholder of us or any of
our Affiliates, as such, shall have any liability for any of our obligations
or any of our Affiliates under the notes or the indenture or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each holder of notes by accepting a note waives and releases all such
liability. The waiver and release are part of the consideration for issuance
of the notes.
Satisfaction and Discharge of Indenture; Defeasance
We may terminate our and the guarantors' substantive obligations in respect
of the notes by delivering all outstanding notes to the trustee for
cancellation and paying all sums payable by it on account of principal of,
premium, if any, and interest on all notes or otherwise. In addition, we may,
provided that no Default or Event of Default has occurred and is continuing or
would arise therefrom
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(or, with respect to a Default or Event of Default specified in clause (7) of
"Events of Default" above, occurs at any time on or prior to the 91st calendar
day after the date of such deposit (it being understood that this condition
shall not be deemed satisfied until after such 91st day)) under the indenture,
terminate our and the guarantors' substantive obligations in respect of the
notes (except for our obligations to pay the principal of (and premium, if
any, on) and the interest on the notes and the guarantors' note guarantee
thereof) by:
(1) depositing with the trustee, under the terms of an irrevocable trust
agreement, money or United States Government Obligations sufficient
(without reinvestment) to pay all remaining Indebtedness on such notes;
(2) delivering to the trustee either an Opinion of Counsel or a ruling
directed to the trustee from the Internal Revenue Service to the effect
that the holders of the notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and termination of
obligations;
(3) delivering to the trustee an Opinion of Counsel to the effect that
our exercise of the option under this paragraph will not result in any of
us, the trustee or the trust created by our deposit of funds pursuant to
this provision becoming or being deemed to be an "investment company" under
the Investment Company Act of 1940, as amended (the "Investment Act"); and
(4) complying with certain other requirements described in the
indenture.
In addition, we may, provided that no Default or Event of Default has occurred
and is continuing or would arise therefrom (or, with respect to a Default or
Event of Default specified in clause (7) of "Events of Default" above, occurs
at any time on or prior to the 91st calendar day after the date of such
deposit (it being understood that this condition shall not be deemed satisfied
until after such 91st day)) under the indenture, terminate all of our and the
guarantors' substantive obligations in respect of the notes (including its
obligations to pay the principal of (and premium, if any, on) and interest on
the notes and the guarantors' note guarantee thereof) by:
(1) depositing with the trustee, under the terms of an irrevocable trust
agreement, money or United States Government Obligations sufficient
(without reinvestment) to pay all remaining Indebtedness on the notes;
(2) delivering to the trustee either a ruling directed to the trustee
from the Internal Revenue Service to the effect that the holders of the
notes will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and termination of obligations or an
Opinion of Counsel addressed to the trustee based upon such a ruling or
based on a change in the applicable federal tax law since the date of the
indenture, to such effect;
(3) delivering to the trustee an Opinion of Counsel to the effect that
our exercise of the option under this paragraph will not result in any of
us, the trustee or the trust created by our deposit of funds pursuant to
this provision becoming or being deemed to be an "investment company" under
the Investment Act; and
(4) complying with certain other requirements described in the
indenture.
Governing Law
The indenture, the notes and the note guarantees are governed by the laws
of the State of New York without regard to principles of conflicts of laws.
Modification and Waiver
Modifications and amendments of the indenture may be made by us, the
guarantors and the trustee with the consent of the holders of a majority in
aggregate principal amount of the outstanding
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notes (including consents obtained in connection with a tender offer or
exchange offer for the notes); provided, however, that no such modification or
amendment to the indenture may, without the consent of the holder of each note
affected thereby,
(a) change the maturity of the principal of or any installment of
interest on any such note or alter the optional redemption or repurchase
provisions of any such note or the indenture in a manner adverse to the
holders of the notes;
(b) reduce the principal amount of (or the premium) of any such note;
(c) reduce the rate of or extend the time for payment of interest on any
such note;
(d) change the place or currency of payment of principal of (or premium)
or interest on any such note;
(e) modify any provisions of the indenture relating to the waiver of
past defaults (other than to add sections of the indenture or the notes
subject thereto) or the right of the holders of notes to institute suit for
the enforcement of any payment on or with respect to any such note or any
note guarantee in respect thereof or the modification and amendment
provisions of the indenture and the notes (other than to add sections of
the indenture or the notes which may not be amended, supplemented or waived
without the consent of each holder therein affected);
(f) reduce the percentage of the principal amount of outstanding notes
necessary for amendment to or waiver of compliance with any provision of
the indenture or the notes or for waiver of any Default in respect thereof;
(g) waive a default in the payment of principal of, interest on, or
redemption payment with respect to, the notes (except a rescission of
acceleration of the notes by the holders thereof as provided in the
indenture and a waiver of the payment default that resulted from such
acceleration);
(h) modify the ranking or priority of any note or the note guarantee in
respect thereof of any guarantor in any manner adverse to the holders of
the notes; or
(i) release any Significant Subsidiary that is a guarantor from any of
its obligations under its note guarantee or the indenture otherwise than in
accordance with the indenture.
Notwithstanding the foregoing, without the consent of any holder of notes,
we and the trustee may amend or supplement the indenture or the notes to
(1) cure any ambiguity, defect or inconsistency,
(2) provide for uncertificated notes in addition to or in place of
certificated notes,
(3) provide for the assumption of our obligations to holders of notes in
the case of a merger or consolidation or sale of all or substantially all
of our assets,
(4) make any change that would provide any additional rights or benefits
to the holders of notes or that does not adversely affect the legal rights
under the indenture of any holder of notes, or
(5) comply with requirements of the Commission to effect or maintain the
qualification of the indenture under the Trust Indenture Act.
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The holders of a majority in aggregate principal amount of the outstanding
notes, on behalf of all holders of notes, may waive compliance by us and the
subsidiary guarantors with certain restrictive provisions of the indenture.
Subject to certain rights of the trustee, as provided in the indenture, the
holders of a majority in aggregate principal amount of the notes, on behalf of
all holders, may waive any past default under the indenture (including any
such waiver obtained in connection with a tender offer or exchange offer for
the notes), except a default in the payment of principal, premium or interest
or a default arising from failure to purchase any notes tendered pursuant to a
Change of Control Offer or a Net Proceeds Offer, or a default in respect of a
provision that under the indenture cannot be modified or amended without the
consent of the holder of each note that is affected.
The Trustee
Except during the continuance of a Default, the trustee will perform only
such duties as are specifically set forth in the indenture. During the
existence of a Default, the trustee will exercise such rights and powers
vested in it under the indenture and use the same degree of care and skill in
its exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
The indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the trustee, should it
become a creditor of us, any guarantor or any other obligor upon the notes, to
obtain payment of claims in certain cases or to realize on certain property
received by it in respect of any such claim as security or otherwise. The
trustee is permitted to engage in other transactions with us or an Affiliate
of us; provided, however, that if it acquires any conflicting interest (as
defined in the Indenture or in the Trust Indenture Act), it must eliminate
such conflict or resign.
Certain Definitions
Described below are certain defined terms used in the indenture. Reference
is made to the indenture for a full definition of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
subsidiaries existing at the time such Person becomes our restricted
subsidiary or that is assumed by us or any of our restricted subsidiaries in
connection with the acquisition of assets from such Person, in each case
excluding any Indebtedness incurred by such Person in connection with, or in
anticipation or contemplation of, such Person becoming our restricted
subsidiary or such acquisition.
"Affiliate" means a Person who directly or indirectly through one or more
intermediaries controls, or controlled by, or is under common control with us.
The term "control" means the possession directly or indirectly, of the power
to direct or cause the direction of the management and policies of a Person
whether through the ownership of voting securities, by contract or otherwise.
Notwithstanding the foregoing, (1) no Person (other than us or any subsidiary
of ours) in whom a Securitization Entity makes an Investment in connection
with a Qualified Securitization Transaction shall be deemed to be an Affiliate
of ours or any of our subsidiaries solely by reason of such Investment and (2)
neither Chase Securities Inc. nor any of its Affiliates shall be our
Affiliates.
"Applicable Premium" means, with respect to any note on any redemption
date, the greater of (a) 1.0% of the principal amount of such note or (b) the
excess of (A) the present value at such redemption date of (1) the redemption
price of such note at July 15, 2004 (such redemption price being set forth
under "--Optional Redemption") plus (2) all required interest payments due on
such note through July 15, 2004 (excluding accrued but unpaid interest),
computed using a discount rate equal to the Treasury Rate at such redemption
date plus 50 basis points over (B) the principal amount of such note, if
greater.
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"Asset Acquisition" means
(a) an Investment by us or any restricted subsidiary of ours in any
other Person if, as a result of such Investment, such Person shall become
our restricted subsidiary, or shall be merged with or into us or any of our
restricted subsidiaries, or
(b) the acquisition by us or any of our restricted subsidiaries of all
or substantially all of the assets of any other Person or any division or
line of business of any other Person.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary
course of business), assignment or other transfer for value by us or any of
our restricted subsidiaries to any Person other than us or our restricted
subsidiaries of
(a) any Capital Stock of our restricted subsidiary or
(b) any other property or assets of ours or our restricted subsidiary
other than in the ordinary course of business;
provided, however, that Asset Sales shall not include
(1) a transaction or series of related transactions for which we or our
restricted subsidiaries receive aggregate consideration of less than $1.0
million;
(2) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of our assets as permitted under the provisions described
above under the caption "--Covenants--Merger, Consolidation, or Sale of
Assets" or any disposition that constitutes a Change of Control;
(3) the sale or discount, in each case without recourse, of accounts
receivable arising in the ordinary course of business, but only in
connection with the compromise or collection thereof;
(4) the factoring of accounts receivable arising in the ordinary course
of business pursuant to arrangements customary in the industry;
(5) the licensing of intellectual property in the ordinary course of
business;
(6) disposals or replacements of obsolete, uneconomical, negligible,
wornout or surplus property in the ordinary course of business;
(7) the sale, lease, conveyance, disposition or other transfer by us or
any restricted subsidiary of assets or property to one or more restricted
subsidiaries in connection with Investments permitted by the covenant
described under the caption "--Restricted Payments"; or
(8) sales of accounts receivable, equipment and related assets
(including contract rights) of the type specified in the definition of
"Qualified Securitization Transaction" to a Securitization Entity for the
fair market value thereof, including cash in an amount at least equal to
75% of the fair market value thereof.
For the purposes of clause (8), Purchase Money Notes shall be deemed to be
cash.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
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(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(1) marketable direct obligations issued by, or unconditionally
guaranteed by, the United States Government or issued by any agency thereof
and backed by the full faith and credit of the United States, in each case
maturing within one year from the date of its acquisition;
(2) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either Standard & Poor's or Moody's
Investors Service, Inc.;
(3) commercial paper maturing no more than one year from the date of
creation thereof and at the time of acquisition, having a rating of at
least A-1 from S&P or at least P-1 from Moody's;
(4) certificates of deposit or bankers' acceptances (or, with respect to
foreign banks, similar instruments) maturing within one year from the date
of acquisition thereof issued by any bank organized under the laws of the
United States of America or any state thereof or the District of Columbia,
Japan or any member of the European Economic Community or any U.S. branch
of a foreign bank having at the date of its acquisition combined capital
and surplus of not less than $200.0 million;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any bank meeting the qualifications specified in clause (4)
above; and
(6) investments in money market funds which invest substantially all
their assets in securities of the types described in clauses (1) through
(5) above.
"Change of Control" means the occurrence of one or more of the following
events:
(1) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of our assets
to any Person or group of related Persons, as defined in Section 13(d) of
the Exchange Act (a "Group"), whether or not otherwise in compliance with
the provisions of the indenture, other than Bain Capital, Inc. and its
Affiliates and members of the Permitted Group;
(2) the approval by the holders of our Capital Stock of any plan or
proposal for our liquidation or dissolution (whether or not otherwise in
compliance with the provisions of the indenture);
(3) any Person or Group (other than Bain Capital, Inc. and its
Affiliates and members of the Permitted Group) shall become the owner,
directly or indirectly, beneficially or of record, of shares representing
more than 50% of the aggregate ordinary voting power represented by the
issued and outstanding our Voting Stock or any successor to all or
substantially all of our assets; or
(4) the first day on which a majority of the members of our board of
directors or of Mattress Holding are not Continuing Directors.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of such Person's
(1) Consolidated Net Income and
(2) to the extent Consolidated Net Income has been reduced thereby,
(A) all income taxes and foreign withholding taxes of such Person
and its restricted subsidiaries paid or accrued in accordance with GAAP
for such period,
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(B) Consolidated Interest Expense,
(C) Consolidated Noncash Charges, and
(D) any payments related to (x) addressing our or any of our
subsidiaries' "Year 2000" information systems issues expensed in
accordance with GAAP or (y) "reengineering" efforts relating to the
installation of our point of sale system expensed in accordance with
GAAP and pursuant to the Financial Accounting Standards Board's (FASB)
Emerging Issues Task Force (EITF) Issue No. 97-13: "Accounting for
Costs Incurred in Connection with a Consulting Contract or an Internal
Project that Combines Business Process Re-engineering and Information
Technology Transformation"; provided, however, that the aggregate
amount of such payments shall not exceed $2.4 million and shall be made
on or prior to December 31, 2001.
With respect to the calculation of Consolidated EBITDA for any period prior
to the expiration of the first Four-Quarter Period subsequent to the date of
the indenture, Consolidated EBITDA shall be calculated on a pro forma basis
for the transactions in accordance with Article 11 of Regulation S-X under the
Securities Act as if the transactions were consummated on the first day of the
relevant Four-Quarter Period.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the most recent
four full fiscal quarters for which internal financial statements are
available (the "Four-Quarter Period") ending on or prior to the date of the
transaction giving rise to the need to calculate the Consolidated Fixed Charge
Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of such
Person for the Four-Quarter Period. In addition to and without limitation of
the foregoing, for purposes of this definition, Consolidated EBITDA and
Consolidated Fixed Charges shall be calculated after giving effect on a pro
forma basis for the period of such calculation to
(1) the incurrence of any Indebtedness or the issuance of any preferred
stock of such Person or any of its restricted subsidiaries (and the
application of the proceeds thereof) and any repayment of other
Indebtedness or redemption of other preferred stock occurring during the
Four-Quarter Period or at any time subsequent to the last day of the Four-
Quarter Period and on or prior to the Transaction Date, as if such
incurrence, repayment, issuance or redemption, as the case may be (and the
application of the proceeds thereof), occurred on the first day of the
Four-Quarter period; and
(2) any Asset Sale or Asset Acquisition (including, without limitation,
any Asset Acquisition giving rise to the need to make such calculation as a
result of such Person or one of its restricted subsidiaries (including any
Person who becomes a restricted subsidiary as a result of the Asset
Acquisition) incurring, assuming or otherwise being liable for Acquired
Indebtedness and also including any Consolidated EBITDA (including any Pro
Forma Cost Savings) associated with any such Asset Acquisition) occurring
during the Four-Quarter Period or at any time subsequent to the last day of
the Four-Quarter Period and on or prior to the Transaction Date, as if such
Asset Sale or Asset Acquisition (including the incurrence of, or assumption
or liability for any such Indebtedness or Acquired Indebtedness) occurred
on the first day of the Four-Quarter Period.
If such Person or any of its restricted subsidiaries directly or indirectly
guarantees Indebtedness of a third Person, the preceding sentence shall give
effect to the incurrence of such guaranteed Indebtedness as if such Person or
any restricted subsidiary of such Person had directly incurred or otherwise
assumed such guaranteed Indebtedness. Furthermore, in calculating Consolidated
Fixed Charges for purposes of determining the denominator (but not the
numerator) of this Consolidated Fixed Charge Coverage Ratio,
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(1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so
determined thereafter and shall be deemed to have accrued at a fixed rate
per annum equal to the rate of interest on such Indebtedness in effect on
the Transaction Date;
(2) if interest on any Indebtedness actually incurred on the Transaction
Date may optionally be determined at an interest rate based upon a factor
of a prime or similar rate, a eurocurrency interbank offered rate, or other
rates, then the interest rate in effect on the Transaction Date will be
deemed to have been in effect during the Four-Quarter Period; and
(3) notwithstanding clause (1) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered
by agreements relating to interest swap obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation
of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of
(1) Consolidated Interest Expense (before amortization or write-off of
debt issuance costs and before amortization of original issue discount
relating to this offering),
(2) the amount of all dividend payments on any series of preferred stock
or Disqualified Stock of such Person (other than dividends paid in
Qualified Capital Stock), and
(3) the amount of all dividend payments on
(x) any series of preferred stock of any restricted subsidiary of
such Person, and
(y) any Refunding Capital Stock of such Person, to the extent paid
pursuant to the terms of clause (2) of the second paragraph of the
covenant described under "--Covenants--Restricted Payments."
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication,
(1) the aggregate of all cash and non-cash interest expense with respect
to all outstanding Indebtedness of such Person and its restricted
subsidiaries, including the net costs associated with interest swap
obligations, for such period determined on a consolidated basis in
conformity with GAAP,
(2) the consolidated interest expense of such Person and its restricted
subsidiaries that was capitalized during such period, and
(3) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by such Person and its
restricted subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Net Income" means, for any period, our aggregate net income
(or loss) and that of our restricted subsidiaries for such period on a
consolidated basis, determined in accordance with GAAP, provided that there
shall be excluded therefrom
(a) gains and losses from Asset Sales (without regard to the $1.0
million limitation set forth in the definition thereof) or abandonments or
reserves relating thereto and the related tax effects according to GAAP,
(b) gains and losses due solely to fluctuations in currency values and
the related tax effects according to GAAP,
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(c) items classified as a cumulative effect accounting change or as
extraordinary, unusual or nonrecurring gains and losses (including, without
limitation, severance, relocation and other restructuring costs), and the
related tax effects according to GAAP,
(d) the net income (or loss) of any Person acquired in a pooling of
interests transaction accrued prior to the date it becomes our restricted
subsidiary or is merged or consolidated with us or our restricted
subsidiary,
(e) the net income of any of our restricted subsidiaries to the extent
that the declaration of dividends or similar distributions by that
restricted subsidiary of that income is restricted by contract, operation
of law or otherwise,
(f) the net loss of any Person, other than our restricted subsidiaries,
(g) the net income of any Person, other than any of our restricted
subsidiaries, except to the extent of cash dividends or distributions paid
to us or any of our restricted subsidiaries by such Person,
(h) only for purposes of clause (c)(1) of the first paragraph of the
covenant described under the caption "--Covenants--Restricted Payments,"
any amounts included under clause (c)(3) of the first paragraph of that
covenant, and
(i) one-time non-cash compensation charges, including any arising from
existing stock options resulting from any merger, acquisition or
recapitalization transaction.
For purposes of clause (c)(1) of the first paragraph of the covenant
described under the caption "--Covenants--Restricted Payments," Consolidated
Net Income shall be reduced by any cash dividends paid with respect to any
series of Designated Preferred Stock.
"Consolidated Noncash Charges" means, with respect to any Person for any
period, the aggregate depreciation, amortization and other non-cash expenses
of such Person and its restricted subsidiaries reducing Consolidated Net
Income of such Person for such period, determined on a consolidated basis in
accordance with GAAP, excluding any such non-cash charge constituting an
extraordinary item or loss or any such non-cash charge which requires an
accrual of or a reserve for cash charges for any future period.
"Continuing Directors" means, as of any date of determination, any member
of our board of directors who (1) was a member of our board of directors on
the date of the indenture or (2) was nominated for election or elected to our
board of directors by any of the Principals or with the approval of a majority
of the Continuing Directors who were members of our board of directors at the
time of such nomination or election.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Noncash Consideration" means any noncash consideration received
by us or one of our restricted subsidiaries in connection with an Asset Sale
that is so designated as Designated Noncash Consideration pursuant to an
officers' certificate executed by the principal executive officer and our
principal financial officer or of such restricted subsidiary. The officers'
certificate shall state the basis of such valuation, which shall be a report
of a nationally recognized investment banking firm with respect to the receipt
in one or a series of related transactions of Designated Noncash Consideration
with a fair market value in excess of $10.0 million.
"Designated Preferred Stock" means Preferred Stock that is so designated as
Designated Preferred Stock, pursuant to an officers' certificate executed by
our principal executive officer and principal financial officer, on the
issuance date thereof, the cash proceeds of which are excluded from
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the calculation set forth in clause (c) (2) of the first paragraph of the
covenant described under the caption '"--Covenants--Restricted Payments."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the notes mature; provided, however, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof have the
right to require us to repurchase such Capital Stock upon the occurrence of a
Change of Control or an Asset Sale shall not constitute Disqualified Stock if
the terms of such Capital Stock provide that we may not repurchase or redeem
any such Capital Stock under such provisions unless such repurchase or
redemption complies with the covenant described above under the caption "--
Covenants--Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Four-Quarter Period" has the meaning specified in the definition of
Consolidated Fixed Charge Coverage Ratio.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any hedging obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing (other than letters of credit and
hedging obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP. In addition, all Indebtedness of
others secured by a Lien on any asset of such Person (whether or not such
Indebtedness is assumed by such Person) and, to the extent not otherwise
included, the Guarantee by such Person of any indebtedness of any other
Person. Indebtedness shall also include all Disqualified Stock issued by such
Person with the amount of Indebtedness represented by such Disqualified Stock
being equal to the greater of its voluntary or involuntary liquidation
preference and its maximum fixed repurchase price, but excluding accrued
dividends, if any. The amount of any Indebtedness outstanding as of any date
shall be
(1) the accreted value thereof, in the case of any Indebtedness issued
with original issue discount, and
(2) the principal amount thereof, together with any interest thereon
that is more than 30 days past due, in the case of any other Indebtedness.
For purposes of calculating the amount of Indebtedness of a Securitization
Entity outstanding as of any date, the face or notional amount of any interest
in receivables or equipment that is outstanding as of such date shall be
deemed to be Indebtedness but any such interests held by Affiliates of such
Securitization Entity shall be excluded for purposes of such calculation. For
purposes of this definition, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall
be calculated in accordance with the terms of such Disqualified Capital Stock
as if such Disqualified Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the indenture, and
if such price is based upon, or measured by, the fair market value of such
Disqualified Capital Stock, such fair market value shall be determined
reasonably and in good faith by the board of directors of the issuer of such
Disqualified Stock.
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"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If we or any of our subsidiaries sells or otherwise disposes of any Equity
Interests of any of our direct or indirect Subsidiaries such that, after
giving effect to any such sale or disposition, such Person is no longer our
Subsidiary, we shall be deemed to have made an Investment on the date of any
such sale or disposition equal to the fair market value of the Equity
Interests of our subsidiaries not sold or disposed of in an amount determined
as provided in the final paragraph of the covenant described above under the
caption "--Restricted Payments."
"Marketable Securities" means publicly traded debt or equity securities
that are listed for trading on a national securities exchange and that were
issued by a corporation whose debt securities are rated in one of the three
highest rating categories by either S&P or Moody's.
"Net Proceeds" means the aggregate cash proceeds received by us or any of
our restricted subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-
cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation
expenses incurred as a result thereof, taxes paid or payable as a result
thereof (after taking into account any available tax credits or deductions and
any tax sharing arrangements) and any reserve for adjustment in respect of the
sale price of such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness
(1) as to which neither we nor any of our restricted subsidiaries
(a) provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Indebtedness),
(b) is directly or indirectly liable (as a guarantor or otherwise),
or
(c) constitutes the lender;
(2) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an unrestricted
subsidiary) would permit (upon notice, lapse of time or both) any holder of
any of our other Indebtedness or any of our restricted subsidiaries to
declare a default on such other Indebtedness or cause the payment thereof
to be accelerated or payable prior to its stated maturity; and
(3) as to which the lenders have been notified in writing that they will
not have any recourse to our stock or assets or of any of our restricted
subsidiaries.
"Obligations" means any principal, interest (including, without limitation,
Post-Petition Interest), penalties, fees, indemnifications, reimbursement
obligations, damages and other liabilities payable under the documentation
governing any Indebtedness.
"Permitted Business" means any business (including stock or assets) that
derives a majority of its revenues from the manufacture, distribution and sale
of mattresses, foundation and other bedding products and activities that are
reasonably similar, ancillary or related to, or a reasonable extension,
development or expansion of, the businesses in which we and our restricted
subsidiaries are engaged on the date of the indenture.
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"Permitted Domestic Subsidiary Preferred Stock" means any series of
Preferred Stock of a U.S. subsidiary of ours that constitutes Qualified
Capital Stock and has a fixed dividend rate, the liquidation value of all
series of which, when combined with the aggregate amount of our Indebtedness
and that of our restricted subsidiaries incurred under clause (16) of the
definition of Permitted Indebtedness, does not exceed $10.0 million.
"Permitted Group" means any group of investors deemed to be a "person" (as
such term is used in Section 13(d)(3) of the Exchange Act) by virtue of the
Shareholders Agreement, as the same may be amended, modified or supplemented
from time to time, provided that
(1) Bain Capital, Inc. or one of its Affiliates is a party to such
Shareholders Agreement,
(2) no Person party to the Shareholders Agreement as so amended,
supplemented or modified from time to time (other than Bain Capital, Inc.
and its Affiliates), together with its Affiliates, owns, directly or
indirectly, beneficially or of record, shares representing more than 50% of
the aggregate ordinary voting power represented by our issued and
outstanding Voting Stock or any successor to all or substantially all of
our assets, and
(3) no Person party to the Shareholders Agreement as so amended,
supplemented or modified from time to time (other than Bain Capital, Inc.
and its Affiliates), together with its Affiliates, has the right, pursuant
to the Shareholders Agreement (as so amended, supplemented or modified) or
otherwise to designate more than 50% of the members of our board of
directors or of Mattress Holding.
"Permitted Investments" means
(1) Investments by us or our restricted subsidiary in any of our
restricted subsidiaries that is a guarantor for so long as it remains a
guarantor, or any Wholly Owned Restricted Subsidiary for so long as it
remains a wholly owned restricted subsidiary (whether existing on the date
of the indenture or created thereafter), or in any other Person (including
by means of any transfer of cash or other property) if as a result of such
Investment such Person shall become our restricted subsidiary that is a
guarantor or a wholly owned restricted subsidiary and Investments in us by
our restricted subsidiary;
(2) cash and Cash Equivalents;
(3) Investments existing on the date of the indenture;
(4) loans and advances to our employees and officers and those of our
restricted subsidiaries in the ordinary course of business;
(5) accounts receivable created or acquired in the ordinary course of
business;
(6) currency agreements and interest swap obligations entered into in
the ordinary course of our businesses and otherwise in compliance with the
indenture;
(7) Investments in securities of trade creditors or customers received
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers;
(8) guarantees by us of Indebtedness otherwise permitted to be incurred
by our restricted subsidiaries that are guarantors under the indenture;
(9) additional Investments having an aggregate fair market value, taken
together with all other Investments made pursuant to this clause (9) that
are at that time outstanding, not to exceed 5.0% of Total Assets at the
time of such Investment (with the fair market value of each Investment
being measured at the time made and without giving effect to subsequent
changes in value);
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(10) any Investment by us or any of our subsidiaries in a Securitization
Entity or any Investment by a Securitization Entity in any other Person in
connection with a Qualified Securitization Transaction; provided that any
Investment in a Securitization Entity is in the form of a Purchase Money
Note or an equity interest;
(11) Investments the payment for which consists exclusively of our
Qualified Capital Stock; and
(12) Investments received by us or our restricted subsidiaries as
consideration for asset sales, including Asset Sales; provided that in the
case of an Asset Sale, such Asset Sale is effected in compliance with the
covenant described under the caption "--Covenants--Disposition of Proceeds
of Asset Sales."
"Permitted Liens" means the following types of Liens:
(1) Liens for taxes, assessments or governmental charges or claims
either
(a) not delinquent or
(b) contested in good faith by appropriate proceedings and as to
which we or any of our restricted subsidiaries shall have set aside on
its books such reserves as may be required in accordance with GAAP;
(2) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(3) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
(4) judgment Liens not giving rise to an Event of Default;
(5) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of our business or that of our
Restricted Subsidiaries;
(6) any interest or title of a lessor under any Capitalized Lease
Obligation;
(7) purchase money Liens to finance our property or assets or those of
our restricted subsidiary acquired in the ordinary course of business;
provided, however, that
(A) the related purchase money Indebtedness shall not exceed the
cost of such property or assets and shall not be secured by any of our
property or assets or of any of our restricted subsidiaries other than
the property and assets so acquired and
(B) the Lien securing such Indebtedness shall be created with 90
days of such acquisition;
(8) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment, or storage of such inventory or other goods;
(9) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
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(10) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of us or any
of our restricted subsidiaries, including rights of offset and set-off;
(11) Liens securing interest swap obligations or currency Agreement
which interest swap obligations or currency agreement relate to
Indebtedness that is otherwise permitted under the indenture;
(12) Liens securing Indebtedness incurred in reliance on clause (12) of
the second paragraph of the covenant described above under the caption "--
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock" so
long as such Lien extends to no assets other than the assets acquired;
(13) Liens incurred in the ordinary course of our business or any of our
restricted subsidiaries with respect to obligations that do not in the
aggregate exceed $5.0 million at any one time outstanding;
(14) Liens on assets transferred to a Securitization Entity or on assets
of a Securitization Entity, in either case incurred in connection with a
Qualified Securitization Transaction;
(15) leases or subleases granted to others that do not materially
interfere with the ordinary course of our business and any of our
restricted subsidiaries;
(16) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(17) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customer duties in connection with the
importation of goods;
(18) Liens on assets of unrestricted subsidiaries that secure Non-
Recourse Debt of unrestricted subsidiaries; and
(19) Liens existing on the date of the Indenture, together with any
Liens securing Indebtedness incurred in reliance on clause (9) of the
definition of Permitted Indebtedness in order to refinance the Indebtedness
secured by Liens existing on the date of the indenture; provided that the
Liens securing the refinancing Indebtedness shall not extend to property
other than that pledged under the Liens securing the Indebtedness being
refinanced.
"Pro Forma Cost Savings" means, with respect to any period, the reduction
in costs that would have been achieved during the Four-Quarter Period or after
the end of the Four-Quarter Period and on or prior to the Transaction Date
that are
(1) directly attributable to an Asset Acquisition and calculated on a
basis that is consistent with Regulation S-X under the Securities Act or
(2) implemented or to be implemented within six months of the date of
the Asset Acquisition and that are supportable and quantifiable by the
underlying accounting records of such business,
as if, in the case of each of clause (1) and (2), all such reductions in costs
had been effected as of the beginning of such period.
"Productive Assets" means assets (including Capital Stock) that are used or
usable by us and our Restricted Subsidiaries in Permitted Businesses.
"Purchase Money Note" means a promissory note of a Securitization Entity
evidencing a line of credit, which may be irrevocable, from us or any of our
restricted subsidiaries in connection with a Qualified Securitization
Transaction, which note shall be repaid from cash available to the
Securitization Entity, other than amounts required to be established as
reserves pursuant to agreements, amounts paid to investors in respect of
interest, principal and other amounts owing to such investors and amounts paid
in connection with the purchase of newly generated receivables or newly
acquired equipment.
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"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Stock.
"Qualified Securitization Transaction" means any transaction or series of
transactions pursuant to which we or any of our restricted subsidiaries may
sell, convey or otherwise transfer to (a) a Securitization Entity (in the case
of a transfer by us or any of our restricted subsidiaries) and (b) any other
Person (in case of a transfer by a Securitization Entity), or may grant a
security interest in, any accounts receivable or equipment (whether now
existing or arising or acquired in the future) of ours or any of our
restricted subsidiaries, and any assets related thereto including, without
limitation, all collateral securing such accounts receivable and equipment,
all contracts and contract rights and all guarantees or other obligations in
respect such accounts receivable and equipment, proceeds of such accounts
receivable and equipment and other assets (including contract rights) which
are customarily transferred or in respect of which security interests are
customarily granted in connection with asset securitization transactions
involving accounts receivable and equipment.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Securitization Entity" means our wholly owned subsidiary (or another
Person in which we or our subsidiary makes an Investment and to which we or
any of our subsidiaries transfer accounts receivable or equipment and related
assets) that engages in no activities other than in connection with the
financing of accounts receivable or equipment and that is designated by our
board of directors (as provided below) as a Securitization Entity
(a) no portion of the Indebtedness or any other Obligations (contingent
or otherwise) of which
(1) is guaranteed by us or any restricted subsidiary of ours
(excluding guarantees of Obligations (other than the principal of, and
interest on, Indebtedness)) in accordance with Standard Securitization
Undertakings,
(2) is recourse to or obligates us or any restricted subsidiary of
ours in any way other than in accordance with Standard Securitization
Undertakings or
(3) subjects any property or asset of ours or any restricted
subsidiary of ours directly or indirectly, contingently or otherwise, to
the satisfaction thereof, other than in accordance with Standard
Securitization Undertakings,
(b) with which neither we nor any restricted subsidiary of ours has any
material contract, agreement, arrangement or understanding other than on
terms no less favorable to us or such restricted subsidiary than those that
might be obtained at the time from Persons that are not our Affiliates,
other than fees payable in the ordinary course of business in connection
with servicing receivables of such entity, and
(c) to which neither we nor any restricted subsidiary of ours has any
obligation to maintain or preserve such entity's financial condition or
cause such entity to achieve certain levels of operating results. Any such
designation by our board of directors shall be evidenced to the trustee by
filing with the trustee a certified copy of the resolution of our board of
directors giving effect to such designation and an officers' certificate
certifying that such designation complied with the foregoing conditions.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date of the
indenture.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by us or any of our subsidiaries that
are reasonably customary in an accounts receivable or equipment transactions.
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"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subordinated Indebtedness" means, with respect to us or any guarantor, any
Indebtedness of ours or such guarantor, as the case may be, which is expressly
subordinated in right of payment to the notes or such guarantor's note
guarantee, as the case may be.
"Subsidiary" means, with respect to any Person,
(1) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the
other subsidiaries of that Person (or a combination thereof) and
(2) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a subsidiary of such Person or (b) the
only general partners of which are such Person or of one or more
subsidiaries of such Person (or any combination thereof), but shall not
include any unrestricted subsidiary.
"Total Assets" means the total consolidated assets of us and our restricted
subsidiaries, as described on our most recent consolidated balance sheet,
adjusted to give effect to any acquisitions or dispositions since the date of
such balance sheet (including any acquisitions for which Indebtedness is
proposed to be incurred).
"Total Tangible Assets" means Total Assets minus goodwill and other
intangibles and deferred tax assets.
"Unrestricted Subsidiary" means any subsidiary that is designated by the
board of directors as an unrestricted subsidiary pursuant to a board
resolution, but only to the extent that such subsidiary:
(a) has no Indebtedness other than Non-Recourse Debt;
(b) is not party to any agreement, contract, arrangement or
understanding with us or any restricted subsidiary of ours unless the terms
of any such agreement, contract, arrangement or understanding are no less
favorable to us or such restricted subsidiary than those that might be
obtained at the time from Persons who are not our Affiliates;
(c) is a Person with respect to which neither we nor any of our
restricted subsidiaries has any direct or indirect obligation (x) to
subscribe for additional Equity Interests or (y) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results;
(d) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of our or any of our restricted
subsidiaries; and
(e) has at least one director on its board of directors that is not a
director or executive officer of us or any of our restricted subsidiaries
and has at least one executive officer that is not a director or executive
officer of us or any of our restricted subsidiaries.
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Any such designation by the board of directors shall be evidenced to the
trustee by filing with the trustee a certified copy of the board resolution
giving effect to such designation and an officers' certificate certifying that
such designation complied with the foregoing conditions and was permitted by
the covenant described above under the caption "Covenants--Restricted
Payments." If, at any time, any unrestricted subsidiary would fail to meet the
foregoing requirements as an unrestricted subsidiary, it shall thereafter
cease to be an unrestricted subsidiary for purposes of the indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by our
restricted subsidiaries as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant described under
the caption "--Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock," we shall be in default of such covenant). Our board of directors may
at any time designate any unrestricted subsidiary to be a restricted
subsidiary; provided that such designation shall be deemed to be an incurrence
of Indebtedness by our restricted subsidiaries of any outstanding Indebtedness
of such unrestricted subsidiary and such designation shall only be permitted
if
(1) Indebtedness is permitted under the covenant described under the
caption "--Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock," calculated on a pro forma basis as if such designation had occurred
at the beginning of the Four-Quarter Period,
(2) the subsidiary shall execute a note guarantee and deliver an Opinion
of Counsel, in each case, if required by the terms of the Indenture and
(3) no Default or Event of Default would be in existence following such
designation.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing
(1) the sum of the products obtained by multiplying
(a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal, including
payment at final maturity, in respect thereof, by
(b) the number of years (calculated to the nearest one-twelfth) that
will elapse between such date and the making of such payment, by
(2) the then outstanding principal amount of such Indebtedness.
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EXCHANGE OFFER
Terms of the Exchange Offer; Period for Tendering Old Notes
Upon the terms and subject to the conditions in this prospectus and in the
letter of transmittal, we will accept any and all notes validly tendered and
not withdrawn prior to 5:00 p.m., New York City time, on the expiration date.
We will issue $1,000 principal amount of exchange notes in exchange for each
$1,000 principal amount of outstanding notes accepted in the exchange offer.
Holders may tender some or all of their notes under the exchange offer.
However, notes may be tendered only in integral multiples of $1,000.
The form and terms of the exchange notes are the same as the form and terms
of the notes except that:
(1) the exchange notes have been registered under the Securities Act of
1933 and hence will not bear legends restricting their transfer thereof;
and
(2) the holders of the exchange notes will not be entitled to rights
under the registration rights agreement. These rights include the
provisions for an increase in the interest rate on the notes in some
circumstances relating to the timing of the exchange offer. All of these
rights will terminate when the exchange offer is terminated. The exchange
notes will evidence the same debt as the notes. Holders of exchange notes
will be entitled to the benefits of the indenture.
As of the date of this prospectus, $140.0 million aggregate principal
amount of notes was outstanding. We have fixed the close of business on
[ ], 2000 as the record date for the exchange offer for purposes of
determining the persons to whom this prospectus and the letter of transmittal
will be mailed initially.
We intend to conduct the exchange offer in accordance with the applicable
requirements of the Securities Exchange Act of 1934 and the rules and
regulations of the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
We shall be deemed to have accepted validly tendered notes when, as and if
we have given oral or written notice to the exchange agent. The exchange agent
will act as agent for the tendering holders for the purpose of receiving the
exchange notes from the issuers.
If any tendered notes are not accepted for exchange because of an invalid
tender, the occurrence of other events in this prospectus or otherwise, we
will return the certificates for any unaccepted notes, at our expense, to the
tendering holder as promptly as practicable after the expiration date.
Holders who tender notes in the exchange offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the letter of
transmittal, transfer taxes with respect to the exchange of notes. We will pay
all charges and expenses, other than transfer taxes in some circumstances, in
connection with the exchange offer as described under the subheading "--Fees
and Expenses."
Expiration Date; Extensions; Amendments
The term "expiration date" shall mean 5:00 p.m., New York City time, on
[ ], 2000, unless we extend the exchange offer. In that case, the term
"expiration date" shall mean the latest date and time to which the exchange
offer is extended. Notwithstanding the foregoing, we will not extend the
expiration date beyond [ ], 2000.
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In order to extend the exchange offer, prior to 9:00 a.m., New York City
time, on the next business day after the previously scheduled expiration date,
we will:
(1) notify the exchange agent of any extension by oral or written notice
and
(2) mail to the registered holders an announcement of any extension.
If we make a fundamental change in the exchange offer, we will file a post-
effective amendment in the registration statement, in addition to providing
notice to the holders.
We reserve the right, in our sole discretion,
(1) if any of the conditions below under the heading "Conditions" shall
not have been satisfied,
(A) to delay accepting any notes,
(B) to extend the exchange offer or
(C) to terminate the exchange offer, or
(2) to amend the terms of the exchange offer in any manner.
Any delay in acceptance, extension, termination or amendment will be followed
as promptly as practicable by oral or written notice of delay to the
registered holders. We will give oral or written notice of any delay,
extension or termination to the exchange agent.
Interest on the Exchange Notes
The exchange notes will bear interest from their date of issuance. Holders
of notes that are accepted for exchange will receive, in cash, accrued
interest on the exchange notes to, but not including, the date of issuance of
the exchange notes. We will make the first interest payment on the exchange
notes on January 15, 2000. Interest on the notes accepted for exchange will
cease to accrue upon issuance of the exchange notes.
Interest on the exchange notes is payable semi-annually on each January 15
and July 15, commencing on January 15, 2000.
Procedures for Tendering Old Notes
Only a holder of notes may tender notes in the exchange offer. To tender in
the exchange offer, a holder must
. complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal,
. have the signatures guaranteed if required by the letter of transmittal,
and
. mail or otherwise deliver the letter of transmittal or send by
facsimile, together with the notes and any other required documents, to
the exchange agent prior to 5:00 p.m., New York City time, on the
expiration date.
To tender notes effectively, the holder must complete the letter of
transmittal and other required documents and the exchange agent must receive
all the documents prior to 5:00 p.m., New York City time, on the expiration
date. Delivery of the notes may be made by book-entry transfer in accordance
with the procedures described below. The exchange agent must receive
confirmation of book-entry transfer prior to the expiration date.
The tender by a holder and the acceptance of the tender by us will
constitute agreement between the holder and us under the terms and subject to
the conditions in this prospectus and in the letter of transmittal.
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The method of delivery of notes and the letter of transmittal and all other
required documents to the exchange agent is at the election and sole risk of
the holder. As an alternative to delivery by mail, holders may wish to
consider overnight or hand delivery service. In all cases, sufficient time
should be allowed to assure delivery to the exchange agent before the
expiration date. No letter of transmittal or notes should be sent to us.
Holders may request their respective brokers, dealers, commercial banks, trust
companies or nominees to effect the above transactions for those holders.
Any beneficial owner whose notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should promptly instruct the registered holder to tender on the
beneficial owner's behalf. See "Instruction to Registered Holder and/or Book-
Entry Transfer Facility Participant from Owner" included with the letter of
transmittal.
An institution that is a member firm of the Medallion system must guarantee
signatures on a letter of transmittal or a notice of withdrawal unless the
notes are tendered:
(1) by a registered holder who has not completed the box entitled
"Special Registration Instructions" or "Special Delivery Instructions" on
the letter of transmittal; or
(2) for the account of member firm of the Medallion system.
If the letter of transmittal is signed by a person other than the
registered holder of any notes listed in that letter of transmittal, the notes
must be endorsed or accompanied by a properly completed bond power, signed by
the registered holder as the registered holder's name appears on the notes. An
institution that is a member firm of the Medallion System must guarantee the
signature.
Trustees, executors, administrators, guardians, attorneys-in-fact, offices
of corporations or others acting in a fiduciary or representative capacity
should indicate their capacities when signing the letter of transmittal or any
notes or bond powers. Evidence satisfactory to us of their authority to so act
must be submitted with the letter of transmittal.
We understand that the exchange agent will make a request promptly after
the date of this prospectus to establish accounts with respect to the notes at
the book-entry transfer facility, The Depository Trust Company, for the
purpose of facilitating the exchange offer. Subject to the establishment of
the accounts, any financial institution that is a participant in The
Depository Trust Company's system may make book-entry delivery of notes. To do
so, the financial institution should cause the book-entry transfer facility to
transfer the notes into the exchange agent's account with respect to the notes
following the book-entry transfer facility's procedures for transfer. Delivery
of the notes may be effected through book-entry transfer into the exchange
agent's account at the book-entry transfer facility. However, the holder must
transmit and the exchange agent must receive or confirm an appropriate letter
of transmittal properly completed and duly executed with any required
signature guarantee and all other required documents on or prior to the
expiration date, or, if the guaranteed delivery procedures described below are
complied with, within the time period provided under the procedures. Delivery
of documents to the book-entry transfer facility does not constitute delivery
to the exchange agent.
The Depositary and The Depository Trust Company have confirmed that the
exchange offer is eligible for The Depository Trust Company Automated Tender
Offer Program. Accordingly, The Depository Trust Company participants may
electronically transmit their acceptance of the exchange offer by causing The
Depository Trust Company to transfer notes to the depositary in accordance
with The Depository Trust Company's Automated Tender Offer Program procedures
for transfer. The Depository Trust Company will then send an "agent's message"
to the Depositary.
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The term "agent's message" means a message transmitted by The Depository
Trust Company, received by the Depositary and forming part of the confirmation
of a book-entry transfer, which states that
(1) The Depository Trust Company has received an express acknowledgment
from the participant in The Depository Trust Company tendering notes
subject of the book-entry confirmation,
(2) the participant has received and agrees to be bound by the terms of
the letter of transmittal and
(3) we may enforce such agreement against the participant.
In the case of an agent's message relating to guaranteed delivery, the term
means a message transmitted by The Depository Trust Company and received by
the Depositary, which states that The Depository Trust Company has received an
express acknowledgment from the participant in The Depository Trust Company
tendering notes that the participant has received and agrees to be bound by
the notice of guaranteed delivery.
Notwithstanding the foregoing, in order to validly tender in the exchange
offer with respect to securities transferred through the Automated Tender
Offer Program, a The Depository Trust Company participant using Automated
Tender Offer Program must also properly complete and duly execute the
applicable letter of transmittal and deliver it to the Depositary.
By the authority granted by The Depository Trust Company, any The
Depository Trust Company participant which has notes credited to its The
Depository Trust Company account at any time (and held of record by The
Depository Trust Company's nominee) may directly provide a tender as though it
were the registered holder by completing, executing and delivering the
applicable letter of transmittal to the Depositary. Delivery of documents to
The Depository Trust Company does not constitute delivery to the Depositary.
All questions as to the
. validity,
. form,
. eligibility (including time of receipt),
. acceptance of tendered notes and
. withdrawal of tendered notes
will be determined by us in our sole discretion. Our determination will be
final and binding. We reserve the absolute right to reject any and all notes
not properly tendered. We reserve the absolute right to reject any notes which
would be unlawful if accepted, in the opinion of our counsel. We also reserve
the right in our sole discretion to waive any defects, irregularities or
conditions of tender as to particular notes. Our interpretation of the terms
and conditions of the exchange offer, including the instructions in the letter
of transmittal, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of notes must be cured
within such time as we shall determine. We intend to notify holders of defects
or irregularities with respect to tenders of notes. However, neither we, the
exchange agent nor any other person shall incur any liability for failure to
give notification of defects or irregularities with respect to tender of
notes. Tenders of notes will not be deemed to have been made until defects or
irregularities have been cured or waived. Any notes received by the exchange
agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the exchange
agent to the tendering holders, unless otherwise provided in the letter of
transmittal, as soon as practicable following the expiration date.
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Guaranteed Delivery Procedures
Holders who wish to tender their notes and:
(1) whose notes are not immediately available;
(2) who cannot deliver their notes, the letter of transmittal or any
other required documents to the exchange agent; or
(3) who cannot complete the procedures for book-entry transfer, prior to
the expiration date may effect a tender if:
(1) they tender through an institution that is a member firm of the
Medallion system;
(2) prior to the expiration date, the exchange agent receives from an
institution that is a member firm of the Medallion system a properly
completed and duly executed notice of guaranteed delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and address of
the holder, the certificate number(s) of the notes tendered and the
principal amount of notes tendered, stating that the tender is being made
and guaranteeing that, within five New York Stock Exchange trading days
after the expiration date, the letter of transmittal (or facsimile thereof)
together with the certificate(s) representing the notes (or a confirmation
of book-entry transfer of such notes into the exchange agent's account at
the book-entry transfer facility), and any other documents required by the
letter of transmittal will be deposited by the firm with the exchange
agent; and
(3) the exchange agent receives
(A) the properly completed and executed letter of transmittal (of
facsimile thereof),
(B) the certificate(s) representing all tendered notes in proper
form for transfer (or a confirmation of book-entry transfer of such
notes into the exchange agent's account at the book-entry transfer
facility), and
(C) all other documents required by the letter of transmittal upon
five New York Stock Exchange trading days after the expiration date.
Upon request to the exchange agent, we will send a notice of guaranteed
delivery to holders who wish to tender their notes according to the guaranteed
delivery procedures described above.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, holders may withdraw
tenders of notes at any time prior to 5:00 p.m., New York City time, on the
expiration date. To withdraw a tender of notes in the exchange offer, the
exchange agent must receive a telegram, telex, letter or facsimile
transmission notice of withdrawal at its address in this prospectus prior to
5:00 p.m., New York City time, on the expiration date. Any notice of
withdrawal must:
(1) specify the name of the person having deposited the notes to be
withdrawn;
(2) identify the notes to be withdrawn (including the certificate
number(s) and principal amount of such notes, or, in the case of notes
transferred by book-entry transfer, the name and number of the account at
the book-entry transfer facility to be credited);
(3) be signed by the holder in the same manner as the original signature
on the letter of transmittal by which the notes were tendered (including
any required signature guarantees) or be accompanied by documents of
transfer sufficient to have the trustee with respect to the notes register
the transfer of notes into the name of the person withdrawing the tender;
and
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(4) specify the name in which any notes are to be registered, if
different from that of the person who deposited the notes.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of a notice of withdrawal. Our determination shall
be final and binding on all parties. We will not deem notes so withdrawn to
have been validly tendered for purposes of the exchange offer. We will not
issue exchange notes for withdrawn notes unless you validly retender the
withdrawn notes. We will return any notes which have been tendered but which
are not accepted for exchange to the holder of the notes at our cost as soon
as practicable after withdrawal, rejection of tender or termination of the
exchange offer. You may retender properly withdrawn notes by following one of
the procedures described above under the heading "Procedures for Tendering Old
Notes" at any time prior to the expiration date.
Conditions
Notwithstanding any other term of the exchange offer, we shall not be
required to accept for exchange, or exchange exchange notes for, any notes,
and may terminate or amend the exchange offer as provided in this prospectus
before the acceptance of the notes, if:
(1) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the exchange offer
which might materially impair our ability to proceed with the exchange
offer or any development has occurred in any existing action or proceeding
which may be harmful to us or any of our subsidiaries; or
(2) any law, statute, rule, regulation or interpretation by the staff of
the Securities and Exchange Commission is proposed, adopted or enacted,
which might impair our ability to proceed with the exchange offer or impair
the contemplated benefits of the exchange offer to us; or
(3) any governmental approval has not been obtained, which we believe is
necessary for the consummation of the exchange offer as outlined in this
prospectus.
If any of the conditions are not satisfied, we may:
(1) refuse to accept any notes and return all tendered notes to the
tendering holders;
(2) extend the exchange offer and retain all notes tendered prior to the
expiration of the exchange offer, subject, however, to the rights of
holders to withdraw their notes; or
(3) waive any of the unsatisfied conditions of the exchange offer and
accept all properly tendered notes which have not been withdrawn.
Exchange Agent
State Street Bank and Trust Company has been appointed as the exchange
agent for the exchange offer. You should direct all
. executed letters of transmittal,
. questions,
. requests for assistance,
. requests for additional copies of this prospectus or of the letter of
transmittal and
. requests for Notices of Guaranteed Delivery
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to the exchange agent addressed as follows:
By Overnight Courier and by Hand By Registered or Certified Mail:
State Street Bank and Trust Company State Street Bank and Trust Company
Two Avenue de Lafayette 5th Floor, P.O. Box 778 Boston, MA 02102-0078
Corporate Trust Window Boston, MA Attn: Kellie Mullen
02111-1724
Attn: Kellie Mullen/MacKenzie Elijah
----------------
Delivery other than those above will not constitute a valid delivery.
Fees and Expenses
We will bear the expenses of soliciting tenders. We are mailing the
principal solicitation. However, our officers and regular employees and those
of our affiliates may make additional solicitation by telegraph, telecopy,
telephone or in person.
We have not retained any dealer-manager in connection with the exchange
offer. We will not make any payments to brokers, dealers, or others soliciting
acceptances of the exchange offer. However, we will pay the exchange agent
reasonable and customary fees for its services. We will reimburse the exchange
agent for its reasonable out-of-pocket expenses.
We will pay the cash expenses incurred in connection with the exchange
offer. These expenses include fees and expenses of the exchange agent and
trustee, accounting and legal fees and printing costs, among others.
Accounting Treatment
The exchange notes will be recorded at the same carrying value as the old
notes. The carrying value is face value net of unamortized discount, as
reflected in our accounting records on the date of exchange. Accordingly, we
will recognize no gain or loss for accounting purposes. The expenses of the
exchange offer will be expensed over the term of the exchange notes.
Transfer Taxes
Holders who tender their old notes for exchange will not be obligated to
pay any transfer taxes in connection with the exchange. However, holders who
instruct us to register exchange notes in the name of, or request that old
notes not tendered or not accepted in the exchange offer be returned to, a
person other than the registered tendering holder will be responsible for the
payment of any applicable transfer tax on that transfer.
Consequences of Failure to Exchange; Resales of Exchange Notes
The notes that are not exchanged for exchange notes under the exchange
offer will remain restricted securities. Accordingly, those notes may be
resold only:
(1) to us (upon redemption of the notes or otherwise);
(2) so long as the notes are eligible for resale under to Rule 144A, to
a person inside the United States who is a qualified institutional buyer
according to Rule 144A under the Securities
98
<PAGE>
Act of 1933 or under another exemption from the registration requirements
of the Securities Act of 1933, based upon an opinion of counsel reasonably
acceptable to us;
(3) outside the United States to a foreign person in a transaction
meeting the requirements of Rule 904 under the Securities Act of 1933; or
(4) under an effective registration statement under the Securities Act
of 1933 in each case in accordance with any applicable securities laws of
any state of the United States.
Resales of the Exchange Notes
Based on interpretations by the staff of the Securities and Exchange
Commission in no-action letters issued to third parties, we believe that a
holder or other person who receives exchange notes whether or not such person
is the holder (other than a person that is our "affiliate" within the meaning
of Rule 405 under the Securities Act of 1933) who receives exchange notes in
exchange for notes in the ordinary course of business and who is not
participating, does not intend to participate, and has no arrangement or
understanding with any person to participate in the distribution of the
exchange notes, will be allowed to resell the exchange notes to the public
without further registration under the Securities Act of 1933 and without
delivering a prospectus that satisfies the requirements of Section 10 of the
Securities Act of 1933. However, if any holder acquires exchange notes in the
exchange offer for the purpose of distributing or participating in a
distribution of the exchange notes, the holder cannot rely on the position of
the staff of the Securities and Exchange Commission enunciated in the no-
action letters or any similar interpretive letters. A holder who acquires
exchange notes in order to distribute them must comply with the registration
and prospectus delivery requirements of the Securities Act of 1933 in
connection with any resale transaction, unless an exemption from registration
is otherwise available. Further, each broker-dealer that receives exchange
notes for its own account in exchange for old notes acquired from Mattress
Discounters and our subsidiary guarantors as a result of market-making
activities or other trading activities (1) must acknowledge that it will
deliver a prospectus in connection with any resale of the exchange notes, (2)
may not rely on the staff's interpretations and (3) must comply with the
registration and prospectus delivery requirements of the Securities Act,
including being named as selling noteholders, in order to resell the
outstanding notes or the new notes.
99
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion, including the opinion of counsel described below,
is based upon current provisions of the Internal Revenue Code of 1986, as
amended, applicable Treasury regulations, judicial authority and
administrative rulings and practice. The Internal Revenue Service may take a
contrary view, and no ruling from the Internal Revenue Service has been or
will be sought. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could alter or modify the following
statements and conditions. Any changes or interpretations may or may not be
retroactive and could affect the tax consequences to holders. Some holders,
including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States, may be subject to special rules
not discussed below. We recommend that each holder consult that holder's own
tax advisor as to the particular tax consequences of exchanging that holder's
old notes for exchange notes, including the applicability and effect of any
state, local or foreign tax laws.
Kirkland & Ellis, our counsel, has advised us that in its opinion, the
exchange of the old notes for exchange notes under the exchange offer will not
be treated as an "exchange" for federal income tax purposes because the
exchange notes will not be considered to differ materially in kind or extent
from the old notes. Rather, the exchange notes received by a holder will be
treated as a continuation of the old notes in the hands of that holder.
Accordingly, there will be no federal income tax consequences to holders
solely as a result of the exchange of the old notes for exchange notes under
the exchange offer.
100
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account under
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of exchange notes.
This prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of exchange notes
received in exchange for old notes if the old senior subordinated notes were
acquired as a result of market-making activities or other trading activities.
We and our guarantor subsidiaries have agreed to make this prospectus, as
amended or supplemented, available to any broker-dealer to use in connection
with the resale of exchange notes received in exchange for old notes for a
period of at least 90 days after the expiration date. In addition, until [ ],
2000, all dealers effecting transactions in the exchange notes may be required
to deliver a prospectus.
Neither we nor our guarantor subsidiaries will receive any proceeds from
any sale of exchange notes by broker-dealers. Exchange notes received by
broker-dealers for their own accounts under the exchange offer may be sold
from time to time in one or more transactions
. in the over-the-counter market,
. in negotiated transactions,
. through the writing of options on the exchange notes or a combination of
those methods of resale,
. at market prices prevailing at the time of resale,
. at prices related to the prevailing market prices or
. at negotiated prices.
Any resale may be made directly to purchasers or to or through brokers or
dealers. Brokers or dealers may receive compensation in the form of
commissions or concessions from any broker-dealer or the purchasers of any
such exchange notes. An "underwriter" within the meaning of the Securities Act
of 1933 includes
(1) any broker-dealer that resells exchange notes that were received by
it for its own account under the exchange offer or
(2) any broker or dealer that participates in a distribution of those
exchange notes.
Any profit on any resale of exchange notes and any commissions or concessions
received by any persons may be deemed to be underwriting compensation under
the Securities Act of 1933. The letter of transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act of 1933.
Based on interpretations by the staff of the Securities and Exchange
Commission in no-action letters issued to third parties, we believe that a
holder or other person who receives exchange notes will be allowed to resell
the exchange notes to the public without further registration under the
Securities Act of 1933 and without delivering to the purchasers of the
exchange notes a prospectus that satisfies the requirements of Section 10 of
the Securities Act of 1933. The holder (other than a person that is an
"affiliate" of Mattress Discounters Corporation within the meaning of Rule 405
under the Securities Act of 1933) who receives exchange notes in exchange for
old notes in the ordinary course of business and who is not participating,
need not intend to participate or have an arrangement or understanding with
person to participate in the distribution of the exchange notes.
101
<PAGE>
However, if any holder acquires exchange notes in the exchange offer for
the purpose of distributing or participating in a distribution of the exchange
notes, the holder cannot rely on the position of the staff of the Securities
and Exchange Commission enunciated in no-action letters issued to third
parties or any similar interpretive letters. The holder must comply with the
registration and prospectus delivery requirements of the Securities Act of
1933 in connection with any resale transaction. A secondary resale transaction
should be covered by an effective registration statement containing the
selling security holder information required by Item 507 or 508, as
applicable, of Regulation S-K under the Securities Act of 1933, unless an
exemption from registration is otherwise available.
Further, each broker-dealer that receives exchange notes for its own
account in exchange for old notes, where the old notes were acquired by a
participating broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of any exchange notes. We and each of our guarantor
subsidiaries have agreed, for a period of not less than 90 days from the
consummation of the exchange offer, to make this prospectus available to any
broker-dealer for use in connection with any such resale.
For a period of not less than 90 days after the expiration date we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests those
documents in the letter of transmittal. We and each of our guarantor
subsidiaries have jointly and severally agreed to pay all expenses incident to
the exchange offer, including the expenses of one counsel for the holders of
the old notes, other than commissions or concessions of any brokers or
dealers. We will indemnify the holders of the old notes against liabilities
under the Securities Act of 1933, including any broker-dealers.
LEGAL MATTERS
Kirkland & Ellis, New York, New York, will issue an opinion for us with
respect to the issuance of the exchange notes including
(1) our existence and good standing under our state of incorporation
(2) our authorization of the sale and issuance of the exchange notes and
(3) the enforceability of the exchange notes.
There are partners of Kirkland & Ellis who indirectly own a portion of the
equity of Mattress Holding.
EXPERTS
The consolidated financial statements of Mattress Discounters Corporation
and its subsidiaries as of January 1, 2000, and for the ten-month period then
ended, included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants (which contains
an explanatory paragraph that describes that for periods prior to August 6,
1999, the financial statements have been prepared from the separate records
maintained by Mattress Discounters and may not necessarily be indicative of
the conditions that would have existed or the results of operations if
Mattress Discounters had been operated as an unaffiliated entity and describes
that portions of certain income and expenses represent allocations from
Heilig-Meyers Company applicable to Mattress Discounters) given on the
authority of that firm as experts in accounting and auditing.
The combined financial statements of Mattress Discounters Corporation,
T.J.B., Inc. and The Bedding Experts, Inc. as of February 28, 1999 and for the
year ended February 28, 1999, the period from July 2, 1997 to February 28,
1998 and the period from December 29, 1996 to July 1, 1997 included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors,
as stated in their
102
<PAGE>
report appearing herein (which report expresses an unqualified opinion and
includes two explanatory paragraphs referring to: (1) the combined financial
statements that have been prepared from the separate records maintained by
Mattress Discounters and may not necessarily be indicative of the conditions
that would have existed or the results of operations if the Company had been
operated as an unaffiliated entity and describes that portions of certain
income and expenses represent allocations made from Heilig-Meyers Company
applicable to Mattress Discounters, and (2) the adoption of a new method of
accounting for revenue recognition), and has been so included in reliance upon
the report of such firm given upon their authority as experts in accounting
and auditing.
The combined financial statements of Mattress Discounters Corporation and
T.J.B., Inc. as of July 1, 1997 and for the period from December 29, 1996 to
July 1, 1997 included in this prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein
(which report expresses an unqualified opinion and includes an explanatory
paragraph referring to the adoption of a new method of accounting for revenue
recognition), and has been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
CHANGE IN INDEPENDENT ACCOUNTANTS
Effective August 6, 1999, we dismissed Deloitte & Touche LLP as our
independent accountants. Concurrent with such dismissal, we engaged
PricewaterhouseCoopers LLP as our independent accountants. The decision to
dismiss Deloitte & Touche LLP as our independent accountants was approved by
our board of directors.
The reports of Deloitte & Touche LLP on the combined financial statements
of Mattress Discounters Corporation, T. J. B., Inc. and The Bedding Experts,
Inc. as of February 28, 1999 and for the year ended February 28, 1999, the
period from July 2, 1997 to February 28, 1998 and the period from December 29,
1996 to July 1, 1997 did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles.
The reports of Deloitte & Touche LLP on the combined statements of Mattress
Discounters Corporation and T. J. B., Inc. as of July 1, 1997 and for the
period from December 29, 1996 to July 1, 1997 did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles.
In connection with the above financial statements, there were no
disagreements between us and Deloitte & Touche LLP on any matters of
accounting principles or practices, financial statement disclosure, or
auditing scope and procedures which, if not resolved to the satisfaction of
Deloitte & Touche LLP, would have caused them to make reference to matter in
their reports.
AVAILABLE INFORMATION
We and our guarantor subsidiaries have filed with the Securities and
Exchange Commission a Registration Statement on Form S-4, the "Exchange Offer
Registration Statement," which term shall encompass all amendments, exhibits,
annexes and schedules attached to the registration statement, in accordance
with the Securities Act of 1933, and the rules and regulations promulgated
thereunder, covering the exchange notes being offered. This prospectus does
not contain all the information in the exchange offer registration statement.
For further information with respect to Mattress Discounters Corporation, the
guarantor subsidiaries and the exchange offer, reference is made to the
exchange offer registration statement. Statements made in this prospectus as
to the contents of any contract, agreement or other document referred to
discloses all material information relating to these contracts, agreements or
other documents. For a more complete understanding and description of each
contract, agreement or other document filed as an exhibit to the exchange
offer registration statement, we encourage you to read the documents contained
in the exhibits.
103
<PAGE>
The exchange offer registration statement, including the exhibits attached
to the registration statement, can be inspected and copied at the public
reference facilities maintained by the Securities and Exchange Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional
Offices of the Securities and Exchange Commission at Seven World Trade Center,
Suite 1300, New York, New York 10048 and at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of these materials can be obtained from
the Public Reference Section of the Securities and Exchange Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition,
the Securities and Exchange Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Securities and Exchange
Commission. The address of the Securities and Exchange Commission Web site is:
http://www.sec.gov.
As a result of the filing of the exchange offer registration statement, we
will become subject to the informational requirements of the Securities
Exchange Act of 1934, and in accordance therewith will be required to file
periodic reports and other information with the Securities and Exchange
Commission. Our obligation to file periodic reports and other information with
the Securities and Exchange Commission will be suspended if the exchange notes
are held of record by fewer than 300 holders as of the beginning of our fiscal
year other than the fiscal year in which the exchange offer registration
statement is declared effective.
We will nevertheless be required to continue to file reports with the
Securities and Exchange Commission if the exchange notes are listed on a
national securities exchange. In the event we cease to be subject to the
informational requirements of the Securities Exchange Act of 1934, we will be
required under the indenture to continue to file with the Securities and
Exchange Commission the annual and quarterly reports, information, documents
or other reports, including reports on Forms 10-K, 10-Q and 8-K, which would
be required under the informational requirements of the Securities Exchange
Act of 1934.
Under the indenture, we shall file with the trustee annual, quarterly and
other reports after we file those reports with the Securities and Exchange
Commission. Annual reports delivered to the trustee and the holders of
exchange notes will contain financial information that has been examined and
reported upon, with an opinion expressed by an independent public accountant.
We will also furnish any other reports as may be required by law.
Information contained in this prospectus contains "forward-looking
statements" which can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should," or "anticipates" or
the negative thereof or other similar terminology, or by discussions of
strategy. Our actual results could differ materially from those anticipated by
any of these forward-looking statements as a result of factors described in
the "Risk Factors" beginning on page 10 and elsewhere in this prospectus.
The market and industry data presented in this prospectus are based upon
third-party data, including information compiled by the International Sleep
Products Association and Furniture Today, market research reports regarding
consumer habits, analyst reports and other publicly available information.
While we believe that these estimates are reasonable and reliable, estimates
cannot always be verified by information available from independent sources.
Accordingly, readers are cautioned not to place undue reliance on the market
share data presented in this prospectus.
Comfort Source(R), Royal Comfort Collection(R), Mattress Discounters(R),
The Bedding Experts(R) and the jingle "Have a Good Night's Sleep on Us"(R) are
trademarks used by us. Trademarks and tradenames of other companies appearing
in this prospectus are the property of their respective holders.
104
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Mattress Discounters Corporation and Subsidiaries
Consolidated Interim Financial Statements (unaudited):
Consolidated Balance Sheets as of January 1, 2000 and April 1, 2000
(unaudited) ........................................................... F-2
Consolidated Statements of Operations for the three months ended March
31, 1999 and April 1, 2000 (unaudited) ................................ F-3
Consolidated Statements of Cash Flows for the three months ended March
31, 1999 and April 1, 2000 (unaudited) ................................ F-4
Consolidated Statement of Stockholder's Equity for the three months
ended April 1, 2000 (unaudited) ....................................... F-5
Notes to Consolidated Financial Statements (unaudited).................. F-6
Report of Independent Accountants......................................... F-10
Consolidated Financial Statements:
Consolidated Balance Sheets as of February 28, 1999 and January 1,
2000................................................................... F-12
Consolidated Statements of Operations for the ten-months ended January
1, 2000, the year ended February 28, 1999, the period from July 2, 1997
to February 28, 1998, and for the period from December 29, 1996 to July
1, 1997................................................................ F-13
Consolidated Statements of Cash Flows for the ten-months ended January
1, 2000, the year ended February 28, 1999, the period from July 2, 1997
to February 28, 1998, and for the period from December 29, 1996 to July
1, 1997................................................................ F-14
Consolidated Statement of Stockholder's Equity for the ten-months ended
January 1, 2000, the year ended February 28, 1999, the period from July
2, 1997 to February 28, 1998, and for the period from December 29, 1996
to July 1, 1997........................................................ F-15
Notes to Consolidated Financial Statements.............................. F-16
Mattress Discounters Corporation and T.J.B., Inc.
Combined Financial Statements:
Independent Auditors' Report............................................ F-33
Combined Balance Sheet as of July 1, 1997............................... F-34
Combined Statement of Operations and Retained Earnings for the period
from December 29, 1996 to July 1, 1997................................. F-35
Combined Statement of Cash Flows for the period from December 29, 1996
to July 1, 1997........................................................ F-36
Notes to Combined Financial Statements.................................. F-37
</TABLE>
F-1
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of January 1, 2000 and April 1, 2000
<TABLE>
<CAPTION>
January 1, April 1,
2000 2000
------------ ------------
<S> <C> <C>
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents......................... $ 7,511,772 $ 8,408,910
Accounts receivable............................... 5,333,775 5,836,954
Inventories....................................... 16,257,356 14,541,611
Prepaid expenses and other current assets......... 828,111 757,888
Due from affiliate................................ 3,086,561 3,998,207
Deferred tax asset................................ 840,000 840,000
------------ ------------
Total current assets............................ 33,857,575 34,383,570
Property and equipment, net......................... 10,583,397 10,226,189
Debt issue costs and other assets................... 10,423,837 10,140,644
Goodwill and other intangibles, net................. 56,142,894 55,763,399
Deferred tax asset ................................. 91,925,000 92,520,037
------------ ------------
Total assets.................................... $202,932,703 $203,033,839
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt................. $ 267,755 $ 196,186
Accounts payable, trade........................... 17,067,993 20,092,495
Accrued expenses.................................. 19,403,490 19,397,268
------------ ------------
Total current liabilities....................... 36,739,238 39,685,949
Long-term debt, excluding current portion........... 133,373,541 133,482,288
Other noncurrent liabilities ....................... 4,421,813 4,305,166
------------ ------------
Total liabilities............................... 174,534,592 177,473,403
Stockholder's equity:
Common stock...................................... 1 1
Additional paid-in capital........................ 29,845,297 27,482,796
Accumulated deficit............................... (1,447,187) (1,922,361)
------------ ------------
Total stockholder's equity...................... 28,398,111 25,560,436
------------ ------------
Total liabilities and stockholder's equity...... $202,932,703 $203,033,839
============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended
March 31, 1999 and April 1, 2000
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1999 April 1, 2000
-------------- -------------
<S> <C> <C>
(Unaudited) (Unaudited)
Net sales........................................ $65,367,828 $71,829,895
Cost of sales.................................... 43,656,375 46,923,310
----------- -----------
Gross profit.................................... 21,711,453 24,906,585
General and administrative expenses.............. 17,403,687 21,131,572
----------- -----------
Income from operations ......................... 4,307,766 3,775,013
Other income (expense):
Interest income................................ 20,111 125,776
Interest expense............................... (16,594) (4,971,000)
----------- -----------
Income (loss) before provision for (benefit from)
income taxes.................................... 4,311,283 (1,070,211)
Provision for (benefit from) income taxes........ 1,993,332 (595,037)
----------- -----------
Net income (loss)............................... $ 2,317,951 $ (475,174)
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and April 1, 2000
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1999 April 1, 2000
-------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 2,317,951 $ (475,174)
Adjustments to reconcile net income (loss) to
net cash provided
by operating activities:
Depreciation and amortization................. 1,236,047 1,204,606
Accretion of discount on Senior Notes......... -- 137,541
Amortization of debt issue costs.............. -- 326,108
Deferred income taxes......................... 1,675,044 (595,037)
Gain on disposition of property and
equipment.................................... (6,328) (4,127)
Changes in operating assets and liabilities:
Accounts receivable......................... (1,816,831) (503,179)
Inventories................................. 1,284,622 1,715,745
Prepaid expenses and other assets........... 289,265 70,223
Due to/from parent/affiliate................ 5,462,097 (911,646)
Accounts payable, trade..................... 680,644 3,024,502
Accrued expenses............................ (6,940,266) (6,222)
Other noncurrent liabilities................ (126,210) (116,647)
----------- -----------
Net cash provided by operating
activities............................... 4,056,035 3,866,693
----------- -----------
Cash flows from investing activities:
Property and equipment expenditures............. (1,213,158) (470,336)
Expenditures for intangible assets.............. (300,000)
Other........................................... 28,300 605
----------- -----------
Net cash used in investing activities..... (1,484,858) (469,731)
----------- -----------
Cash flows from financing activities:
Payments on long-term debt...................... (39,011) (71,344)
Payments on capital lease obligations........... (45,659) (29,019)
Payment of debt issue costs..................... -- (36,960)
Repurchase of stock options..................... -- (2,362,501)
----------- -----------
Net cash used in financing activities..... (84,670) (2,499,824)
----------- -----------
Net increase in cash and cash equivalents......... 2,486,507 897,138
Cash and cash equivalents, beginning of period.... (1,271,425) 7,511,772
----------- -----------
Cash and cash equivalents, end of period.......... $ 1,215,082 $ 8,408,910
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
For the Three Months Ended April 1, 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.... -- (2,362,501) -- (2,362,501)
Net loss....................... -- -- (475,174) (475,174)
--- ----------- ----------- -----------
Balances as of April 1, 2000... $1 $27,482,796 $(1,922,361) $25,560,436
=== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<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 April 1, 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 April 1, 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 May 28, 1999, Heilig-Meyers entered into a transaction agreement (the
"Transaction Agreement") with HMA and MD Acquisition Corporation, a transitory
Virginia merger corporation ("MDAC"). Heilig-Meyers owned 100% of the stock of
Mattress Discounters, T.J.B. and Bedding Experts. Pursuant to the Transaction
Agreement, upon the satisfaction of certain conditions, and after all of the
issued and outstanding shares of Mattress Discounters, T.J.B. and Bedding
Experts had been contributed to the capital of HMA, MDAC was merged with and
into HMA, with HMA being the surviving corporation, subsequently changing its
name to Mattress Holding Corporation ("Holdings"), effective on August 6, 1999
(the "Closing Date"). HMA was recapitalized (the "Recapitalization") whereby
certain equity investors acquired an approximate 92.7% economic and voting
equity stake in HMA. Pursuant to the merger, the issued and outstanding shares
of common stock of HMA were converted into the right to receive (i) a number
of shares of fully paid and nonassessable shares of Holdings, the surviving
corporation, that immediately following the Closing Date represented
approximately 7.3% of each class of the issued and outstanding common stock of
Holdings; (ii) $204.2 million in cash and (iii) a $10.0 million principal
amount 10% junior subordinated promissory note and a $7.5 million principal
amount 12% junior subordinated promissory note issued by Holdings.
F-6
<PAGE>
Concurrent with the Recapitalization of Holdings the Company issued 140,000
units consisting of $140 million of Mattress Discounters Corporation senior
notes due 2007 (the "Senior Notes") and warrants to purchase 679,000 shares of
Class A common stock and 75,460 shares of Class L common stock of Holdings
(the "Warrants"); and entered into a $20 million senior credit facility (the
"Senior Credit Facility") of which approximately $5.2 million was drawn at the
Closing Date.
In addition to the above pretax charge, the Company has recorded the
following transactions resulting from the consummation of the Transaction
Agreement:
(i) The deemed settlement and net distribution from capital of the note
receivable from Heilig-Meyers of $5,976,790, the elimination and
distribution of current taxes payable to Heilig-Meyers of $4,322,556,
and the distribution of excess cash at the Closing Date of $1,675,587
to Heilig-Meyers
(ii) The establishment of deferred income taxes and additional paid in
capital of approximately $88.7 million resulting from a new basis in
the Company's assets for income tax reporting purposes as a result of
the parties to the Transaction Agreement electing to treat the
transactions as a taxable event pursuant to section 338(h)(10) of the
Internal Revenue Code;
(iii) The payment of financing fees of approximately $10 million, which
have been deferred in the consolidated balance sheet;
(iv) The contribution of capital from Holdings representing the granting of
the Management Stock Options and the Warrants in Holdings' common
stock; and
(v) The dividend distribution of approximately $130.0 million from the
Company to Holdings to partially fund the Recapitalization of
Holdings.
Subsequent to the Closing, Holdings submitted its claim for a working
capital adjustment to Heilig-Meyers under the Transaction Agreement. In
connection with the working capital adjustment, on December 22, 1999, Heilig-
Meyers agreed to pay to Holdings $1,953,135, which Holdings advanced to the
Company. In addition, Heilig-Meyers agreed to reduce the outstanding principal
amount of its $7.5 million 12% Junior Subordinated Promissory Note of Holdings
to $5.875 million. The working capital adjustment transactions were accounted
for by Holdings as a reduction to merger consideration. Heilig-Meyers also
agreed to discharge certain lease obligations of the Company aggregating
approximately $42,000.
2. Severance Expense
In January and February 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 $1.4 million during the first quarter of calendar
2000, and paid approximately $2.4 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.
3. Inventories
Inventories are summarized as follows: as of January 1, 2000 and April 1,
2000:
<TABLE>
<CAPTION>
January 1, April 1,
2000 2000
----------- -----------
(Unaudited)
<S> <C> <C>
Finished Goods....................................... $14,291,184 $12,990,358
Work in Process...................................... 175,876 235,110
Raw Materials........................................ 1,790,296 1,316,143
----------- -----------
$16,257,356 $14,541,611
=========== ===========
</TABLE>
F-7
<PAGE>
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.
Mattress Discounters and Heilig-Meyers entered into a Tax Agreement in
conjunction with the Transaction Agreement. The Tax Agreement requires Heilig-
Meyers to be responsible for and to pay all taxes resulting from pre-August 6,
1999 operations, including any federal and state income tax attributable to
the making of an Internal Revenue Code section 338(h)(10) election. The
Company shall be responsible for and pay all taxes resulting from post-August
5, 1999 operations.
As a result of the 338(h)10 election, the Company stepped up its tax basis,
which resulted in recognition of a deferred tax asset of $88.7 million,
comprised primarily of future tax goodwill amortization deductions and
differences between the tax and book basis for inventory. Management believes
that it is more likely than not that the tax benefit will be realized. The
total amount of future taxable income necessary to realize the asset is
approximately $220.0 million. The Company expects to realize this asset by
generating future taxable income. Failure to achieve forecasted taxable income
might affect the ultimate realization of the net deferred tax assets.
The effective rate for income taxes for the three months ended April 1,
2000 was 55.6% due to nondeductible goodwill and state income taxes.
5. Segment Information
Retail--Sale of mattresses and bedding products through 256 and 238
retail locations as of April 1, 2000 and March 31, 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>
Manufacturing
--------------------------
Retail Interco.
Period(/1/) Retail Segment Affiliates Total Elim. Consolidated
----------- ------- ------- ---------- ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.. 2000 $63,169 $9,621 $8,661 $18,282 $9,621 $71,830
1999 56,688 8,795 8,680 17,475 8,795 65,368
</TABLE>
<TABLE>
<CAPTION>
Corporate/
Period(/1/) Retail Manufacturing Other Consolidated
----------- ------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Segment profit(/2/)..... 2000 $ (55) $3,830 $ -- $ 3,775
1999 1,226 3,082 -- 4,308
Depreciation and
amortization........... 2000 944 261 -- 1,205
1999 956 280 -- 1,236
Capital expenditures.... 2000 410 60 -- 470
1999 1,049 164 -- 1,213
Identifiable
assets(/3/)............ 2000 20,792 3,976 178,266 203,034
1999 22,871 3,862 73,304 100,037
</TABLE>
F-8
<PAGE>
- --------
(1)Periods are as follows:
2000---Three month period ended April 1, 2000
1999--Three month period ended March 31, 1999
(2)Segment profit represents earnings before interest and the provision for
income taxes.
(3) 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. The
following table sets forth the "summarized financial information" of Mattress
Discounters ("Parent").
<TABLE>
<CAPTION>
January 1, 2000 April 1, 2000
--------------- --------------
(unaudited)
(in thousands) (in thousands)
<S> <C> <C>
Balance Sheet Data:
Current assets............................. $ 25,872 $ 27,355
Noncurrent assets.......................... 164,681 164,182
Current liabilities........................ 26,723 30,464
Noncurrent liabilities..................... 135,432 135,513
Total stockholder's equity................. 28,398 25,560
<CAPTION>
Three-months Three-months
ended ended
March 31, 1999 April 1, 2000
--------------- --------------
(unaudited) (unaudited)
(in thousands) (in thousands)
<S> <C> <C>
Operating Data:
Net sales.................................. $ 40,419 $ 47,196
Gross profit............................... 13,432 17,118
Net income (loss).......................... 1,668 (475)
</TABLE>
F-9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder and Board of Directors of
Mattress Discounters Corporation and Subsidiaries:
In our opinion, the accompanying consolidated balance sheet as of January
1, 2000, and the related consolidated statements of operations, of
stockholder's equity and of cash flows present fairly, in all material
respects, the financial position of Mattress Discounters Corporation and its
subsidiaries as of January 1, 2000, and the results of their operations and
their cash flows for the ten-months then ended, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
As discussed in Note 1 to the financial statements, the financial position
and operating results of the entities for periods prior to August 6, 1999,
were combined as each entity was under common ownership and control by Heilig-
Meyers Company ("Heilig") through August 5, 1999. Accordingly, the financial
position and operating results for periods prior to August 6, 1999, may not
necessarily be indicative of the conditions that would have existed or the
results of operations if the Company had been operated as an unaffiliated
entity. As discussed in Note 15 to the financial statements, portions of
certain income and expenses for periods prior to August 6, 1999, represent
allocations made from Heilig applicable to the Company.
PricewaterhouseCoopers LLP
McLean, Virginia
March 10, 2000
F-10
<PAGE>
[LOGO OF DELOITTE & TOUCHE]
INDEPENDENT AUDITORS' REPORT
To the Stockholder and Board of Directors
Mattress Discounters
We have audited the accompanying combined balance sheet of Mattress
Discounters Corporation, TJB, Inc., and The Bedding Experts, Inc. (the
"Company") (as described in Note 1 to the combined financial statements) as of
February 28, 1999, and the related combined statements of operations,
stockholder's equity and cash flows for the year ended February 28, 1999, the
period from July 2, 1997 to February 28, 1998, and the period from December
29, 1996 to July 1, 1997. 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 generally accepted auditing
standards. 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, such combined financial statements present fairly, in all
material respects, the combined financial position of the Company as of
February 28, 1999, and the combined results of their operations and their
combined cash flows for the year ended February 28, 1999, the period from
July 2, 1997 to February 28, 1998, and for the period from December 29, 1996
to July 1, 1997, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the combined financial statements, the accompanying
combined financial statements have been prepared from the separate records
maintained by the Company and may not necessarily be indicative of the
conditions that would have existed or the results of operations if the Company
had been operated as an unaffiliated entity. As discussed in Note 15 to the
combined financial statements, portions of certain income and expenses
represent allocations made from Heilig-Meyers Company applicable to the
Company.
As discussed in Note 2 to the combined financial statements, the Company
changed its method of accounting for revenue recognition and retroactively
restated the combined financial statements for the change.
Deloitte & Touche LLP
Richmond, Virginia
June 5, 1999 (March 27, 2000
as to paragraph 12 of
note 2, under the caption Revenues and Costs of Sales related to the
adoption of a
new method of accounting for revenue recognition)
F-11
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, 1999 and January 1, 2000
<TABLE>
<CAPTION>
January 1,
February 28, 1999 2000
----------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.............. $ 1,365,805 $ 7,511,772
Accounts receivable....... 5,681,413 5,333,775
Inventories............... 15,590,944 16,257,356
Prepaid expenses and other
current assets........... 308,583 828,111
Due from affiliate........ 7,251,161 3,086,561
Deferred tax asset........ 970,394 840,000
------------ ------------
Total current assets.... 31,168,300 33,857,575
Property and equipment,
net........................ 10,839,814 10,583,397
Debt issue costs and other
assets..................... 641,223 10,423,837
Goodwill and other
intangibles, net........... 58,464,190 56,142,894
Deferred tax asset.......... 374,852 91,925,000
------------ ------------
Total assets............ $101,488,379 $202,932,703
============ ============
LIABILITIES AND
STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-
term debt................ $ 229,838 $ 267,755
Accounts payable, trade... 17,474,386 17,067,993
Accrued expenses.......... 12,326,587 19,403,490
------------ ------------
Total current
liabilities............ 30,030,811 36,739,238
Long-term debt, excluding
current portion............ 425,883 133,373,541
Other noncurrent
liabilities................ 4,967,462 4,421,813
------------ ------------
Total liabilities....... 35,424,156 174,534,592
------------ ------------
Stockholder's equity:
Common stock.............. 29,050 1
Additional paid-in
capital.................. 46,047,515 29,845,297
Retained earnings
(accumulated deficit).... 19,987,658 (1,447,187)
------------ ------------
Total stockholder's
equity................. 66,064,223 28,398,111
------------ ------------
Total liabilities and
stockholder's equity... $101,488,379 $202,932,703
============ ============
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period from December 29, 1996 to July 1, 1997,the Period from July 2,
1997 to February 28, 1998, the Year Ended February 28, 1999,and the Ten-Months
Ended January 1, 2000
<TABLE>
<CAPTION>
1997 1998 1999 2000
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales................ $20,737,886 $159,752,386 $245,460,833 $218,768,387
Cost of sales............ 12,543,017 103,866,763 156,598,163 141,098,503
----------- ------------ ------------ ------------
Gross profit........... 8,194,869 55,885,623 88,862,670 77,669,884
General and
administrative
expenses................ 5,291,768 40,626,938 67,261,355 60,895,148
Other operating
expenses................ -- -- -- 4,556,313
----------- ------------ ------------ ------------
Income from
operations............ 2,903,101 15,258,685 21,601,315 12,218,423
Other income (expense):
Interest income........ 9,480 130,733 203,892 199,426
Interest expense....... -- (42,372) (75,568) (8,035,021)
Other, net............. 2,072 (532,055) 322,207 (97,500)
----------- ------------ ------------ ------------
Income before
provision for income
taxes............... 2,914,653 14,814,991 22,051,846 4,285,328
Provision for income
taxes................... -- 5,396,992 9,361,576 2,181,218
----------- ------------ ------------ ------------
Net income............. $ 2,914,653 $ 9,417,999 $ 12,690,270 $ 2,104,110
=========== ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period from December 29, 1996 to July 1, 1997,the Period from July 2,
1997 to February 28, 1998, the Year Ended February 28, 1999,and the Ten-Months
Ended January 1, 2000
<TABLE>
<CAPTION>
1997 1998 1999 2000
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............ $ 2,914,653 $ 9,417,999 $ 12,690,270 $ 2,104,110
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Compensation expense
in connection with
the
Recapitalization..... -- -- -- 3,825,000
Depreciation and
amortization......... 108,058 2,648,484 4,540,875 4,062,910
Accretion of discount
on Senior Notes...... -- -- -- 242,168
Amortization of debt
issue costs.......... -- -- -- 526,079
Deferred income
taxes................ -- (409,999) 2,085,043 (1,908,754)
Provision for obsolete
inventory............ 107,599 400,000
Loss on disposition of
property and
equipment............ 24,622 22,437 476,567 40,926
Changes in operating
assets and
liabilities:
Accounts receivable.. (521,841) (2,942,130) (543,623) 347,638
Inventories.......... (329,421) (3,659,861) (1,395,532) (1,066,412)
Prepaid expenses and
other current
assets.............. 527,035 (344,018) 228,177 (519,528)
Due to/from
parent/affiliate.... -- 3,226,029 (10,477,190) (1,070,529)
Accounts payable,
trade............... 644,571 (6,502,866) (2,406,465) (406,393)
Accrued expenses..... (123,949) 2,478,317 (2,218,207) 10,436,063
Other noncurrent
liabilities......... 510,421 (1,225,919) (545,649)
----------- ----------- ------------ -------------
Net cash provided by
operating
activities......... 3,243,728 4,552,412 1,753,996 16,467,629
----------- ----------- ------------ -------------
Cash flows from
investing activities:
Property and equipment
expenditures......... (423,681) (2,121,853) (5,162,137) (2,614,759)
Proceeds from
disposition of
property and
equipment............ -- 3,982 132,794 99,515
Net cash acquired
through acquisition.. -- 3,733,154 -- --
Expenditures for
intangible asset..... -- -- (597,508) (10,880)
Due to/from
parent/affiliate..... -- -- -- (741,661)
Other................. -- -- -- (61,078)
----------- ----------- ------------ -------------
Net cash provided
(used in) by
investing
activities......... (423,681) 1,615,283 (5,626,851) (3,328,863)
----------- ----------- ------------ -------------
Cash flows from
financing activities:
Payments on long-term
debt................. (34,858) (83,042) (138,769) (211,989)
Long-term borrowings.. -- 545,000 40,000 133,070,457
Payments on capital
lease obligations.... -- (114,947) (165,801) (115,061)
Revolving line of
credit borrowings.... -- -- -- 5,204,900
Payments on revolving
line of credit
borrowings........... -- -- -- (5,204,900)
Payment of debt issue
costs................ -- -- -- (10,247,615)
Distribution to
Heilig-Meyers in
connection with
Recapitalization..... -- -- -- (1,675,587)
Distribution to
stockholders......... (2,608,749) (2,380,729) -- --
Dividend to Holdings.. -- -- -- (130,001,035)
Capital contributions
from Holdings........ -- -- -- 2,200,000
Other, net............ -- -- -- (11,969)
----------- ----------- ------------ -------------
Net cash used in
financing
activities......... (2,643,607) (2,033,718) (264,570) (6,992,799)
----------- ----------- ------------ -------------
Net increase (decrease)
in cash and cash
equivalents........... 176,440 4,133,977 (4,137,425) 6,145,967
Cash and cash
equivalents, beginning
of period............. 1,192,813 1,369,253 5,503,230 1,365,805
----------- ----------- ------------ -------------
Cash and cash
equivalents, end of
period................ $ 1,369,253 $ 5,503,230 $ 1,365,805 $ 7,511,772
=========== =========== ============ =============
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
For the Period from December 29, 1996 to July 1, 1997,
the Period from July 2, 1997 to February 28, 1998, the Year ended February 28,
1999,
and the Ten-Months Ended January 1, 2000
<TABLE>
<CAPTION>
Retained
Additional Earnings Total
Common Paid-In (accumulated Stockholder's
Stock Capital deficit) Equity
-------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balances as of December
28, 1996............... $ 1,000 $ -- $ (45,786) $ (44,786)
Distribution to
stockholders........... -- -- (2,608,749) (2,608,749)
Net Income.............. -- -- 2,914,653 2,914,653
-------- ------------- ------------ -------------
Balances as of July 1,
1997................... 1,000 -- 260,118 261,118
Distribution to
stockholders........... -- -- (2,380,729) (2,380,729)
Acquisition of Mattress
Discounters and TJB.... 28,050 42,872,915 -- 42,900,965
Net income.............. -- -- 9,417,999 9,417,999
-------- ------------- ------------ -------------
Balances as of February
28, 1998............... 29,050 42,872,915 7,297,388 50,199,353
Additional consideration
for Mattress
Discounters and TJB.... -- 3,174,600 -- 3,174,600
Net Income.............. -- -- 12,690,270 12,690,270
-------- ------------- ------------ -------------
Balances as of February
28, 1999............... 29,050 46,047,515 19,987,658 66,064,223
Distribution to Heilig-
Meyers................. -- (3,541,187) -- (3,541,187)
Capital contribution
from Mattress Holding
Corporation............ -- 2,200,000 -- 2,200,000
Recapitalization of
Mattress Discounters
Corporation............ (29,049) 29,049 -- --
Stepped-up tax basis
related to the
recapitalization....... -- 88,703,000 -- 88,703,000
Compensatory stock
options................ -- 2,869,000 -- 2,869,000
Dividend to Mattress
Holding Corporation.... -- (106,462,080) (23,538,955) (130,001,035)
Net income.............. -- -- 2,104,110 2,104,110
-------- ------------- ------------ -------------
Balances as of January
1, 2000................ $ 1 $ 29,845,297 $ (1,447,187) $ 28,398,111
======== ============= ============ =============
</TABLE>
See notes to consolidated financial statements.
F-15
<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 January 1, 2000 and February 28, 1999, 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 (as
described below) 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 (as
described below), 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 annual 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 financial statements for the period from December 29, 1996 to July 1,
1997 include only the results of operations and cash flows of Bedding Experts.
On May 28, 1999, Heilig-Meyers entered into a transaction agreement (the
"Transaction Agreement") with HMA and MD Acquisition Corporation, a transitory
Virginia merger corporation ("MDAC"). Heilig-Meyers owned 100% of the stock of
Mattress Discounters, T.J.B. and Bedding Experts. Pursuant to the Transaction
Agreement, upon the satisfaction of certain conditions, and after all of the
issued and outstanding shares of Mattress Discounters, T.J.B. and Bedding
Experts had been contributed to the capital of HMA, MDAC was merged with and
into HMA, with HMA being the surviving corporation, subsequently changing its
name to Mattress Holding Corporation ("Holdings"), effective on August 6, 1999
(the "Closing Date"). HMA was recapitalized (the "Recapitalization") whereby
certain equity investors acquired an approximate 92.7% economic and voting
equity stake in HMA. Pursuant to the merger, the issued and outstanding shares
of common stock of HMA were converted into the right to receive (i) a number
of shares of fully paid and nonassessable shares of Holdings, the surviving
corporation, that immediately following the Closing Date represented
approximately 7.3% of each class of the issued and outstanding common stock of
Holdings; (ii) $204.2 million in cash and (iii) a $10.0 million principal
amount 10% junior subordinated promissory note and a $7.5 million principal
amount 12% junior subordinated promissory note issued by Holdings.
Concurrent with the Recapitalization of Holdings the Company issued 140,000
units consisting of $140 million of Mattress Discounters Corporation senior
notes due 2007 (the "Senior Notes") and warrants to purchase 679,000 shares of
Class A common stock and 75,460 shares of Class L common stock of Holdings
(the "Warrants"); and entered into a $20 million senior credit facility (the
"Senior Credit Facility") of which approximately $5.2 million was drawn at the
Closing Date (see Note 7).
F-16
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the Transaction Agreement, certain of the Company's
management were granted "in the money" stock options to purchase shares of
Class A and Class L common stock of Holdings with an intrinsic value of
approximately $2.9 million ("Management Stock Options") together with deferred
compensation benefits of approximately $0.9 million. This resulted in a pretax
charge of $3.8 million that was recognized by the Company during the three
month period ended August 31, 1999.
In addition to the above pretax charge, the Company has recorded the
following transactions resulting from the consummation of the Transaction
Agreement:
<TABLE>
<C> <S>
(i) The deemed settlement and net distribution from capital of the note
receivable from Heilig-Meyers of $5,976,790, the elimination and
distribution of current taxes payable to Heilig-Meyers of $4,322,556,
and the distribution of excess cash at the Closing Date of $1,675,587
to Heilig-Meyers;
(ii) The establishment of deferred income taxes and additional paid in
capital of approximately $88.7 million resulting from a new basis in
the Company's assets for income tax reporting purposes as a result of
the parties to the Transaction Agreement electing to treat the
transactions as a taxable event pursuant to section 338(h)(10) of the
Internal Revenue Code;
(iii) The payment of financing fees of approximately $10 million, which
have been deferred in the consolidated balance sheet;
(iv) The contribution of capital from Holdings representing the granting
of the Management Stock Options and the Warrants in Holdings' common
stock; and
(v) The dividend distribution of approximately $130.0 million from the
Company to Holdings to partially fund the Recapitalization of
Holdings.
</TABLE>
Subsequent to the Closing, Holdings submitted its claim for a working
capital adjustment to Heilig-Meyers under the Transaction Agreement. In
connection with the working capital adjustment, on December 22, 1999, Heilig-
Meyers agreed to pay to Holdings $1,953,135. In addition, Heilig-Meyers agreed
to reduce the outstanding principal amount of its $7.5 million 12% Junior
Subordinated Promissory Note of Holdings to $5.875 million. The working
capital adjustment transactions were accounted for by Holdings as a reduction
to merger consideration. Heilig-Meyers also agreed to discharge certain lease
obligations of the Company aggregating approximately $42,000.
Prior to the July 2, 1997 acquisitions of Mattress Discounters and T.J.B.,
and the January 3, 1998 acquisition of Bedding Experts, the companies were
structured as S corporations for federal and state income tax purposes.
On July 2, 1997, Heilig-Meyers acquired all of the outstanding capital
stock of Mattress Discounters and T.J.B. The initial purchase price was valued
at approximately $42,900,000 based on the average closing price of the Heilig-
Meyers common stock for the 10 days prior to the acquisition date of July 2,
1997. Heilig-Meyers issued 2,269,839 shares of its common stock at the time of
closing and placed 264,550 shares of common stock in escrow to be paid to the
former shareholders of Mattress Discounters if the acquired stores met certain
earnings targets in the twelve months following the closing. On July 8, 1998,
these shares were released to the former shareholders, resulting in an
increase to the purchase price of approximately $3,175,000. The transaction
was accounted for as a purchase.
On January 3, 1998, Heilig-Meyers acquired all of the outstanding capital
stock of Bedding Experts, Heilig-Meyers issued 2,019,182 shares of its common
stock in the transaction valued at $25,000,000 based on the fair market value
of the stock at that date. The transaction was accounted
F-17
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for as a pooling of interests. The consolidated statements of operations and
retained earnings, and cash flows include the results of Bedding Experts for
all periods presented herein.
2. Summary of Significant Accounting Policies
Fiscal Year--On November 5, 1999, the Company elected to change its fiscal
year from the last day of February to the closest Saturday to December 31,
beginning with the ten-months ended January 1, 2000. On July 2, 1997, pursuant
to the acquisition of the Company by Heilig-Meyers, the Company's reporting
period changed from a 52-53 week fiscal year ending on the Saturday nearest
December 31, to a fiscal year ending February 28. Accordingly, results for
fiscal year 1999 represent the year ended February 28, 1999. The results of
operations and of cash flows for 1998 represent the eight-month period from
July 2, 1997 to February 28, 1998, and the results of operations and cash
flows for 1997 represent the six-month period from December 29, 1996 to July
1, 1997. Due to the various acquisitions and the periods presented, the
financial statements presented herein are not fully comparable.
Use of Estimates in the Preparation of Financial Statements--The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments--SFAS No. 107, "Disclosure About Fair
Value of Financial Instruments," requires certain disclosures regarding the
fair value of financial instruments. The amounts reported in the consolidated
balance sheets for cash and cash equivalents, accounts receivable, accounts
payable, accrued liabilities, amounts due from and to parent/affiliate
approximate fair value because of the short-term maturity of these
instruments. In addition, the fair value of long-term debt approximates its
carrying value.
Cash and Cash Equivalents--Cash equivalents include time deposits with
maturities of three months or less when purchased.
Accounts Receivable--Accounts receivable are primarily comprised of amounts
due to the Company pursuant to vendor cooperative advertising and rebate
agreements, and bank-financed customer sales.
Due from Affiliate--Due from affiliate represents sales to Heilig-Meyers
for mattresses, boxsprings and foundations manufactured by the Company, and
noninterest-bearing loans to Heilig-Meyers, for periods prior to August 6,
1999.
Inventories--Inventories are valued at the lower of cost or market. Cost is
determined by the first-in, first-out method. Manufactured inventories include
raw materials, direct labor and manufacturing overhead.
Property and Equipment--Property and equipment are stated at cost.
Depreciation is provided on the straight-line method at rates based on the
estimated useful lives of individual assets or classes of assets. Improvements
to leased property are amortized over their estimated useful lives or lease
period, whichever is shorter. Amortization of capitalized leased assets is
computed on the straight-line method over the shorter of the asset life or
term of the lease. Normal repairs and maintenance are expensed as incurred.
Expenditures which significantly extend asset useful lives are capitalized.
The estimated useful lives are 30 to 31.5 years for buildings, 3 to 7 years
for furniture, fixtures, equipment and vehicles, and 2 to 15 years for
leasehold improvements.
F-18
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Debt Issue Costs--Debt issue costs incurred in connection with the issuance
of the Senior Notes are being amortized through July 15, 2007. Amortization of
these costs are included in interest expense in the consolidated statements of
operations.
Goodwill and Other Intangibles--The Company amortizes goodwill on a
straight-line basis over forty years. Other intangibles, including its
trademark and copyright, are amortized over their economic lives, which range
from 3 to 20 years. Goodwill and other intangible assets are reviewed for
impairment whenever the facts and circumstances indicate that the carrying
amounts may not be recoverable. Impairment, should any occur, would be
recognized by a charge to operating results and a reduction in the carrying
value of the intangible asset.
Revenues and Costs of Sales--Sales revenue is recognized upon delivery and
acceptance of mattresses and bedding products by the Company's customers.
Sales are presented net of returns. Cost of sales includes occupancy and
delivery expenses.
In preparing the January 1, 2000 financial statements, the Company adopted
a new method of accounting for revenue recognition. In connection with the
planned registration of the Company's Senior Notes with the Securities and
Exchange Commission, the Company retroactively applied this method to their
financial statements. Previously, the Company recognized revenues for sales
upon receiving payment in full or if applicable, upon approval of customer
third party credit. The Company now recognizes revenue upon delivery and
acceptance of the product by the customer which is a preferred method. The
Company has restated its 1998 and 1999 financial statements for Mattress
Discounters Corporation, T.J.B. Inc. and The Bedding Experts, Inc. This change
resulted in $570,000 less net income and retained earnings, $1,570,000 more
inventory and $2,140,000 more accrued expenses in 1998 than amounts previously
reported. In 1999, the change resulted in $500,000 less net income, $1,070,000
less retained earnings, $1,810,000 more inventory and $2,880,000 more accrued
expenses in 1999 than amounts previously reported.
Advertising Costs--Costs incurred for advertising are expensed in the
period in which the advertising takes place. The Company records cooperative
advertising funds as a reduction of advertising expense, when the Company has
earned the cooperative advertising income. Net advertising expense recognized
during the period from December 29, 1996 to July 1, 1997, from July 2, 1997 to
February 28, 1998, for the year ended February 29, 1999, and the ten-month
period ended January 1, 2000 was $7,181,442, $3,780,505, $10,640,890, and
$7,269,699, respectively.
Income Taxes--Deferred income taxes are recognized for the tax consequences
in future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each period ended based on enacted
tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes in the consolidated
financial statements for periods prior to August 6, 1999, reflect tax
calculations on a separate company basis, and do not reflect actual taxes owed
by the Company on the Heilig-Meyers consolidated tax return. Bedding Experts,
was structured as an S corporation until the January 3, 1998 date of its
acquisition by Heilig-Meyers. Accordingly, no provision for taxes for Bedding
Experts, is included in the consolidated statement of operations for the
period from July 2, 1997 to January 2, 1998, and the period from December 29,
1996 to July 1, 1997.
Stock-Based Compensation--The Company has chosen to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
and related interpretations. The Company accounts for stock-based compensation
to non-employees using the fair value method prescribed by SFAS No. 123.
Accordingly, compensation costs for Holdings' stock options granted to
employees of the
F-19
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company is measured as the excess, if any, of the value of Holdings' stock at
the date of the grant over the amount an employee must pay to acquire the
stock. Compensation cost for Holdings' stock options granted to non-employees
is measured as the fair value of the option at the date of grant. Such
compensation costs, if any, are amortized on a straight-line basis over the
underlying option vesting terms.
New Accounting Standards--As of March 1, 1999, the Company adopted
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires certain
software development costs to be capitalized. Generally, once the
capitalization criteria of the SOP have been met, external direct costs of
materials and services used in development of internal-use software, payroll,
and payroll-related costs for employees directly involved in the development
of internal-use software, and interest costs incurred when developing software
for internal use are to be capitalized. The adoption of SOP 98-1 did not have
a material effect on the Company's consolidated financial position, results of
operations, or cash flows.
As of March 1, 1999, the Company adopted SOP 98-5, "Reporting on the Costs
of Start-Up Activities." SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. The adoption of SOP 98-5 did
not have a material effect on the Company's consolidated financial position,
results of operations, or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition. The Company has
determined that the provisions of SAB No. 101 did not have an impact on the
financial statements.
3. Inventories
Inventories are summarized as follows: as of February 28, 1999 and January
1, 2000:
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Finished goods...................................... $14,061,925 $14,291,184
Work in process..................................... 283,192 175,876
Raw materials....................................... 1,245,827 1,790,296
----------- -----------
$15,590,944 $16,257,356
=========== ===========
As of February 28, 1999 and January 1, 2000, the Company had recorded
reserves for inventory obsolescence of $25,000 and $ 379,880, respectively.
The Company purchases the majority of its mattress, boxspring and
foundation inventory from one supplier. During the fiscal year 1999, and
during the ten month period ended January 1, 2000, the Company purchased
approximately 62% and 64%, respectively, of its inventory from this supplier.
4. Property and Equipment
Property and equipment consist of the following at February 28, 1999 and
January 1, 2000:
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Land and buildings.................................. $ 1,122,468 $ 1,042,002
Furniture, fixtures, equipment, and vehicles........ 14,384,258 14,961,438
Leasehold improvements.............................. 7,028,717 8,862,424
----------- -----------
22,535,443 24,865,864
Less: Accumulated depreciation and amortization..... 11,695,629 14,282,467
----------- -----------
$10,839,814 $10,583,397
=========== ===========
</TABLE>
F-20
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation expense for the period from December 29, 1996 to July 1, 1997,
the period from July 2, 1997 to February 28, 1998, the year ended February 28,
1999, and the ten-months ended January 1, 2000, was $108,058, $1,727,484,
$3,051,805, and $2,730,735, respectively.
5. Goodwill and Other Intangibles
Goodwill and other intangibles consist of the following at February 28,
1999 and January 1, 2000:
<TABLE>
<CAPTION>
Straight-line
Amortization
Description Period (Years) 1999 2000
----------- -------------- ----------- -----------
<S> <C> <C> <C>
Goodwill............................. 40 $60,540,760 $59,540,752
Trademark............................ 20 300,000 300,000
Copyrights........................... 3 32,500 43,388
----------- -----------
60,873,260 59,884,140
Less: Accumulated amortization....... 2,409,070 3,741,246
----------- -----------
$58,464,190 $56,142,894
=========== ===========
</TABLE>
The following is a reconciliation of the goodwill balance as of February
28, 1999 and January 1, 2000 (amounts in thousands):
<TABLE>
<CAPTION>
1999 2000
------- -------
<S> <C> <C>
Market value of shares issued.............................. $42,900 $42,900
Acquisition costs.......................................... 600 600
------- -------
Total consideration...................................... 43,500 43,500
Tangible equity of Mattress Discounters.................... (8,673) (8,673)
------- -------
Premium before fair value adjustments...................... 52,173 52,173
Fair value adjustments..................................... (5,193) (6,193)
------- -------
57,366 56,366
Additional consideration................................... 3,175 3,175
------- -------
Total goodwill........................................... $60,541 $59,541
======= =======
</TABLE>
See Note 6 for an explanation of the $1.0 million increase to the fair
value adjustment during the ten-months ended January 1, 2000. Amortization
expense for the period from December 29, 1996 to July 1, 1997, the period from
July 2, 1997 to February 28, 1998, the year ended February 28, 1999, and the
ten-months ended January 1, 2000, was $-0-, $921,000, $1,489,070, and
$1,332,175, respectively.
6. Accrued Liabilities
Current accrued expenses consist of the following:
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Accrued salaries, taxes and benefits................ $ 2,496,877 $ 3,662,493
Accrued sales tax................................... 1,001,485 767,092
Accrued retail store expenses....................... 817,382 1,558,787
Acquisition reserve................................. 1,357,157 311,159
Accrued income taxes................................ 965,750 --
Accrued interest.................................... -- 7,168,196
Customer deposits and layaway....................... 907,939 783,162
Deferred revenue.................................... 3,580,000 2,500,000
Other............................................... 1,199,997 2,652,601
----------- -----------
Total............................................. $12,326,587 $19,403,490
=========== ===========
</TABLE>
F-21
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Noncurrent liabilities consist of the following:
<TABLE>
<CAPTION>
1999 2000
---------- -----------
<S> <C> <C>
Accrued rent......................................... $3,648,450 $ 2,643,528
Workers compensation reserve......................... 967,727 1,435,980
Other................................................ 351,285 342,305
---------- -----------
Total.............................................. $4,967,462 $ 4,421,813
========== ===========
</TABLE>
In August 1999, the Company decided not to close eight stores which had
been identified for closure in connection with the July 1997 acquisition of
Mattress Discounters by Heilig-Meyers. The reversal of the original store
closure accrual of $1.0 million related to these stores was recognized as a
reduction to accrued liabilities and goodwill in August 1999. The remaining
acquisition reserve of approximately $0.3 million is for future lease payments
on stores that have been closed, net of anticipated sublease income.
7. Senior Credit Facility
On August 6, 1999, the Company entered into a new credit agreement with a
consortium of banks (the "Senior Credit Facility"), to finance a portion of
the Recapitalization and to provide available borrowings for use in the normal
course of business. The Senior Credit Facility provides for revolving loans
for up to $20.0 million, including letters of credit of up to $5.0 million.
The interest rate under the Senior Credit Facility is either: (1) the base
rate, which is the higher of the prime lending rate, 1% in excess of the
secondary market rate for three-month depository certificates or 0.5% in
excess of the Federal funds effective rate, plus a margin or (2) Eurodollar
rate plus a margin. The margins of the loans under the Senior Credit Facility
will be established and then will vary according to a pricing grid based upon
the achievement of performance targets. Commitment fees are payable at a rate
per annum of 0.5% on the undrawn amounts of the revolving loans but may be
reduced depending upon the achievement of performance targets, as defined by
the Senior Credit Facility.
The Senior Credit Facility requires that the Company meet certain financial
covenants which include a maximum total debt ratio and a minimum interest
coverage ratio. In addition, the Senior Credit Facility contains restrictions,
subject to certain exceptions, including, but not limited to engaging in
transactions with affiliates; prepaying subordinated debt and the Senior
Notes; incurring indebtedness and liens; declaring dividends or redeeming or
repurchasing capital stock; making loans and investments; engaging in mergers,
acquisitions, consolidations and asset sales; and making capital expenditures.
The revolving loans under the Senior Credit Facility are due in August 2005.
The Senior Credit Facility is subject to mandatory prepayment in a variety
of circumstances, including upon certain asset sales and financing
transactions, and, also from excess cash flow (as defined in the Senior Credit
Facility).
T.J.B. and Bedding Experts and Holdings have guaranteed the Company's
obligations under the Senior Credit Facility. The Senior Credit Facility is
collateralized by substantially all assets of the Company.
At February 28, 1999 and January 1, 2000, the Company had approximately
$1,800,000, of outstanding letters of credit.
F-22
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Long-Term Debt
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
1999 2000
-------- ------------
<S> <C> <C>
Senior notes, maturing July 15, 2007, with an
effective interest rate of 13.71%. Interest is
payable semi-annually on January 15 and July 15 of
each year, starting on January 15, 2000............. $ $132,969,968
Notes payable to lessor, maturing June 8, 2001, with
interest at 10%..................................... 32,115 21,492
Notes payable to bank, maturing July 1, 2002, with
interest at 9.50%, these notes are collateralized by
the Company's land and building..................... 451,154 398,042
Notes payable to banks, maturing through September
11, 1999, with interest ranging from 2.79% to 8.5%.
These notes are collateralized by the Company's
vehicles............................................ 28,372
Notes payable maturing July 6, 2001, with interest
ranging from 5.88% to 6.049%........................ 222,776
Capital lease obligations, maturing through fiscal
year 2001, interest ranging from 3% to 11%.......... 144,080 29,018
-------- ------------
655,721 133,641,296
Less: Current portion of long term debt and capital
lease obligations................................... 229,838 267,755
-------- ------------
Long-term debt and capital lease obligations,
excluding current portion........................... $425,883 $133,373,541
======== ============
</TABLE>
On August 6, 1999, the Company issued 140,000 Units consisting of $140
million aggregate principal amount of 12 5/8% Senior Notes ("Senior Notes")
due July 15, 2007 of Mattress Discounters and separately transferable warrants
(the "Warrants") to purchase an aggregate of 679,000 shares of Class A common
stock and 75,460 shares of Class L common stock of Holdings. The notes are
guaranteed on a senior uncollateralized basis by T.J.B. and Bedding Experts
and, to the extent applicable, future domestic subsidiaries of the Company.
Except as discussed below, the Company may not redeem the Senior Notes
prior to July 15, 2004. The Company may redeem the Senior Notes, in whole or
in part, on or after July 15, 2004, at redemption prices of 106.313%,
103.156%, and 100%, if redeemed during the 12-month period beginning on July
15, 2004, 2005 and 2006, respectively, plus accrued and unpaid interest, if
any, to the date of repurchase. In addition, any time prior to July 15, 2002,
the Company may redeem up to 35% of the Senior Notes at a redemption price
equal to 112.625% of the principal amount, plus accrued and unpaid interest,
with the net proceeds of equity issuances, provided that at least 65% of the
aggregate principal amount of the Senior Notes originally issued remains
outstanding immediately after each such redemption.
Upon the occurrence of a "Change of Control," as defined by the indenture
related to the Senior Notes, the Company will be required to make an offer to
repurchase each holder's Senior Notes in whole or in part at a price equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the date of repurchase. In addition, upon occurrence of a "Change of
Control" occurring prior to July 15, 2004, the Company may redeem all of the
Senior Notes at a redemption price equal to 100% of the principal amount
thereof plus the Applicable Premium, as defined, plus accrued and unpaid
interest, if any, to the date of repurchase.
F-23
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Senior Notes contain certain restrictions, including, but not limited
to, limits on additional indebtedness and preferred stock; limits on
restricted payments; limits on transactions with affiliates; limits on liens;
limits on dividends and other payment restrictions affecting subsidiaries; and
restrictions on consolidations, mergers and the sale of assets.
The Warrants will entitle the holders thereof to acquire an aggregate of
679,000 shares of Holdings' Class A common stock and 75,460 shares of
Holdings' Class L common stock, representing approximately 5% of Holdings'
fully diluted common stock immediately after giving effect to the consummation
of the Transaction Agreement. The Warrants will expire on July 15, 2007 (the
"Expiration Date"). Each Warrant will entitle the holder to acquire, on or
after the Exercisability Date (as defined below) and prior to the Expiration
Date, 4.850 shares of Holdings' Class A common stock and 0.539 shares of
Holdings' Class L common stock at a price equal to $0.01 per share, subject to
adjustment from time to time upon the occurrence of certain changes in the
Class A common stock and Class L common stock and certain issuances of Class A
common stock and Class L common stock, options or convertible securities of
Holdings.
The "Exercisability Date" means the first day that any of the following has
occurred: (i) upon the closing of an Initial Public Offering; (ii) a class of
equity securities of Holdings is listed on a national securities exchange or
authorized for quotation on the Nasdaq National Market or is otherwise subject
to registrations under the Exchange Act, or (iii) the date at which the
Warrants become separately transferable.
The net proceeds from the sale of the Notes and Warrants was $134.9
million. Holdings and the Company have determined that approximately $2.2
million of the net proceeds should be allocated to the Warrants, based on the
relative fair values of the Notes and Warrants. Accordingly, this amount has
been reflected in the Company's financial statements as a contribution of
capital from Holdings. The fair value of the warrants was determined based on
the value of Holdings' equity purchased by Bain Capital and the other
Holdings' equity investors. This value was discounted by 40% to reflect the
minority discount since the warrants issued only represent 5% of our fully
diluted ownership and the limitations on the transferability of ownership of
the minority interest.
The aggregate maturates of long term debt and capital lease obligations,
are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------------
<S> <C>
2000........................ $ 267,755
2001........................ 84,190
2002........................ 319,383
2007........................ 132,969,968
</TABLE>
Interest payments of $12,961, $53,294, $55,938, and $227,703 were made
during the period from December 29, 1996 to July 1, 1997, the period from July
2, 1997 to February 28, 1998, the year ended February 28, 1999, and the ten-
month period ended January 1, 2000, respectively.
9. Income Taxes
The provision for income taxes in the consolidated financial statements for
periods prior to August 6, 1999, reflect tax calculations on a separate
company basis and do not reflect actual taxes owed by the Company on the
Heilig-Meyers consolidated tax return through August 5, 1999.
Mattress Discounters and Heilig-Meyers entered into a Tax Agreement in
conjunction with the Transaction Agreement. The Tax Agreement requires Heilig-
Meyers to be responsible for and to pay all taxes resulting from pre-August 6,
1999 operations, including any federal and state income tax attributable to
the making of an Internal Revenue Code section 338(h)(10) election. The
Company shall be responsible for and pay all taxes resulting from post-August
5, 1999 operations.
F-24
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As a result of the 338(h)10 election, the Company stepped up the tax basis
of its net assets which resulted in recognition of a deferred tax asset of
$88.7 million and additional paid-in capital, comprised primarily of future
tax goodwill amortization deductions and differences between the tax and book
basis for inventory. Management believes that it is more likely than not that
the tax benefit will be realized. The total amount of future taxable income
necessary to realize the asset is approximately $199.0 million. The Company
expects to realize this asset by generating future taxable income. Failure to
achieve forecasted taxable income might affect the ultimate realization of the
net deferred tax assets.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1999 2000
---------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal................................ $4,805,607 $5,843,875 $ 3,445,595
State.................................. 1,106,476 1,432,659 644,377
---------- ---------- -----------
5,912,083 7,276,534 4,089,972
---------- ---------- -----------
Deferred:
Federal................................ (452,118) 1,830,131 (1,622,441)
State.................................. (62,973) 254,911 (286,313)
---------- ---------- -----------
(515,091) 2,085,042 (1,908,754)
---------- ---------- -----------
$5,396,992 $9,361,576 $ 2,181,218
========== ========== ===========
</TABLE>
The temporary differences that gave rise to significant portions of the net
deferred tax assets as of February 28, 1999 and January 1, 2000, consist of
the following:
<TABLE>
<CAPTION>
1999 2000
---------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward................... $ -- $ 7,845,578
Property and equipment............................ 428,917 --
Goodwill.......................................... 1,177,489 80,561,580
Accrued liabilities and noncurrent liabilities.... -- 2,533,344
Compensation expense in connection with the
recapitalization................................. -- 1,530,000
Inventory......................................... -- 294,498
Other assets...................................... 12,521 --
---------- -----------
1,618,927 92,765,000
---------- -----------
Deferred tax liabilities:
Accrued liabilities............................... 139,844 --
Inventory......................................... 133,837 --
---------- -----------
273,681 --
---------- -----------
$1,345,246 $92,765,000
========== ===========
</TABLE>
Net operating loss carryforwards of the Company expire in 2020.
F-25
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the statutory federal income tax rate to the Company's
effective rate is provided below:
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................ 35.0 % 35.0% 34.0 %
State income taxes, net of federal income tax benefit.... 5.2 5.2 7.9
Goodwill amortization.................................... 2.3 2.1 10.4
Income taxed to S-Corp shareholders...................... (5.8)
Other, net............................................... (0.3) 0.1 (1.5)
---- ---- ----
36.4 % 42.4% 50.8 %
==== ==== ====
</TABLE>
Federal and state income tax payments of $1,276,148, $2,152,247 and
$461,000 were made to Heilig-Meyers during the period from July 2, 1997 to
February 28, 1998, during the year ended February 28, 1999 and during the ten-
month period ended January 1, 2000, respectively.
Prior to January 3, 1998, Bedding Experts had elected to be treated as an
"S" corporation for federal and state income tax purposes. Under terms of that
election, Bedding Experts did not pay federal and certain state income taxes
on its earnings, since the earnings were allocated to its stockholders.
Accordingly, no provision for income taxes for Bedding Experts is included in
the consolidated statement of operations for the period from December 29, 1996
to July 1, 1997, and the period from July 2, 1997 to January 2, 1998.
10. Stockholder's Equity
As of January 1, 2000, common stock of the Company consisted of 3000
authorized common shares with a per value of $0.01, of which 100 shares were
issued and outstanding. Common stock consisted of the following as of February
28, 1999:
<TABLE>
<CAPTION>
Shares Par Shares Shares
Name of Entity Authorized Value Issued Outstanding
-------------- ---------- ----- ------ -----------
<S> <C> <C> <C> <C>
Mattress Discounters Corporation........ 3,000 $.01 100 100
T.J.B., Inc............................. 5,000 None 4,500 4,500
The Bedding Experts, Inc. .............. 1,000 None 1,000 1,000
</TABLE>
11. Retirement Plans
As of January 1, 1999 the Company began participating in the Heilig-Meyers'
qualified profit-sharing and retirement savings plan, which included a cash or
deferred arrangement under Section 401(k) of the Internal Revenue Code and
covered substantially all of the Company's employees. Subsequent to the
Recapitalization, a proto-type plan was created by the Company, with
substantially the same provisions as the plan with Heilig-Meyers. The plan
expense for the Company participants recognized in fiscal 1999 and the ten-
month period ended January 1, 2000, was $17,751 and $152,161, respectively,
and is reflected in the consolidated statement of operations.
In addition, the Company sponsors two other qualified deferred compensation
plans in accordance with Internal Revenue Code Section 401(k) covering
substantially all employees. These plans do not allow for any employee or
Company contributions as of January 1, 1999. The plan assets are available for
benefits or loans under the terms of the plan. The plan expense recognized
during the period from December 29, 1996 to July 1, 1997, the period from July
2, 1997 to February 28, 1998, and the year ended February 28, 1999, and the
ten-months ended January 1, 2000, was $5,737, $67,999, $105,962 and $152,161,
respectively, and is reflected in the consolidated statements of operations.
F-26
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of January 1, 1999, the Company began participating in the Heilig-Meyers
nonqualified supplemental profit-sharing and retirement savings plan that was
established as of March 1, 1991, for the purpose of providing deferred
compensation for certain employees whose benefits and contributions under the
qualified plan are limited by the Code. The deferred compensation expense
recognized in fiscal 1999 was $6,817 and is reflected in the consolidated
statement of operations. This plan was discontinued in connection with the
Recapitalization.
12. Commitments and Contingencies
Leases--The Company has entered into noncancellable lease agreements with
initial terms ranging from 1 to 15 years for certain stores, warehouses and
the corporate office. Certain leases include renewal options ranging from 1 to
10 years which may be exercised at the Company's option. Most of the leases
are net leases under which the lessees pay their proportionate share of the
taxes, insurance and maintenance costs.
The following capital leased assets are included in the accompanying
consolidated balance sheets:
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Equipment................................................. $776,910 $776,910
Less: Accumulated amortization............................ 670,785 739,628
-------- --------
$106,125 $ 37,282
======== ========
</TABLE>
Capitalized lease amortization is included in depreciation expense within
general and administrative expenses in the Company's consolidated statements
of operations.
Future minimum lease payments under capital and operating leases having
initial or remaining noncancellable lease terms in excess of one year at
January 1, 2000, are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- -----------
<S> <C> <C>
2000.................................................... 29,442 19,638,151
2001.................................................... -- 16,686,952
2002.................................................... -- 13,673,902
2003.................................................... -- 9,083,081
2004.................................................... -- 6,113,989
After 2004.............................................. -- 16,637,198
------- -----------
Total minimum lease payments.......................... $29,442 $81,833,273
===========
Less: imputed interest.................................. 424
-------
Present value of minimum lease payments................. $29,018
=======
</TABLE>
Total rental expense under operating leases for the period from December
29, 1996 to July 1, 1997, the period from July 2, 1997 to February 28, 1998,
the year ended February 28, 1999, and the ten-month period ended January 1,
2000 was $1,428,943, $13,475,219, $18,638,827 and $16,891,023, respectively.
Certain leases include escalation clauses for adjusting rentals to reflect
changes in price indices or to reflect normal step increases with the passage
of time. Rent expense is calculated on straight-line
F-27
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
basis with the difference between actual cash rental payments and straight-
line rental expense recorded as accrued rent (see Note 6). Certain leases
provide for contingent rentals which are based on sales volumes.
Certain properties are subleased under operating leases providing for
future annual rental income through 2008, minimum sublease rental income is:
$1,235,474 in 2000, $1,098,596 in 2001, $1,031,907 in 2002, $599,959 in 2003,
$253,125 in 2004, and $354,361 thereafter which is offset to rent expense. In
connection with the store closings in the New York and New Jersey regions, the
Company subleased certain locations in which the Company is obligated for
future rentals with respect to such leases if the subleasee defaults on their
commitment. Future minimum rents associated with these leases are $1,655,823
in 2000, $1,537,667 in 2001, $930,419 in 2002, $296,575 in 2003, $254,236 in
2004, and $261,555 thereafter.
Legal Matters--The Company is party to various lawsuits and actions arising
in the course of its business. In the opinion of management, based on a number
of factors, including advice of outside legal counsel in certain instances,
the ultimate resolution of these matters will not have a material adverse
effect on the financial position or results of operations of the Company.
Employment Contracts and Separation Agreements--The Company has employment
agreements with certain executive officers, the terms of which expire at
various dates through February 28, 2001. In addition, certain agreements
automatically extend for one-year periods if not canceled before the
expiration dates. Such agreements provide for certain minimum salary levels,
adjusted annually for cost-of-living changes, fringe benefits and performance
bonuses, as defined in the agreements.
13. Stock Option and Performance Stock Award Plans
Certain key employees of the Company were granted Heilig-Meyers common
stock options in fiscal year 1999 (at an exercise price of no less than fair
market value at the date of grant) under the Heilig-Meyers 1998 stock option
plan. Accordingly, no compensation expense was recognized in the consolidated
statements of operations. All options granted have ten-year terms. Options
granted were immediately vested and became exercisable when granted. These
options will expire during calendar 2000.
In August 1999, in connection with the Recapitalization, 637,500 options
were granted to certain of the Company's executives by Holdings, to purchase
Holdings' Class A and Class L common stock. These options ("Management Stock
Options") were immediately exercisable with exercise prices below fair value,
resulting in a non-cash compensation charge of approximately $2.9 million at
the grant date. Subsequent to January 1, 2000, 525,000 Management Stock
Options were repurchased by the Company in connection with the resignations of
certain executives--see Note 18. The Management Stock Options expire ten years
from the date of grant.
In addition, 1,656,057 non-qualified options were granted to employees to
purchase Holdings' Class A common stock, and are generally exercisable
beginning one year from the date of grant in cumulative yearly amounts of 20%
of the shares under option and generally expire ten years from the date of
grant.
F-28
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of options granted (which is amortized to expense over the
option-vesting period in determining the pro forma impact) is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<S> <C>
Expected life of option........................................... 5.72 years
Risk free interest rate........................................... 6.07%
Expected volatility of Holdings' stock............................ 39.81%
Expected dividend yield........................................... 0%
</TABLE>
The weighted-average fair value of Management Stock Options and non-
qualified options granted to employees was $44.05 and $0.33, respectively,
during the ten-months ended January 1, 2000. If the Company used the fair
value-based method of accounting for these stock options and charged
compensation cost against operations, over the vesting period, based on the
fair value of options at the date of grant, net income would have been reduced
to the following pro forma amount:
<TABLE>
<CAPTION>
For the ten-month
period ended
January 1, 2000
-----------------
<S> <C>
Net income:
As reported.............................................. $2,104,110
Pro forma................................................ 1,825,411
</TABLE>
There were no option exercises or cancellations during the ten months ended
January 1, 2000. The following table summarizes information about stock
options outstanding at January 1, 2000:
<TABLE>
<CAPTION>
Exercise Prices Options
--------------- ---------
<S> <C>
Holdings' Class A Common Stock Options:
$0.17............................................................ 573,750
0.67............................................................ 1,656,057
Holdings' Class L Common Stock Options:
$13.50........................................................... 63,750
---------
2,293,557
=========
</TABLE>
As of January 1, 2000, 637,500 Management Stock Options were exercisable.
The weighted average remaining contractual life for stock options granted
during the ten-months ended January 1, 2000 is approximately 9.5 years.
14. Segment Information
Retail--Sale of mattresses and bedding products through 252 retail
locations as of January 1, 2000.
Manufacturing--Manufacture and sale of mattresses, box springs and
foundations to the retail segment and to Heilig-Meyers and affiliates.
Prior to July 2, 1997, the Company did not have manufacturing operations.
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.
F-29
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized financial information concerning the Company's reportable
segments is shown in the following table (amounts in thousands):
<TABLE>
<CAPTION>
Manufacturing
--------------------------
Retail Interco.
Period(/1/) Retail Segment Affiliates Total Elim. Consolidated
----------- -------- ------- ---------- ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ 2000 $209,153 $34,262 $9,630 $43,892 $34,262 $218,768
1999 237,057 38,147 8,404 46,551 38,147 245,461
1998 157,154 20,697 2,598 23,295 20,697 159,752
</TABLE>
<TABLE>
<CAPTION>
Corporate/Consolidated
-----------------------
Period(/1/) Retail Manufacturing Other
----------- ------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Segment profit(/2/)..... 2000 $ 2,459 $9,662 $ -- $ 12,121
1999 13,830 8,094 -- 21,924
1998 11,590 3,137 -- 14,727
Depreciation and
amortization........... 2000 3,196 867 -- 4,063
1999 3,654 887 -- 4,541
1998 2,199 449 -- 2,648
Capital expenditures.... 2000 2,150 465 -- 2,615
1999 4,380 782 -- 5,162
1998 1,828 294 -- 2,122
Identifiable
assets(/3/)............ 2000 21,663 5,177 176,093 202,933
1999 22,276 4,155 75,057 101,488
</TABLE>
--------
(1) Periods are as follows:
2000--Ten-month period ended January 1, 2000
1999--Year ended February 28, 1999
1998--Period from July 2, 1997, to February 28, 1998
(2) Segment profit represents income before interest and the provision for
income taxes.
(3) Identifible 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.
15. Related Party
In connection with the Recapitalization, the Company will pay an annual
shareholder advisory fee of $1.0 million to Bain Capital for management and
advisory services. During the ten-month period ended January 1, 2000, the
Company paid Bain Capital $0.4 million.
Revenues from sales to Heilig-Meyers of mattresses, box spring and
foundations were approximately $2,598,000 for the period from July 2, 1997 to
February 28, 1998, approximately $8,404,000 for the year ended February 28,
1999, and approximately $9,630,000 for the ten-month period ended January 1,
2000.
The Company provided noninterest-bearing loans in fiscal year 1999 to
Heilig-Meyers in the gross amount of approximately $19,500,000 which does not
include Mattress Discounters share of intercompany federal tax allocation. The
balance outstanding at February 28, 1999, was $803,265.
F-30
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Heilig-Meyers made payments for the Company for acquisition expenses and
certain operating expenses of approximately $540,000 for the period from July
2, 1997 to February 28, 1998 and $270,000 for the year ended February 28,
1999. These costs have been reflected in the consolidated financial
statements.
Prior to August 6, 1999, Heilig-Meyers allocated costs to the Company for
certain services including cash management, real estate, tax and accounting,
and information technology support. In addition, Heilig-Meyers allocated other
corporate overhead costs including executive management and the treasury
department based on the Company's budgeted sales and bonuses. Amounts
allocated to the Company were approximately $0 for the period from July 2,
1997 to February 28, 1998, $1,900,000 for fiscal year 1999 and $707,000 for
the period of March 1, 1999 through August 5, 1999. These costs have been
reflected in the consolidated financial statements. Management believes the
allocation of these costs is reasonable.
Heilig-Meyers made income tax payments for the Company of approximately
$1,300,000 for the period July 2, 1997 to February 28, 1998, and $2,200,000
for the year ended February 28, 1999. In addition, Heilig-Meyers charged the
Company approximately $4,400,000 for the period from July 2, 1997 to February
28, 1998, and $5,100,000 for the year ended February 28, 1999, to reflect tax
calculations based on a stand-alone basis.
16. 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. The
following table sets forth the "summarized financial information" of Mattress
Discounters ("Parent").
<TABLE>
<CAPTION>
February 28, 1999 January 1, 2000
----------------- ---------------
(in thousands) (in thousands)
<S> <C> <C>
Balance Sheet Data:
Current assets........................... $20,920 $25,872
Noncurrent assets ....................... 51,900 164,681
Current liabilities...................... 18,705 26,723
Noncurrent liabilities................... 2,805 135,432
Total stockholder's equity............... 51,310 28,398
</TABLE>
<TABLE>
<CAPTION>
Period from Period from Ten-months
December 29, 1996 July 2, 1997 to Year ended ended
to July 1, 1997 February 29, 1998 February 28, 1999 January 1, 2000
----------------- ----------------- ----------------- ---------------
(in thousands) (in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C>
Operating Data:
Net sales............. $54,309 $114,738 $135,008 $130,022
Gross profit.......... 17,340 40,482 50,269 50,724
Net income............ 51 7,207 6,907 2,046
</TABLE>
F-31
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Unaudited Operating Results
Unaudited operating results for the ten-months ended December 31, 1998
<TABLE>
<CAPTION>
Ten-Months
Ended
December 31,
1998
------------
<S> <C>
Consolidated Statements of Operations
ten-months ended December 31, 1998
Net sales.................................................... $201,182,701
Cost of sales................................................ 126,513,640
------------
Gross profit................................................. 74,669,061
General and administrative expenses.......................... 55,741,989
------------
Income from operations....................................... 18,927,072
Other income (expense):
Interest income.............................................. 190,944
Interest expense............................................. (64,667)
Other, net................................................... 450,372
------------
Income before provision for income taxes....................... 19,503,721
Provision for income taxes..................................... 8,265,686
------------
Net income (loss).............................................. $ 11,238,035
============
</TABLE>
18. Subsequent Event
In January and February 2000, the Company entered into separation
agreements with certain of the Company's executives, in connection with the
resignations of those executives. The Company will pay approximately $4.6
million, and record severance expense of approximately $1.4 million during the
first quarter of calendar 2000 for severance benefits and for the repurchase
of compensatory stock options granted to these executives in connection with
the Recapitalization.
* * * * * *
F-32
<PAGE>
Logo of Deloitte & Touche, LLP
INDEPENDENT AUDITORS' REPORT
To the Stockholder and Board of Directors
Mattress Discounters
We have audited the accompanying combined balance sheet of Mattress
Discounters Corporation and TJB, Inc. (the "Company") (as described in Note 1
to the combined financial statements) as of July 1, 1997, and the related
combined statements of operations and retained earnings, and cash flows for
the period from December 29, 1996 to July 1, 1997. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined financial position of the Company as of July
1, 1997, and the combined results of its operations and its combined cash
flows for the period from December 29, 1996 to July 1, 1997, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the combined financial statements, the Company
changed it's method of accounting for revenue recognition and retroactively
restated the combined financial statements for the change.
Deloitte & Touche, LLP
Richmond, Virginia
June 5, 1999 (March 27, 2000
as to paragraph 12
of note 1, under the
caption Revenues and
Costs of Sales
related to the
adoption of a new
method of accounting
for revenue
recognition)
F-33
<PAGE>
MATTRESS DISCOUNTERS CORPORATION
AND TJB, INC.
COMBINED BALANCE SHEET
July 1, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 3,732,189
Accounts receivable............................................. 1,458,590
Inventories..................................................... 9,964,613
Prepaid expenses and other current assets....................... 215,311
------------
Total current assets.......................................... 15,370,703
PROPERTY AND EQUIPMENT, NET....................................... 8,241,814
DEPOSITS AND OTHER ASSETS......................................... 296,746
GOODWILL AND OTHER INTANGIBLES, NET............................... 637,200
------------
$ 25,546,463
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................ $ 22,418,541
Accrued expenses................................................ 7,008,218
Current portion of capital lease obligations.................... 174,415
Long-term debt.................................................. 11,440
------------
Total current liabilities..................................... 29,612,614
LONG-TERM DEBT, EXCLUDING CURRENT PORTION......................... 17,798
NONCURRENT PORTION OF CAPITAL LEASE OBLIGATIONS................... 250,414
OTHER NONCURRENT LIABILITIES...................................... 4,378,948
------------
Total liabilities............................................. 34,259,774
------------
STOCKHOLDERS' DEFICIT:
Common stock.................................................... 28,050
Additional paid-in capital...................................... 550,975
Retained deficit................................................ (10,292,336)
------------
Total stockholders' deficit................................... (9,713,311)
------------
$ 25,546,463
============
</TABLE>
See notes to combined financial statements.
F-34
<PAGE>
MATTRESS DISCOUNTERS CORPORATION
AND TJB, INC.
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
Period from December 29, 1996 to July 1, 1997
<TABLE>
<S> <C>
SALES............................................................ $ 83,713,892
COST OF SALES.................................................... 56,281,152
------------
GROSS PROFIT..................................................... 27,432,740
GENERAL AND ADMINISTRATIVE EXPENSES.............................. 27,683,213
------------
LOSS FROM OPERATIONS............................................. (250,473)
OTHER INCOME (EXPENSE):
Interest income, net of interest expense....................... 328,336
Other income................................................... 91,022
Other expense.................................................. (83,517)
------------
NET EARNINGS..................................................... 85,368
RETAINED EARNINGS, BEGINNING OF PERIOD........................... 4,745,001
DISTRIBUTION TO STOCKHOLDERS..................................... (15,122,705)
------------
RETAINED DEFICIT, END OF PERIOD.................................. $(10,292,336)
============
</TABLE>
See notes to combined financial statements.
F-35
<PAGE>
MATTRESS DISCOUNTERS CORPORATION
AND TJB, INC.
COMBINED STATEMENT OF CASH FLOWS
Period from December 29, 1996 to July 1, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................... $ 85,368
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization................................ 1,007,125
Loss on disposition of property and equipment................ 29,599
Gain on investment securities................................ (80,365)
Changes in operating assets and liabilities:
Accounts receivable........................................ 944,248
Inventories................................................ 298,829
Prepaid expenses and other assets.......................... (96,448)
Other noncurrent assets.................................... 193,587
Accounts payable........................................... 66,785
Accrued expenses........................................... 2,873,434
Other noncurrent liabilities............................... 485,506
------------
Net cash provided by operating activities................ 5,807,668
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment expenditures............................ (1,592,034)
Proceeds from sale of property and equipment................... 192,916
Proceeds from disposal of investments.......................... 1,119,010
------------
Net cash used in investing activities.................... (280,108)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to stockholders.................................. (15,122,705)
Payments on debt............................................... (5,377)
Payments on capital lease obligations.......................... (82,844)
------------
Net cash used in financing activities.................... (15,210,926)
------------
NET DECREASE IN CASH............................................. (9,683,366)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................... 13,415,555
------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................... $ 3,732,189
============
</TABLE>
See notes to combined financial statements.
F-36
<PAGE>
MATTRESS DISCOUNTERS CORPORATION
AND TJB, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Period from December 29, 1996 to July 1, 1997
1. Summary of Significant Accounting Policies
Nature of Operations and Basis of Combination--The Company as described
below is engaged in the manufacture and retail sale of mattresses and bedding
products. The financial position and operating results of the corporations are
combined in the financial statements and are under common ownership and
control.
<TABLE>
<CAPTION>
Name of State of No. of
Entity Incorporation Business Market Locations
- ------- ------------- ---------------- ------------------------ ---------
<S> <C> <C> <C> <C>
Mattress
Discounters Delaware Retail Sales and New England, New Jersey, 117
Corporation Manufacturing California, Pittsburgh,
and Detroit
TJB, Inc. Maryland Retail Sales Washington, D.C., 55
Baltimore, and Richmond
</TABLE>
The combined financial statements include the accounts of both entities.
All significant inter-entity accounts and transactions of the Company have
been eliminated in the combination. The existence of common ownership and
control of the entities could result in operating results or financial
position of the entities that could be significantly different from those that
would have been achieved if the enterprises were autonomous. Mattress
Discounts was owned by two individuals and TJB, Inc. was owned by the same two
individuals and one other individual.
Common stock of the Company consists of the following as of July 1, 1997:
<TABLE>
<CAPTION>
Shares Par Shares Shares
Name of Entity Authorized Value Issued Outstanding
- -------------- ---------- ----- ------ -----------
<S> <C> <C> <C> <C>
Mattress Discounters Corporation............ 3,000 $.01 100 100
TJB, Inc.................................... 5,000 None 4,500 4,500
</TABLE>
Fiscal Year--The Company operates on a 52-53 week fiscal year ending on the
Saturday nearest December 31. The results of operations and cash flows for
1997 represent the six-month period from December 29, 1996 to July 1, 1997,
the day prior to the acquisition by Heilig-Meyers Company. See footnote 9 for
a description of the audit period for the financial statements herein.
Use of Estimates in the Preparation of Financial Statements--The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments--SFAS No. 107, "Disclosure About Fair
Value of Financial Instruments," requires certain disclosures regarding the
fair value of financial instruments. The amounts reported in the combined
balance sheets for cash and cash equivalents, accounts receivable, accounts
payable, accrued liabilities, and current portions of long-term debt
approximate fair value because of the short-term maturity of these
instruments. In addition, the fair value of long-term debt approximates its
carrying value.
Cash and Cash Equivalents--Cash equivalents include time deposits with
maturities of three months or less when purchased.
F-37
<PAGE>
MATTRESS DISCOUNTERS CORPORATION
AND TJB, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Accounts Receivable--Accounts receivable are primarily comprised of amounts
due to the Company pursuant to vendor cooperative advertising and rebate
agreements, and bank-financed customer sales.
Inventories--Inventories are valued at the lower of cost or market value.
Cost is determined by the first-in, first-out method. Manufactured inventories
include raw materials, direct labor and manufacturing overhead.
Property and Equipment--Property and equipment is valued at cost.
Depreciation is provided on the straight-line method at rates based on the
estimated useful lives of individual assets or classes of assets. Improvements
to leased property are amortized over their estimated useful lives or lease
period, whichever is shorter. Leased property meeting certain criteria is
capitalized and the present value of the related lease payments is recorded as
a liability. Amortization of capitalized leased assets is computed on the
straight-line method over the term of the lease. Normal repairs and
maintenance are expensed as incurred. Expenditures which materially increase
values, change capacities or extend useful lives are capitalized. The
estimated useful lives are 3 to 7 years for furniture, fixtures, equipment and
vehicles, and 2 to 15 years for leasehold improvements.
Goodwill and Other Intangibles--The Company amortizes goodwill on a
straight-line basis over twenty-five years. Intangible assets, which include
covenants not to compete and copyrights, are reviewed for impairment whenever
the facts and circumstances indicate that the carrying amounts may not be
recoverable. Impairment, should any occur, would be recognized by a charge to
operating results and a reduction in the carrying value of the intangible
asset.
Revenues and Costs of Sales--Sales revenue is recognized upon delivery of
mattresses and bedding products to the Company's customers. Sales are
presented net of returns. Cost of sales includes occupancy and delivery
expenses.
In connection with the recapitalization of Mattress Discounters Corporation
("MDC") on August 6, 1999, and subsequent preparation of the Company's
financial statements for the planned registration of MDC's senior notes with
the Securities and Exchange Commission, the Company adopted a new method of
accounting for revenue recognition. The Company has retroactively applied this
method to their financial statements. Previously, the Company recognized
revenue for sales upon receiving payment in full or if applicable, upon
approval of customer third party credit. The Company now recognizes revenue
upon delivery and acceptance of the product by the customer which is a
preferred method. The Company has restated its 1997 financial statements,
which resulted in $220,000 less net income, $1,040,000 less retained earnings,
$1,220,000 more inventory and $2,260,000 more accrued expenses in 1997 than
amounts previously reported.
Advertising Costs--Costs incurred for advertising are expensed when the
initial advertising takes place. The Company records cooperative advertising
funds as a reduction of advertising expense, when the Company has earned the
cooperative advertising income.
Income Taxes--The corporations comprising the Company for the period from
December 29, 1996 to July 1, 1997 elected to be treated as S corporations for
federal and state income tax purposes. Under terms of that election, the
corporations did not pay federal and state income taxes on its earnings.
Accordingly, no provision for taxes is included in the combined statement of
operations and retained earnings for such period.
Earnings Per Share--Earnings per share have been omitted from the combined
statement of operations and retained earnings for the period from December 29,
1996 to July 1, 1997, as the Company was structured as an S corporation.
F-38
<PAGE>
MATTRESS DISCOUNTERS CORPORATION
AND TJB, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
2. Inventories
Inventories are summarized as follows:
<TABLE>
<S> <C>
Finished goods.................................................... $9,514,346
Work in process................................................... 98,003
Raw materials..................................................... 352,264
----------
$9,964,613
==========
</TABLE>
3. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<S> <C>
Computer equipment and software................................. $ 2,616,480
Furniture, fixtures, equipment and vehicles..................... 7,162,000
Leasehold improvements.......................................... 5,748,468
-----------
15,526,948
Less accumulated depreciation................................... (7,285,134)
-----------
$ 8,241,814
===========
</TABLE>
Depreciation expense for the period from December 29, 1996 to July 1, 1997,
was $972,276.
4. Goodwill and Intangible Assets
Intangible assets and related amortization periods are summarized as
follows:
<TABLE>
<CAPTION>
Amortization
Description Period
----------- ----------------
<S> <C> <C>
Covenants not to compete......................... $ 836,000 24 to 108 months
Copyright........................................ 100,000 50 years
License rights................................... 23,510 24 to 36 months
Goodwill......................................... 669,000 25 years
----------
1,628,510
Less accumulated amortization.................... 991,310
----------
$ 637,200
==========
</TABLE>
5. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<S> <C>
Note payable to bank, maturing through 11/1/99, interest at
8.25%, secured by vehicles...................................... $ 29,238
Capital lease obligations, maturing through 3/1/00, interest
ranging from 3% to 11%.......................................... 424,829
--------
Less current portion............................................. 185,855
--------
Total Long-Term Debt........................................... $268,212
========
</TABLE>
Principal payments due for the four fiscal years after July 1, 1997, are as
follows:
<TABLE>
<CAPTION>
Year Amount
---- --------
<S> <C>
1997................................................................ $ 91,313
1998................................................................ 192,461
1999................................................................ 141,349
2000................................................................ 28,944
</TABLE>
Interest payments of $1,337, net of capitalized interest of $18,294, were
made during the period from December 29, 1996 to July 1, 1997, respectively.
F-39
<PAGE>
MATTRESS DISCOUNTERS CORPORATION
AND TJB, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
At July 1, 1997, the Company had approximately $1,800,000 of outstanding
letters of credit secured by a bank facility agreement.
6. EMPLOYEE BENEFIT PLAN
The Company sponsors a deferred compensation plan in accordance with
Internal Revenue Code Section 401(k) covering substantially all employees.
Employees are permitted within limitations imposed by tax law to make pre-tax
contributions to the plan pursuant to salary reduction agreements.
Contributions to the plan by the Company are discretionary. Deferred
compensation plan expense for the period from December 29, 1996 to July 1,
1997 was $21,714.
7. COMMITMENTS AND CONTINGENCIES
Leases--The Company has entered into noncancellable lease agreements with
initial terms ranging from 1 to 15 years for certain stores, warehouses and
the corporate office. Certain leases include renewal options ranging from 1 to
10 years which may be exercised at the Company's option. Most of the leases
are net leases under which the lessees pay their proportionate share of the
taxes, insurance and maintenance costs.
The following capital leases are included in the accompanying combined
balance sheet:
<TABLE>
<S> <C>
Equipment.......................................................... $776,910
Less: Accumulated amortization..................................... 384,632
--------
$392,278
========
</TABLE>
Capitalized lease amortization is included in depreciation expense within
general and administrative expenses in the Company's combined statement of
operations and retained earnings.
Future minimum lease payments under capital and operating leases having
initial or remaining noncancellable lease terms in excess of one year at July
1, 1997, are as follows:
<TABLE>
<CAPTION>
Capital Operating
Fiscal Years Leases Leases
------------ -------- -----------
<S> <C> <C>
1997................................................... $101,000 $ 8,503,300
1998................................................... 202,000 16,931,732
1999................................................... 139,000 16,429,514
2000................................................... 29,000 14,383,881
2001................................................... -- 11,415,684
After 2001............................................. -- 30,592,403
-------- -----------
Total minimum lease payments........................... 471,000 $98,256,514
===========
Less:
Imputed interest..................................... 46,171
--------
Present value of minimum lease payments................ $424,829
========
</TABLE>
Total rental expense under operating leases for the period from December
29, 1996 to July 1, 1997, was $7,983,666.
Certain properties are subleased under operating leases providing for
future annual rental income through 2008; minimum sublease rental income is:
$379,886 in fiscal 1997, $823,033 in fiscal 1998, $818,026 in fiscal 1999,
$835,651 in fiscal 2000, $771,810 in fiscal 2001, and $1,100,730 thereafter.
F-40
<PAGE>
MATTRESS DISCOUNTERS CORPORATION
AND TJB, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Concluded)
In connection with the store closings in the New York and New Jersey
regions, the Company subleased certain locations in which the Company is
obligated for future rentals with respect to such leases if the sublease
defaults on their commitment. Future minimum contingent rents are $424,316 in
fiscal 1997, $802,507 in fiscal 1998, $793,158 in fiscal 1999, $799,308 in
fiscal 2000, $824,491 in fiscal 2001, and $2,731,232 thereafter.
Legal Matters--The Company is party to various lawsuits and actions arising
in the course of its business. In the opinion of management, based on a number
of factors, including advice of outside legal counsel in certain instances,
the ultimate resolution of these matters will not have a material adverse
effect on the financial position or results of operations of the Company.
Employment Contracts--The Company has employment agreements with certain
executive officers, the terms of which expire upon the earliest of the
officers' sixty-fifth birthday, December 31 of the second calendar year after
any calendar year in which the Company provides the officers with written
notice of termination, or the third anniversary of the date on which a change
in Company control occurs, as defined in the agreement. Such agreements
provide for minimum salary levels, adjusted annually for cost-of-living
changes, fringe benefits, and performance bonuses as defined in the
agreements.
8. STOCK OPTION AND PERFORMANCE STOCK AWARD PLANS
On June 30, 1997, the Company made equity rights and stock option
termination payments to certain officers who were also shareholders, in the
total amount of $1,750,000, which is included in distribution to stockholders'
in the Company's combined statement of operations and retained earnings. The
payments were settlement for equity rights and options pursuant to agreements
dated as of April 1, 1996. In consideration of the payments, all equity rights
and options have been canceled. The cancellations were a condition to the
acquisition of the Company by Heilig-Meyers Company in July 1997.
9. SUBSEQUENT EVENTS
On July 2, 1997, Heilig-Meyers Company acquired all of the outstanding
capital stock of Mattress Discounters Corporation and TJB, Inc. The initial
purchase price was valued at approximately $42,900,000 based on the fair
market value of the stock at that date. Heilig-Meyers Company issued 2,269,839
shares of its common stock at the time of closing and placed 264,550 shares of
common stock in escrow to be paid to the former shareholders of Mattress
Discounters if the acquired stores met certain earnings targets in the twelve
months following the closing. On July 8, 1998, these shares were released to
the former shareholders, resulting in an increase to the purchase price of
approximately $3,175,000. The transaction was accounted for as a purchase.
On May 28, 1999, Heilig-Meyers Company entered into a definitive agreement
to sell 93% of its interest in the Company and The Bedding Experts, Inc.,
another Heilig-Meyers Company subsidiary, to an investment group, including
certain key managers of Mattress Discounters, led by Bain Capital, a Boston
based capital investment group.
The Company is obligated to pay total severance benefits of $555,000 to two
former executives under separation agreements dated September 30, 1997 and
March 31, 1999, the terms of which expire on December 31, 1999 and June 30,
2000, respectively. These amounts were recorded as severance expense when the
amounts became due pursuant to the severance agreements.
* * * * * *
F-41
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Mattress Discounters Corporation is a Delaware corporation. Section 145 of
the General Corporation Law of the State of Delaware provides that a Delaware
corporation may indemnify any person who were, are or are threatened to be
made, parties to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of such corporation) (hereinafter, a
"proceeding"), by reason of the fact that such person is or was an officer,
director, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such
action, suit or proceeding, provided such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's
best interests and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was illegal. A Delaware
corporation may indemnify any persons who are, were or are threatened to be
made, a party to any threatened, pending or completed action or suit by or in
the right of the corporation by reasons of the fact that such person was a
director, officer, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent
of another corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interest, provided that no indemnification
is permitted without judicial approval if the officer, director, employee or
agent is adjusted to be liable to the corporation. Where an officer, director,
employee or agent is successful on the merits or otherwise in the defense of
any action referred to above, the corporation must indemnify him against the
expenses which such officer or director has actually and reasonably incurred.
The Certificate of Incorporation of Mattress Discounters Corporation
provides that each person who was or is made a party or is threatened to be
made a party to or is involved in any proceeding by reason of the fact that he
is or was a director or officer of Mattress Discounters Corporation or is or
was serving at the request of Mattress Discounters Corporation as a director,
officer, employee or agent of another corporation or of a partnership, joint
venture, trust or other enterprise shall be indemnified by Mattress
Discounters Corporation to the fullest extent permitted by the General
Corporation Law of the State of Delaware against all expense, liability and
loss (including attorneys' fees), actually and reasonably incurred by such
person in connection with such proceeding.
T.J.B., Inc. is a Maryland corporation. Section 2-418 of the Maryland
General Corporation Law provides that, in general, a corporation may indemnify
each director to the corporation or its stockholders for judgments, penalties,
fines, settlements and reasonable expenses actually incurred by the director
in connection with the proceeding, except for liability (1) where the act or
omission of the director was material to the matter giving rise to the
proceeding and was committed in bad faith or involved active and deliberate
dishonesty; (2) for any transaction from which the director derived an
improper personal benefit; and (3) in the case of a criminal proceeding, the
director had reasonable cause to believe that the act or omission was
unlawful.
The bylaws of T.J.B. provide that any person who is serving or has served
as a director or officer of T.J.B., or at its request as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise in which it owns a capital interest or of which it is a
creditor, shall
II-1
<PAGE>
be indemnified by T.J.B. against judgments, fines, liabilities, costs, amounts
paid in settlement, and expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense of any proceeding,
except in relation to matters as to which such person is adjudged in such
proceeding to be liable for negligence or misconduct in the performance of
duty. The bylaws of T.J.B. require the determination as to whether such
director or officer had not been negligent in the performance of duty by a
majority of the members of the board of directors who are not parties to such
proceeding, or by the stockholders.
The Bedding Experts Inc. is an Illinois corporation. Section 8.75 of the
Illinois Business Corporation Act provides that a corporation may indemnify
any person (or his or her personal representatives) who, by reason of the fact
that such person is or was a director or officer of such corporation, is made
(or threatened to be made) a party to any pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, other
than one brought on behalf of the corporation, against reasonable expenses
(including attorneys' fees), judgments, fines and settlement payments, if such
person acted in good faith and in a manner he or she reasonably believed to be
not opposed to the best interests of such corporation and, in criminal
actions, in addition, had no reasonable cause to believe his or her conduct
was unlawful. In the case of actions on behalf of the corporation,
indemnification may extend only to reasonable expenses (including attorneys'
fees) and only if such person acted in good faith and in a manner he or she
reasonably believed to be not opposed to the best interests of the
corporation, provided that no such indemnification is permitted in respect of
any claim, issue or matter as to which such person is adjudged to be liable
for negligence or misconduct in the performance of his or her duty to the
corporation except to the extent that the adjudicating court otherwise
provides. To the extent that such person has been successful in defending any
action, suit or proceeding (even one on behalf of the corporation) or in
defense of any claim, issue or matter therein, such person is entitled to
indemnification for reasonable expenses (including attorney's fees) incurred
by such person in connection therewith.
The bylaws of Bedding Experts provide that any person who was or is a party
or is threatened to be made a party to any proceeding by reason of the fact
that he is or was a director, officer, employee or agent of Bedding Experts
shall be indemnified against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such proceeding, provided, however, he acted in good
faith and in a manner he reasonably believed to be in the best interests of
Bedding Experts, and, with respect to any criminal proceeding, he had no
reasonable cause to believe such conduct was unlawful. The bylaws of Bedding
Experts require the determination as to whether any indemnification is proper
in the circumstances to be made by a majority vote of the board of directors
excluding directors who were party to any proceeding, or by the shareholders.
Bedding Experts is empowered to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of Bedding
Experts, or is or was serving at the request of Bedding Experts as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, any liability incurred by such person in such
capacity.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits.
See Exhibit Index.
(b) Financial Statement Schedules.
All schedules have been omitted because they are not applicable or because
the required information is shown in the financial statements or notes
thereto.
II-2
<PAGE>
Item 22. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers
and controlling persons of the registrant pursuant to the provisions
described under Item 20 or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(4) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11 or 13 of this form, within one business day
of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(5) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Upper Marlboro, State of Maryland, on May 23, 2000.
Mattress Discounters Corporation
By: /s/ Stephen A. Walker
----------------------------------
Name:Stephen A. Walker
Title: Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities indicated on May 23, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Stephen A. Walker Chief Executive Officer and
___________________________________________ Director (principal
Stephen A. Walker executive officer)
* Chief Financial Officer and
___________________________________________ Director
James B. Hirshorn (principal financial
officer and accounting
officer)
* Director
___________________________________________
Joshua Bekenstein
* Vice President and Director
___________________________________________
Michael Krupka
* Director
___________________________________________
Andrew S. Janower
* Director
___________________________________________
</TABLE> Joe L. Gonzalez
* Executed by power of attorney.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Upper Marlboro, State of Maryland, on May 23, 2000.
The Bedding Experts, Inc.
By: /s/ Stephen A. Walker
----------------------------------
Name:Stephen A. Walker
Title: Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities indicated on May 23, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Stephen A. Walker Chief Executive Officer and
___________________________________________ Director (principal
Stephen A. Walker executive officer)
* Vice President, Secretary,
___________________________________________ Treasurer and Director
James B. Hirshorn (principal financial
officer and accounting
officer)
* Director
___________________________________________
Joshua Bekenstein
* Vice President and Director
___________________________________________
Michael Krupka
* Director
___________________________________________
Andrew S. Janower
* Director
___________________________________________
</TABLE> Joe L. Gonzalez
* Executed by Power of Attorney.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Upper Marlboro, State of Maryland, on May 23, 2000.
T.J.B., Inc.
By: /s/ Stephen A. Walker
----------------------------------
Name: Stephen A. Walker
Title: Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities indicated on May 23, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Stephen A. Walker Chief Executive Officer and
___________________________________________ Director (principal
Stephen A. Walker executive director)
* Vice President, Secretary,
___________________________________________ Treasurer and Director
James B. Hirshorn (principal financial
officer and accounting
officer)
* Director
___________________________________________
Joshua Bekenstein
* Vice President and Director
___________________________________________
Michael Krupka
* Director
___________________________________________
Andrew S. Janower
* Director
___________________________________________
Joe L. Gonzalez
</TABLE>
* Executed by Power of Attorney.
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
2.1 Transaction Agreement, dated May 28, 1999 by and among Heilig-Meyers
Company, Heilig-Meyers Associates, Inc., and Mattress Discounters
Acquisition Corporation.*
2.2 Amendment No. 1 to the Transaction Agreement, dated July 15, 1999 by and
among Heilig-Meyers Company, Heilig-Meyers Associates, and Mattress
Discounters Acquisition Corporation.*
2.3 Amendment No. 2 to the Transaction Agreement, dated July 27, 1999 by and
among Heilig-Meyers Company, Heilig-Meyers Associates, and Mattress
Discounters Acquisition Corporation.*
2.4 Articles of Merger merging Mattress Discounters Acquisition Corporation
into Heilig-Meyers Associates, Inc., dated as of August 6, 1999 as filed
with the Commonwealth of Virginia State Corporation Commission.*
3.1 Articles of Incorporation of Mattress Discounters Corporation, dated
March 4, 1996.*
3.2 By-laws of Mattress Discounters Corporation dated March 5, 1996.*
3.3 Articles of Incorporation of The Bedding Experts, Inc. dated July 1,
1984.*
3.4 By-laws of The Bedding Experts, Inc. dated July 1, 1984.*
3.5 Articles of Incorporation of T.J.B., Inc. dated April 3, 1980.*
3.6 By-laws of T.J.B., Inc. dated April 3, 1980.*
3.7 By-laws of Mattress Discounters Acquisition Corporation, dated August 6,
1999.*
4.1 Indenture, dated as of August 6, 1999 by and among Mattress Discounters
Corporation, as the Issuer, the Guarantors named therein and State
Street Bank and Trust Company, as the Trustee.*
5.1 Opinion of Kirkland & Ellis.**
8.1 Opinion of Kirkland & Ellis with respect to Federal tax consequences.**
9.1 Stockholders Agreement, dated August 6, 1999 by and among Mattress
Discounters Corporation ( previously Mattress Discounters Holding
Corporation), Mattress Discounters Holding L.L.C., Heilig-Meyers
Company, and certain other stockholders of Mattress Holding Corporation
who are from time to time a party thereto.*
10.1 Registration Rights Agreement, dated August 6, 1999 by and among
Mattress Holding Corporation, Mattress Holding L.L.C., Heilig-Meyers
Corporation, and certain other stockholders of Mattress Discounters
Holding Corporation who are from time to time a party thereto.*
10.2 Common Stock Registration Rights Agreement, dated as of August 6, 1999
by and among Mattress Discounters Corporation, Mattress Discounters
Holding L.L.C., and Chase Securities, Inc, CIBC World Markets Corp., and
BancBoston Robertson Stephens, Inc.*
10.3 Purchase Agreement, dated August 3, 1999 by and among Mattress
Discounters Corporation, Mattress Discounters Corporation, the
Guarantors and the Initial Purchasers.*
10.4 Supply Agreement, dated March 17, 1997 by and among Mattress Discounters
Corporation and Sealy, Inc.***
10.5 Amendment No. 1 to the Supply Agreement, dated March 17, 1997 by and
among Mattress Discounters Corporation and Sealy, Inc.***
10.6 Amendment No. 2 to the Supply Agreement, dated March 17, 1997 by and
among Mattress Discounters Corporation and Sealy, Inc.***
10.7 Amendment No. 3 to the Supply Agreement dated March 17, 1997 by and
among Mattress Discounters Corporation and Sealy, Inc.***
10.8 Amendment No. 4 to the Supply Agreement dated March 17, 1997 by and
among Mattress Discounters Corporation and Sealy, Inc.***
10.9 Supply Agreement, dated August 6, 1999 by and among Heilig-Meyers
Company, Mattress Discounters Corporation, and Mattress Holding
Corporation (previously MD Acquisition Corporation.)***
10.10 Amendment No. 1 to the Supply Agreement, dated August 6, 1999 by and
among Heilig-Meyers Company, Mattress Discounters Corporation, and
Mattress Holding Corporation.***
10.11 Indemnity Agreement, dated May 28, 1999 by and among Heilig-Meyers
Company, Bain Capital, Inc., and Mattress Discounters Acquisition
Corporation.*
</TABLE>
II-7
<PAGE>
<TABLE>
<C> <S>
10.12 Amendment No. 1 to the Indemnity Agreement, dated July 29, 1999 by and
among Heilig-Meyers Company, Bain Capital, Inc., and Mattress
Discounters Acquisition Corporation.*
10.13 Assignment and Assumption Agreement, dated August 6, 1999 by and between
Heilig-Meyers Company and mattress Discounters Corporation.*
10.14 Tax Agreement, dated August 6, 1999 by and among Heilig-Meyers Company,
Heilig-Meyers Associates, Inc., Mattress Discounters Acquisition
Corporation, T.J.B., Inc., and The Bedding Experts, Inc.*
10.15 Tax Sharing Agreement, dated August 6, 1999 by and among Mattress
Discounters Holding, LLC, Mattress Holding Corporation, Mattress
Discounters Corporation, The Bedding Experts, Inc., T.J.B., Inc., and
Comfort Source Mattress Company.*
10.16 Landlord Agreement, dated July 27, 1999 by O.J.B./ Mid Atlantic Realty
IV, LLC.*
10.17 Management Services Agreement, dated August 6, 1999 by and among
Mattress Holding Corporation, Mattress Discounters Corporation, and Bain
Capital, Inc.*
10.18 Executive Stock and Option Agreement, dated May 1, 2000 between Mattress
Holding Corporation and Steve Newton.**
10.19 Executive Stock and Option Agreement, between Mattress Holding
Corporation and Stephen A. Walker.**
10.20 Executive Stock and Option Agreement, dated August 6, 1999 between
Mattress Holding Corporation and Raymond T. Bojanowski.*
10.21 Executive Stock and Option Agreement, dated August 6, 1999 between
Mattress Holding Corporation and Richard L. Branch.*
10.22 Executive Stock and Option Agreement, dated January 13, 2000 between
Mattress Holding Corporation and Michael Mauler.**
10.23 Executive Stock and Option Agreement, dated August 6, 1999 between
Mattress Holding Corporation and Robert D. Gorney.*
10.24 Employment Agreement, dated May 1, 2000 between Mattress Discounters
Corporation and Steve Newton.**
10.25 Employment Agreement, dated December 6, 1999 between Mattress
Discounters Corporation and Stephen A. Walker.*
10.26 Employment Agreement, dated August 6, 1999 between Mattress Discounters
Corporation and Raymond T. Bojanowski.*
10.27 Employment Agreement, dated August 6, 1999 between Mattress Discounters
Corporation and Richard L. Branch.*
10.28 Employment Agreement, dated January 10, 2000 between Mattress
Discounters Corporation and Michael Mauler.**
10.29 Warrant Agreement, dated August 6, 1999 between Mattress Discounters
Holding Corporation and State Street Bank and Trust Company.*
10.30 Credit Agreement, dated August 6, 1999 by and between Mattress
Discounters Holding Corporation, Mattress Discounters Corporation,
BancBoston, N.A., Canadian Imperial Bank of Commerce, and the Chase
Manhattan Bank.*
10.31 Guarantee and Collateral Agreement, dated August 6, 1999 by and between
Mattress Holding Corporation, Mattress Discounters Corporation, and
Chase Manhattan Bank.*
12.1 Statement of Ratio of Earnings to Fixed Charges.**
21.1 Subsidiaries of the Registrant.*
23.1 Consent of Kirkland & Ellis (included in Exhibit 5.1).*
23.2 Consent of Deloitte & Touche LLP.**
23.3 Consent of PricewaterhouseCoopers LLP.**
24.1 Powers of Attorney (included in signature pages).*
25.1 Statement of Eligibility of Trustee on Form T-1.*
27.1 Financial Data Schedule.**
99.1 Form of Letter of Transmittal.*
99.2 Form of Letter of Notice of Guaranteed Delivery.*
</TABLE>
* Filed previously.
** Filed herewith.
*** To be filed by amendment.
II-8
<PAGE>
EXHIBIT 5.1
[Letterhead of Kirkland & Ellis]
To Call Writer Directly:
(212) 446-4800
May 23, 2000
Mattress Discounters Corporation
9822 Fallard Court
Upper Marlboro, MD 20772
Re: Exchange Offer for $140,000,000 12 5/8% Series A Senior
Notes due 2007 for $140,000,000 12 5/8% Series B
Senior Notes due 2007.
Dear Ladies and Gentlemen:
We have acted as counsel to Mattress Discounters Corporation (the
"Company") and the Subsidiary Guarantors (together with the Company, the
"Registrants") in connection with the proposed offer (the "Exchange Offer") to
exchange an aggregate principle amount of up to $140,000,000 12 5/8% Series A
Senior Notes due 2007 (the "Old Notes") for $140,000,000 12 5/8% Series B Senior
Subordinated Notes due 2007 (the "Exchange Notes"), pursuant to a Registration
Statement on Form S-4 filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"). Such Registration Statement, as amended or supplemented, is hereinafter
referred to as the "Registration Statement". The Exchange Notes, to be
guaranteed by the Subsidiary Guarantors (the "Exchange Guarantees"), are to be
issued pursuant to the Indenture (the "Indenture"), dated as of August 6, 1999
by and among the Registrants and State Street Bank and Trust Company, as the
Trustee, in exchange for and in replacement of the Company's outstanding Old
Notes, of which $140,000,000 in aggregate principal amount is outstanding.
In that connection, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate records
and other instruments as have deemed necessary for the purposes of this opinion,
including (i) the corporate and organizational documents of each of the
Registrants, (ii) minutes and records of the corporate proceedings of each of
the Registrants with respect to the issuance of the Exchange Notes, (iii) the
Registration Statement and exhibits thereto and (iv) the Notes Exchange and
Registration Rights Agreement,
<PAGE>
Mattress Discounters Corporation
Page 2
dated as of August 6, 1999, among the Registrants, Chase Securities Inc., CIBC
World Markets Corp., and BancBoston Robertson Stephens Inc.
For purposes of this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as copies and the authenticity of the originals of all
documents submitted to us as copies. We have also assumed the genuineness of the
signatures of persons signing all documents in connection with which this
opinion is rendered, the authority of such persons signing on behalf of the
parties thereto other than the Registrants, and the due authorization, execution
and delivery of all documents by the parties thereto other than the Registrants.
As to any facts material to the opinions expressed herein which we have not
independently established or verified, we have relied upon statements and
representations of officers and other representatives of the Registrants and
others.
Based upon and subject to the foregoing qualifications, assumptions and
limitations and the further limitations set forth below, we are of the opinion
that:
1. Mattress Discounters Corporation is in good standing under the laws
of the State of Delaware.
2. The sale and issuance of the Exchange Notes has been validly
authorized by the Company.
3. When the Exchange Notes are issued pursuant to the Exchange Offer,
the Exchange Notes will constitute valid and binding obligations of the
Registrants and the Indenture will be enforceable in accordance with its terms.
4. Assuming the Indenture and the sale and issuance of the Exchange
Guarantees have been validly authorized, executed and delivered by each of the
Subsidiary Guarantors, the Exchange Guarantees when issued pursuant to the
Exchange Offer will constitute valid and binding obligations of the Subsidiary
Guarantors.
Our opinions expressed above are subject to the qualifications that we
express no opinion as to the applicability of, compliance with, or effect of (i)
any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent
conveyance, moratorium or other similar law affecting the enforcement of
creditors' rights generally, (ii) general principals of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law), and
(iii) except for purposes of the opinion in paragraphs 1 and 2, any laws except
the laws except the laws of the State of New York.
<PAGE>
Mattress Discounters Corporation
Page 3
We hereby consent to the filing of this opinion in Exhibit 5.1 to the
Registration Statement. We also consent to the reference to our firm under the
heading "Legal Matters" in the Registration Statement. In giving this consent,
we do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of the rules and regulations of
the Commission.
We do not find it necessary for the purposes of this opinion, and
accordingly we do not purport to cover herein, the application of the securities
or "Blue Sky" laws of the various states to the issuance of the Exchange Notes.
This opinion is limited to the specific issues addressed herein, and no
opinion may be inferred or implied beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the present
laws of the State of New York be changed by legislative action, judicial
decision or otherwise.
This opinion is furnished to you in connection with the filing of the
Registration Statement, and is not to be used, circulated, quoted or otherwise
relied upon for any other purposes.
Yours very truly,
KIRKLAND & ELLIS
<PAGE>
EXHIBIT 8.1
KIRKLAND & ELLIS
PARTNERSHIPS INCLUDING PROFESSIONAL CORPORATIONS
Citicorp Center
153 East 53rd Street
New York, New York 10022-4675
(212) 446-4800
To Call Writer Directly: Facsimile:
(212) 446-4800 (212) 446-4900
May 23, 2000
Mattress Discounters Corporation
9822 Fallard Court
Upper Marlboro, MD 20772
Re: Exchange Offer for $140,000,000 12 5/8% Series A Senior Notes due 2007 for
$140,000,000 12 5/8 Series B Senior Notes due 2007.
Ladies and Gentlemen:
We have acted as special counsel to Mattress Discounters Corporation ("the
Company") in connection with the proposed offer (the "Exchange Offer") to
exchange an aggregate principle amount of up to $140,000,000 12 5/8% Series B
Senior Notes due 2007 (the "Exchange Notes") in exchange for and in replacement
of the Company's 12 5/8% Series A Senior Notes due 2007 (the "Old Notes").
You have requested our opinion as to certain United States federal income
tax consequences of the Exchange Offer. In preparing our opinion, we have
reviewed and relied upon the Company's Registration Statement on Form S-4, filed
with the Securities and Exchange Commission on February 1, 2000 ("the
Registration Statement"), and such other documents as we deemed necessary.
On the basis of the foregoing, it is our opinion that the exchange of the
Old Notes for the Exchange Notes pursuant to the Exchange Offer will not be
treated as an "exchange" for United States federal income tax purposes, because
the Exchange Notes will not be considered to differ materially in kind or
extent from the Old Notes. Rather, the Exchange Notes received by a holder of
the Old Notes will be treated as a continuation of the Old Notes in the hands of
that holder. Accordingly, there will be no federal income tax consequences to
the holders solely as a result of the exchange of the Old Notes for Exchange
Notes under the Exchange Offer.
The opinion set forth above is based upon the applicable provisions of the
Internal Revenue Code of 1986, as amended, the Treasury Regulations promulgated
or proposed thereunder, current positions of the Internal Revenue Service (the
"IRS") contained in published revenue rulings, revenue procedures, and
announcements, existing judicial decisions and other applicable authorities. No
tax ruling has been sought from the IRS with respect to any of the matters
discussed herein. Unlike a ruling from the IRS, an opinion of counsel is not
binding on the IRS. Hence, no assurances can be given that a court would reach
the same conclusion as the opinion stated in this letter, or that such opinion
will not be
<PAGE>
KIRKLAND & ELLIS
Page 2
successfully challenged by the IRS. We express no opinion concerning any tax
consequences of the Exchange Offer except as expressly set forth above.
We hereby consent to the filing of this opinion as Exhibit 8.1 to the
Registration Statement. We also consent to the reference to our firm under the
heading "Federal Income Tax Considerations." In giving this consent, we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
Very truly yours,
Kirkland & Ellis
<PAGE>
EXHIBIT 10.18
MATTRESS HOLDING CORPORATION
AGREEMENT EVIDENCING A GRANT OF A
NONQUALIFIED STOCK OPTION UNDER
1999 STOCK OPTION PLAN
Agreement made as of May 1, 2000, between Mattress Holding Corporation, a
Virginia corporation (the "Company"), and Steve Newton ("Grantee").
------- -------
Capitalized terms used but not defined herein shall have the meanings assigned
to such terms in the Plan (as defined below).
1. Grant of Option. Pursuant to the Mattress Holding Corporation 1999
Stock Option Plan (the "Plan"), the Company hereby grants to Grantee, as of the
----
date hereof, a nonqualified stock option (the "Option") to purchase 166,430
------
shares (the "Shares") of the Company's Class A Common Stock, $.01 par value per
------
share (the "Class A Common"), at the exercise price per share of $0.6667 (the
--------------
"Exercise Price"), subject to the terms and conditions set forth herein and in
- ---------------
the Plan. Upon certain events, the number of Shares and/or the Exercise Price
may be adjusted as provided in the Plan.
2. Grantee Bound by Plan. Attached hereto as Annex A is a copy of the
-------
Plan which is incorporated herein by reference and made a part hereof. Grantee
hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all
the terms and provisions thereof. The Plan should be carefully examined before
any decision is made to exercise the Option.
3. Exercise of Option. Subject to the earlier termination of the Option
as provided herein and in the Plan and subject to Section 5 hereof, the Option
may be exercised, in whole or in part, to the extent it has become vested, by
written notice to the Company at any time and from time to time after the date
of grant. The Option shall not be exercisable in any event after the tenth
anniversary of the date hereof. An Option may not be exercised for a fraction of
a share of Class A Common. Options are subject to cancellation as provided in
the Plan. Any part of the Option that is not vested on the date that (a)
Grantee's employment with the Company or any of its Subsidiaries terminates or
(b) Grantee receives notice from the Company that Grantee's position has changed
to one which, in the judgment of the Board, is not of sufficient management
authority for option eligibility ("Grantee Termination Date") shall expire and
------------------------
be forfeited on such date, and any part of the Option that is vested on the
Grantee Termination Date shall also expire and be forfeited to the extent not
exercised on or before the sixtieth (60th) day following the Grantee Termination
Date (180 days if the Grantee Termination Date occurs as a result of the death
of Grantee), but in no event after the tenth anniversary of the date hereof.
4. Vesting of Options. The Option may be exercised only to the extent it
has become vested. The Option shall fully vest and become exercisable with
respect to all of the Shares
<PAGE>
if and only if the Grantee remains continuously employed with the Company or any
of its Subsidiaries during the period beginning on the date hereof and ending on
the fifth anniversary of the date hereof. Notwithstanding the foregoing, the
Option shall (i) cumulatively vest and become exercisable with respect to 20% of
the Shares (rounded to the nearest whole share) upon each of the first
anniversary of the Employment Date, the second anniversary of the Employment
Date, the third anniversary of the Employment Date, the fourth anniversary of
the Employment Date and the fifth anniversary of the Employment Date and (ii)
vest and become exercisable with respect to all of the then unvested Shares upon
a Sale of the Company, in each case, if and only if the Grantee remains
continuously employed by the Company or any of its Subsidiaries during the
period beginning on the date hereof and ending on the applicable vesting date
referred to above. The "Employment Date" means May 1, 2000.
5. Conditions to Exercise. The Option may not be exercised by Grantee
unless the following conditions are met:
(a) The Option has become vested with respect to the Shares to be
acquired pursuant to such exercise;
(b) legal counsel for the Company must be satisfied at the time of
exercise that the issuance of shares of Class A Common upon exercise will be in
compliance with the Securities Act and applicable United States federal, state,
local and foreign laws; and
(c) Grantee must pay at the time of exercise the full purchase price
for the shares of Class A Common being acquired hereunder plus any withholding
tax required in connection with such exercise, in each case, in accordance with
the terms of the Plan.
6. Transferability. The Option (including the right to receive the
Shares) may not be Transferred or assigned by Grantee, other than by will or the
laws of descent and distribution and, during the lifetime of Grantee, the Option
may be exercised only by Grantee (or, if Grantee is incapacitated, by Grantee's
legal guardian or legal representative). In the event of the death of Grantee,
Options which are not vested on the date of death shall terminate; and the
exercise of Options which are vested as of the date of death may be made only by
the executor or administrator of Grantee's estate or the Person or Persons to
whom Grantee's rights under the Options pass by will or the laws of descent and
distribution. If Grantee or anyone claiming under or through Grantee attempts to
violate this Section 6, such attempted violation shall be null and void and
without effect, and the Company's obligation hereunder shall terminate. Any
Issued Stock received upon exercise of this Option is subject to the repurchase
right, restrictions on Transfer and other rights and obligations set forth in
the Plan.
7. Administration. Any action taken or decision made by the Company, the
Board, or the Committee or its delegates arising out of or in connection with
the construction, administration, interpretation or effect of the Plan or this
Agreement shall lie within its sole and absolute discretion, as the case may be,
and shall be final, conclusive and binding on Grantee and
2
<PAGE>
all persons claiming under or through Grantee. By accepting this grant or other
benefit under the Plan, Grantee and each person claiming under or through
Grantee shall be conclusively deemed to have indicated acceptance and
ratification of, and consent to, any action taken under the Plan by the Company,
the Board or the Committee or its delegates.
8. No Rights as Stockholder. Unless and until a certificate or
certificates representing such shares of Class A Common shall have been issued
to Grantee (or any person acting under Section 6 above), Grantee shall not be or
have any of the rights or privileges of a stockholder of the Company with
respect to shares of Class A Common acquirable upon exercise of the Option.
9. Investment Representation. Grantee hereby acknowledges that the shares
of Class A Common which Grantee may acquire by exercising the Option shall be
acquired for investment without a view to distribution, within the meaning of
the Securities Act, and shall not be Transferred in the absence of an effective
registration statement for the shares of Class A Common under the Securities Act
and applicable state securities laws or an applicable exemption from the
registration requirements of the Securities Act and any applicable state
securities laws. Grantee also agrees that the shares of Class A Common which
Grantee may acquire by exercising the Option will not be sold or otherwise
disposed of in any manner which would constitute a violation of any applicable
federal or state securities laws.
10. Rights of Participants. Neither this Agreement nor the Plan creates
any employment rights in Grantee and neither the Company nor any of its
Subsidiaries shall have any liability arising out of the Plan or this Agreement
for terminating Grantee's employment or reducing Grantee's responsibilities.
11. Notices. Any notice hereunder to the Company shall be addressed to the
Company's principal executive office, Attention: Board of Directors, and any
notice hereunder to Grantee shall be addressed to Grantee at Grantee's last
address on the records of the Company, subject to the right of either party to
designate at any time hereafter in writing some other address. Any notice shall
be deemed to have been duly given when delivered personally, one day following
dispatch if sent by reputable overnight courier, fees prepaid, or three days
following mailing if sent by registered mail, return receipt requested, postage
prepaid and addressed as set forth above.
12. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of any successors and assigns to the Company and all persons lawfully
claiming under Grantee.
13. Governing Law. The validity, construction, interpretation,
administration and effect of the Plan, and of its rules and regulations, and
rights relating to the Plan and to this Agreement, shall be governed by the
substantive laws, but not the choice of law rules, of whichever state in the
United States in which the Company is incorporated from time to time.
3
<PAGE>
14. Non-Competition. In consideration of the Company's grant of the Option
hereunder, the Grantee agrees that, during the Grantee's employment by the
Company, and for eighteen months thereafter, Grantee shall not act as a
proprietor, investor, director, officer, employee, substantial stockholder,
consultant, or partner in any business engaged to a material extent in the
manufacture or sale of (a) mattresses or other bedding products or (b) any other
products which constitute more than ten percent (10%) of the Company's
consolidated revenues at the time in direct competition with the Company or any
of its Subsidiaries in any market. Grantee understands that the foregoing
restrictions prohibit grantee from working for another sleep shop or other
mattress retailer and may limit his or her ability to engage in certain business
pursuits during the period provided for above, but acknowledges that the Grantee
has no right to a grant of Options under the Plan and this grant is adequate
consideration for Grantee's agreeing to this non-competition limitation.
* * * * *
4
<PAGE>
IN WITNESS WHEREOF, the Company and Grantee have executed this Agreement as
of the date first above written.
MATTRESS HOLDING CORPORATION
/s/ Stephen Walker
-----------------------------------
Name:
Title:
GRANTEE:
/s/ Steve Newton
-----------------------------------
Steve Newton
5
<PAGE>
EXHIBIT 10.19
MATTRESS HOLDING CORPORATION
AGREEMENT EVIDENCING A GRANT OF A
NONQUALIFIED STOCK OPTION UNDER
1999 STOCK OPTION PLAN
Agreement made as of December 6, 1999, between Mattress Holding
Corporation, a Virginia corporation (the "Company"), and Stephen A. Walker
-------
("Grantee"). Capitalized terms used but not defined herein shall have the
-------
meanings assigned to such terms in the Plan (as defined below).
1. Grant of Option. Pursuant to the Mattress Holding Corporation
1999 Stock Option Plan (the "Plan"), the Company hereby grants to Grantee, as of
----
the date hereof, a nonqualified stock option (the "Option") to purchase 250,000
------
shares (the "Shares") of the Company's Class A Common Stock, $.01 par value per
------
share (the "Class A Common"), at the exercise price per share of $0.6667 (the
--------------
"Exercise Price"), subject to the terms and conditions set forth herein and in
- ---------------
the Plan. Upon certain events, the number of Shares and/or the Exercise Price
may be adjusted as provided in the Plan.
2. Grantee Bound by Plan. Attached hereto as Annex A is a copy of
-------
the Plan which is incorporated herein by reference and made a part hereof.
Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound
by all the terms and provisions thereof. The Plan should be carefully examined
before any decision is made to exercise the Option.
3. Exercise of Option. Subject to the earlier termination of the
Option as provided herein and in the Plan and subject to Section 5 hereof, the
Option may be exercised, in whole or in part, to the extent it has become
vested, by written notice to the Company at any time and from time to time after
the date of grant. The Option shall not be exercisable in any event after the
tenth anniversary of the date hereof. An Option may not be exercised for a
fraction of a share of Class A Common. Options are subject to cancellation as
provided in the Plan. Any part of the Option that is not vested on the date
that (a) Grantee's employment with the Company or any of its Subsidiaries
terminates or (b) Grantee receives notice from the Company that Grantee's
position has changed to one which, in the judgment of the Board, is not of
sufficient management authority for option eligibility ("Grantee Termination
-------------------
Date") shall expire and be forfeited on such date, and any part of the Option
- ----
that is vested on the Grantee Termination Date shall also expire and be
forfeited to the extent not exercised on or before the sixtieth (60th) day
following the Grantee Termination Date (180 days if the Grantee Termination Date
occurs as a result of the death of Grantee), but in no event after the tenth
anniversary of the date hereof.
<PAGE>
4. Vesting of Options. The Option may be exercised only to the
extent it has become vested. The Option shall fully vest and become exercisable
with respect to all of the Shares if and only if the Grantee remains
continuously employed with the Company or any of its Subsidiaries during the
period beginning on the date hereof and ending on the fifth anniversary of the
date hereof. Notwithstanding the foregoing, the Option shall (i) cumulatively
vest and become exercisable with respect to 20% of the Shares (rounded to the
nearest whole share) upon each of the first anniversary of the Employment Date,
the second anniversary of the Employment Date, the third anniversary of the
Employment Date, the fourth anniversary of the Employment Date and the fifth
anniversary of the Employment Date and (ii) vest and become exercisable with
respect to all of the then unvested Shares upon a Sale of the Company, in each
case, if and only if the Grantee remains continuously employed by the Company or
any of its Subsidiaries during the period beginning on the date hereof and
ending on the applicable vesting date referred to above. The "Employment Date"
means December 6, 1999.
5. Conditions to Exercise. The Option may not be exercised by
Grantee unless the following conditions are met:
(a) The Option has become vested with respect to the Shares to be
acquired pursuant to such exercise;
(b) legal counsel for the Company must be satisfied at the time of
exercise that the issuance of shares of Class A Common upon exercise will be in
compliance with the Securities Act and applicable United States federal, state,
local and foreign laws; and
(c) Grantee must pay at the time of exercise the full purchase price
for the shares of Class A Common being acquired hereunder plus any withholding
tax required in connection with such exercise, in each case, in accordance with
the terms of the Plan.
6. Transferability. The Option (including the right to receive the
Shares) may not be Transferred or assigned by Grantee, other than by will or the
laws of descent and distribution and, during the lifetime of Grantee, the Option
may be exercised only by Grantee (or, if Grantee is incapacitated, by Grantee's
legal guardian or legal representative). In the event of the death of Grantee,
Options which are not vested on the date of death shall terminate; and the
exercise of Options which are vested as of the date of death may be made only by
the executor or administrator of Grantee's estate or the Person or Persons to
whom Grantee's rights under the Options pass by will or the laws of descent and
distribution. If Grantee or anyone claiming under or through Grantee attempts
to violate this Section 6, such attempted violation shall be null and void and
without effect, and the Company's obligation hereunder shall terminate. Any
Issued Stock received upon exercise of this Option is subject to the repurchase
right, restrictions on Transfer and other rights and obligations set forth in
the Plan.
7. Administration. Any action taken or decision made by the
Company, the Board, or the Committee or its delegates arising out of or in
connection with the construction, administration, interpretation or effect of
the Plan or this Agreement shall lie within its sole and
2
<PAGE>
absolute discretion, as the case may be, and shall be final, conclusive and
binding on Grantee and all persons claiming under or through Grantee. By
accepting this grant or other benefit under the Plan, Grantee and each person
claiming under or through Grantee shall be conclusively deemed to have indicated
acceptance and ratification of, and consent to, any action taken under the Plan
by the Company, the Board or the Committee or its delegates.
8. No Rights as Stockholder. Unless and until a certificate or
certificates representing such shares of Class A Common shall have been issued
to Grantee (or any person acting under Section 6 above), Grantee shall not be or
have any of the rights or privileges of a stockholder of the Company with
respect to shares of Class A Common acquirable upon exercise of the Option.
9. Investment Representation. Grantee hereby acknowledges that the
shares of Class A Common which Grantee may acquire by exercising the Option
shall be acquired for investment without a view to distribution, within the
meaning of the Securities Act, and shall not be Transferred in the absence of an
effective registration statement for the shares of Class A Common under the
Securities Act and applicable state securities laws or an applicable exemption
from the registration requirements of the Securities Act and any applicable
state securities laws. Grantee also agrees that the shares of Class A Common
which Grantee may acquire by exercising the Option will not be sold or otherwise
disposed of in any manner which would constitute a violation of any applicable
federal or state securities laws.
10. Rights of Participants. Neither this Agreement nor the Plan
creates any employment rights in Grantee and neither the Company nor any of its
Subsidiaries shall have any liability arising out of the Plan or this Agreement
for terminating Grantee's employment or reducing Grantee's responsibilities.
11. Notices. Any notice hereunder to the Company shall be addressed
to the Company's principal executive office, Attention: Board of Directors, and
any notice hereunder to Grantee shall be addressed to Grantee at Grantee's last
address on the records of the Company, subject to the right of either party to
designate at any time hereafter in writing some other address. Any notice shall
be deemed to have been duly given when delivered personally, one day following
dispatch if sent by reputable overnight courier, fees prepaid, or three days
following mailing if sent by registered mail, return receipt requested, postage
prepaid and addressed as set forth above.
12. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of any successors and assigns to the Company and all persons
lawfully claiming under Grantee.
13. Governing Law. The validity, construction, interpretation,
administration and effect of the Plan, and of its rules and regulations, and
rights relating to the Plan and to this Agreement, shall be governed by the
substantive laws, but not the choice of law rules, of whichever state in the
United States in which the Company is incorporated from time to time.
3
<PAGE>
14. Non-Competition. In consideration of the Company's grant of the
Option hereunder, the Grantee agrees that, during the Grantee's employment by
the Company, and for eighteen months thereafter, Grantee shall not act as a
proprietor, investor, director, officer, employee, substantial stockholder,
consultant, or partner in any business engaged to a material extent in the
manufacture or sale of (a) mattresses or other bedding products or (b) any other
products which constitute more than ten percent (10%) of the Company's
consolidated revenues at the time in direct competition with the Company or any
of its Subsidiaries in any market. Grantee understands that the foregoing
restrictions prohibit grantee from working for another sleep shop or other
mattress retailer and may limit his or her ability to engage in certain business
pursuits during the period provided for above, but acknowledges that the Grantee
has no right to a grant of Options under the Plan and this grant is adequate
consideration for Grantee's agreeing to this non-competition limitation.
* * * * *
4
<PAGE>
IN WITNESS WHEREOF, the Company and Grantee have executed this Agreement as of
the date first above written.
MATTRESS HOLDING CORPORATION
/s/ James B. Hirshorn
----------------------------------------
Name: James B. Hirshorn
Title: Vice President
GRANTEE:
/s/ Stephen A. Walker
----------------------------------------
Stephen A. Walker
5
<PAGE>
Annex A
- -------
Mattress Holding Corporation
1999 Stock Option Plan
Copy attached.
6
<PAGE>
EXHIBIT 10.22
MATTRESS HOLDING CORPORATION
AGREEMENT EVIDENCING A GRANT OF A
NONQUALIFIED STOCK OPTION UNDER
1999 STOCK OPTION PLAN
Agreement made as of January 13, 2000, between Mattress Holding
Corporation, a Virginia corporation (the "Company"), and Michael Mauler
-------
("Grantee"). Capitalized terms used but not defined herein shall have the
-------
meanings assigned to such terms in the Plan (as defined below).
1. Grant of Option. Pursuant to the Mattress Holding Corporation
1999 Stock Option Plan (the "Plan"), the Company hereby grants to Grantee, as of
----
the date hereof, a nonqualified stock option (the "Option") to purchase 44,903
------
shares (the "Shares") of the Company's Class A Common Stock, $.01 par value per
------
share (the "Class A Common"), at the exercise price per share of $0.6667 (the
--------------
"Exercise Price"), subject to the terms and conditions set forth herein and in
--------------
the Plan. Upon certain events, the number of Shares and/or the Exercise Price
may be adjusted as provided in the Plan.
2. Grantee Bound by Plan. Attached hereto as Annex A is a copy
-------
of the Plan which is incorporated herein by reference and made a part hereof.
Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound
by all the terms and provisions thereof. The Plan should be carefully examined
before any decision is made to exercise the Option.
3. Exercise of Option. Subject to the earlier termination of
the Option as provided herein and in the Plan and subject to Section 5 hereof,
the Option may be exercised, in whole or in part, to the extent it has become
vested, by written notice to the Company at any time and from time to time after
the date of grant. The Option shall not be exercisable in any event after the
tenth anniversary of the date hereof. An Option may not be exercised for a
fraction of a share of Class A Common. Options are subject to cancellation as
provided in the Plan. Any part of the Option that is not vested on the date that
(a) Grantee's employment with the Company or any of its Subsidiaries terminates
or (b) Grantee receives notice from the Company that Grantee's position has
changed to one which, in the judgment of the Board, is not of sufficient
management authority for option eligibility ("Grantee Termination Date") shall
------------------------
expire and be forfeited on such date, and any part of the Option that is vested
on the Grantee Termination Date shall also expire and be forfeited to the extent
not exercised on or before the sixtieth (60th) day following the Grantee
Termination Date (180 days if the Grantee Termination Date occurs as a result of
the death of Grantee), but in no event after the tenth anniversary of the date
hereof.
4. Vesting of Options. The Option may be exercised only to the
extent it has become vested. The Option shall fully vest and become exercisable
with respect to all of the Shares if and only if the Grantee remains
continuously employed with the Company or any of its
<PAGE>
Subsidiaries during the period beginning on the date hereof and ending on the
fifth anniversary of the date hereof. Notwithstanding the foregoing, the Option
shall (i) cumulatively vest and become exercisable with respect to 20% of the
Shares (rounded to the nearest whole share) upon each of the first anniversary
of the Employment Date, the second anniversary of the Employment Date, the third
anniversary of the Employment Date, the fourth anniversary of the Employment
Date and the fifth anniversary of the Employment Date and (ii) vest and become
exercisable with respect to all of the then unvested Shares upon a Sale of the
Company, in each case, if and only if the Grantee remains continuously employed
by the Company or any of its Subsidiaries during the period beginning on the
date hereof and ending on the applicable vesting date referred to above. The
"Employment Date" means January 13, 2000.
5. Conditions to Exercise. The Option may not be exercised by
Grantee unless the following conditions are met:
(a) The Option has become vested with respect to the Shares
to be acquired pursuant to such exercise;
(b) legal counsel for the Company must be satisfied at the
time of exercise that the issuance of shares of Class A Common upon exercise
will be in compliance with the Securities Act and applicable United States
federal, state, local and foreign laws; and
(c) Grantee must pay at the time of exercise the full
purchase price for the shares of Class A Common being acquired hereunder plus
any withholding tax required in connection with such exercise, in each case, in
accordance with the terms of the Plan.
6. Transferability. The Option (including the right to receive
the Shares) may not be Transferred or assigned by Grantee, other than by will or
the laws of descent and distribution and, during the lifetime of Grantee, the
Option may be exercised only by Grantee (or, if Grantee is incapacitated, by
Grantee's legal guardian or legal representative). In the event of the death of
Grantee, Options which are not vested on the date of death shall terminate; and
the exercise of Options which are vested as of the date of death may be made
only by the executor or administrator of Grantee's estate or the Person or
Persons to whom Grantee's rights under the Options pass by will or the laws of
descent and distribution. If Grantee or anyone claiming under or through Grantee
attempts to violate this Section 6, such attempted violation shall be null and
void and without effect, and the Company's obligation hereunder shall terminate.
Any Issued Stock received upon exercise of this Option is subject to the
repurchase right, restrictions on Transfer and other rights and obligations set
forth in the Plan.
7. Administration. Any action taken or decision made by the
Company, the Board, or the Committee or its delegates arising out of or in
connection with the construction, administration, interpretation or effect of
the Plan or this Agreement shall lie within its sole and absolute discretion, as
the case may be, and shall be final, conclusive and binding on Grantee and
2
<PAGE>
all persons claiming under or through Grantee. By accepting this grant or other
benefit under the Plan, Grantee and each person claiming under or through
Grantee shall be conclusively deemed to have indicated acceptance and
ratification of, and consent to, any action taken under the Plan by the Company,
the Board or the Committee or its delegates.
8. No Rights as Stockholder. Unless and until a certificate or
certificates representing such shares of Class A Common shall have been issued
to Grantee (or any person acting under Section 6 above), Grantee shall not be or
have any of the rights or privileges of a stockholder of the Company with
respect to shares of Class A Common acquirable upon exercise of the Option.
9. Investment Representation. Grantee hereby acknowledges that
the shares of Class A Common which Grantee may acquire by exercising the Option
shall be acquired for investment without a view to distribution, within the
meaning of the Securities Act, and shall not be Transferred in the absence of an
effective registration statement for the shares of Class A Common under the
Securities Act and applicable state securities laws or an applicable exemption
from the registration requirements of the Securities Act and any applicable
state securities laws. Grantee also agrees that the shares of Class A Common
which Grantee may acquire by exercising the Option will not be sold or otherwise
disposed of in any manner which would constitute a violation of any applicable
federal or state securities laws.
10. Rights of Participants. Neither this Agreement nor the Plan
creates any employment rights in Grantee and neither the Company nor any of its
Subsidiaries shall have any liability arising out of the Plan or this Agreement
for terminating Grantee's employment or reducing Grantee's responsibilities.
11. Notices. Any notice hereunder to the Company shall be
addressed to the Company's principal executive office, Attention: Board of
Directors, and any notice hereunder to Grantee shall be addressed to Grantee at
Grantee's last address on the records of the Company, subject to the right of
either party to designate at any time hereafter in writing some other address.
Any notice shall be deemed to have been duly given when delivered personally,
one day following dispatch if sent by reputable overnight courier, fees prepaid,
or three days following mailing if sent by registered mail, return receipt
requested, postage prepaid and addressed as set forth above.
12. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of any successors and assigns to the Company and all
persons lawfully claiming under Grantee.
13. Governing Law. The validity, construction, interpretation,
administration and effect of the Plan, and of its rules and regulations, and
rights relating to the Plan and to this Agreement, shall be governed by the
substantive laws, but not the choice of law rules, of whichever state in the
United States in which the Company is incorporated from time to time.
3
<PAGE>
14. Non-Competition. In consideration of the Company's grant of
the Option hereunder, the Grantee agrees that, during the Grantee's employment
by the Company, and for eighteen months thereafter, Grantee shall not act as a
proprietor, investor, director, officer, employee, substantial stockholder,
consultant, or partner in any business engaged to a material extent in the
manufacture or sale of (a) mattresses or other bedding products or (b) any other
products which constitute more than ten percent (10%) of the Company's
consolidated revenues at the time in direct competition with the Company or any
of its Subsidiaries in any market. Grantee understands that the foregoing
restrictions prohibit grantee from working for another sleep shop or other
mattress retailer and may limit his or her ability to engage in certain business
pursuits during the period provided for above, but acknowledges that the Grantee
has no right to a grant of Options under the Plan and this grant is adequate
consideration for Grantee's agreeing to this non-competition limitation.
* * * * *
4
<PAGE>
IN WITNESS WHEREOF, the Company and Grantee have executed this Agreement as
of the date first above written.
MATTRESS HOLDING CORPORATION
/S/ James Hirshorn
------------------------------
Name: James B. Hirshorn
Title: Vice President
GRANTEE:
/S/ Michael Mauler
------------------
Michael Mauler
5
<PAGE>
EXHIBIT 10.24
MATTRESS DISCOUNTERS CORPORATION
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made as of May 1st, 2000, by and among Mattress
Discounters Corporation, a Delaware corporation (the "Company"), and Steve
-------
Newton ("Executive").
---------
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive, and Executive
----------
hereby accepts employment with the Company, upon the terms and conditions set
forth in this Agreement for the period beginning on the date hereof and ending
as provided in Section 4 hereof (the "Employment Period").
-----------------
2. Position and Duties.
-------------------
(a) During the Employment Period, Executive shall serve as the Chief
Operating Officer of the Company and shall have supervisory duties,
responsibilities and authority over the Company's sales, store operations, real
estate and construction operations, subject to the power of the Chief Executive
Officer and the Company's board of directors (the "Board") to expand or limit
-----
such duties, responsibilities and authority and to override actions of officers
of the Company.
(b) During the Employment Period, Executive shall report to the Chief
Executive Officer and shall devote his best efforts and his full business time
and attention (except for permitted vacation periods and reasonable periods of
illness or other incapacity other than Disability) to the business and affairs
of the Company and the Subsidiaries. Executive shall perform his duties and
responsibilities to the Company and the Subsidiaries hereunder to the best of
his abilities in a diligent, trustworthy, businesslike and efficient manner.
(c) For purposes of this Agreement, "Subsidiaries" shall mean any
------------
corporation or other entity of which the securities or other ownership interests
having the voting power to elect a majority of the board of directors or other
governing body are, at the time of determination, owned by the Company, directly
or through one or more Subsidiaries. For purposes hereof, the Company shall be
deemed to have a majority ownership interest in a partnership, limited liability
company (without voting securities), association or other business entity if the
Company, directly or through one or more Subsidiaries, shall be allocated a
majority of partnership, limited liability company, association or other
business entity gains or losses or shall be or control the managing director or
general partner of such partnership, limited liability company, association or
other business entity. For purposes of this Agreement, "Disability" means the
----------
inability, due to illness, accident, injury, physical or mental incapacity or
other disability, of the Executive to carry out effectively his duties and
obligations to the Company or to participate effectively and actively in the
management of the
-1-
<PAGE>
Company or a Subsidiary for a period or periods aggregating at least 90 days
(whether or not consecutive) during any twelve-month period, as determined in
the reasonable judgment of the Board.
3. Compensation and Benefits.
-------------------------
(a) During the Employment Period, Executive's base salary shall be
$250,000 per annum or such higher rate as the Board may designate from time to
time (the "Base Salary"), which salary shall be payable by the Company in
-----------
regular installments in accordance with the Company's general payroll practices.
In addition, during the Employment Period, Executive shall be entitled to
participate in all of the Company's applicable employee compensatory and benefit
programs for which senior executive employees of the Company are generally
eligible.
(b) During the Employment Period, the Company shall reimburse Executive
for all reasonable expenses incurred by him in the course of performing his
duties and responsibilities under this Agreement which are consistent with the
Company's policies in effect from time to time with respect to travel,
entertainment and other business expenses, subject to the Company's requirements
with respect to reporting and documentation of such expenses.
(c) In addition to the Base Salary, the Board will award (and the Company
will pay) a bonus to Executive of up to 60% (with a 30% target) of the Base
Salary following the end of each fiscal year during the Employment Period based
upon Executive's performance and the Company's consolidated operating results
during such year, with certain financial targets to be mutually agreed upon by
the Company and Executive.
(d) The Company will provide Executive with the following amounts (the
"Relocation Payments") to reimburse Executive for his relocation expenses (i)
-------------------
the cost of no more than two trips to the Washington, D.C./Baltimore, MD area
for Executive and his spouse for the purpose of searching for a house (such cost
to include travel, lodging and automobile), (ii) an amount equal to the real
estate broker's fee Executive actually pays in connection with the sale of his
Marietta, GA home (such amount not to exceed 6% of the sale price of such home),
(iii) up to $30,000 for moving expenses which Executive actually incurs and for
which Executive provides the Company with itemized receipts, and (iv) a
miscellaneous payment of $10,000. The Company will pay Executive the Relocation
Payments referenced in subsection (i) above at the time Executive submits such
expenses for reimbursement and in subsections (ii) through (iv) above within two
business days after Executive actually relocates to the Washington,
D.C./Baltimore, MD area. Until the earlier of such relocation and 120 days from
the date of this Agreement, the Company will (1) reimburse Executive for travel
expenses and coach airline tickets between his Marietta, GA home and Mattress
Discounters Corporation's executive offices for one round trip per week
(Executive will attempt to obtain the most economical fares available) and (2)
provide Executive with an automobile and temporary furnished lodging in the
Washington, D.C./Baltimore, MD area. The Company shall pay Executive an
additional amount equal to the marginal increase in Executive's
-2-
<PAGE>
income taxes which results from the payments referred to in this Section 3(d),
including the payment referred to in this sentence.
(e) Mattress Holding Corporation, a Virginia corporation, will grant to
Executive options pursuant to an option agreement dated the date of this
Agreement in the form attached hereto as Exhibit B.
---------
(f) All amounts payable to Executive as compensation hereunder shall be
subject to customary withholding by the Company.
4. Term.
----
(a) The initial Employment Period shall end on April 30, 2001 and will
thereafter be automatically extended for consecutive 12 month periods unless
notice of termination is delivered by either party to the other at least 90 days
prior to the end of such period; provided that (i) the Employment Period shall
terminate prior to such date immediately upon Executive's resignation, death or
Disability and (ii) the Employment Period may be terminated by the Company at
any time prior to such date for Cause (as defined below) or without Cause.
Except as otherwise provided herein, any termination of the Employment Period by
the Company shall be effective as specified in a written notice from the Company
to Executive.
(b) If the Employment Period is terminated by the Company or its
successors in interest without Cause, Executive shall be entitled to continue to
receive from the Company his Base Salary payable in regular installments for a
period of 12 months from the date of termination (the "Severance Period"),
----------------
if and only if Executive has executed and delivered to the Company a General
Release in the form of Exhibit A attached hereto and only so long as Executive
---------
has not breached the provisions of Sections 5, 6 and 7 hereof. The amounts
payable pursuant to Section 4(b) may be payable, at the Company's discretion, in
one lump sum payment within 30 days following termination of the Employment
Period.
(c) If the Employment Period is terminated by the Company for Cause or is
terminated pursuant to clause (a)(i) above or expires and is not renewed
hereunder, Executive shall only be entitled to receive his Base Salary through
the date of termination or expiration.
(d) Except as otherwise expressly provided herein, all of Executive's
rights to salary, bonuses, fringe benefits and other compensation hereunder
which accrue or become payable after the termination or expiration of the
Employment Period shall cease upon such termination or expiration. The Company
may offset any amounts Executive owes it or its Subsidiaries against any amounts
it owes Executive hereunder.
(e) For purposes of this Agreement, "Cause" shall mean (i) the commission
-----
of a felony or other crime involving moral turpitude or the commission of any
other act or omission involving dishonesty, disloyalty or fraud with respect to
the Company or any Subsidiary or any of
-3-
<PAGE>
their customers or suppliers, (ii) chronic drug or alcohol abuse or other
repeated conduct causing the Company or any Subsidiary substantial public
disgrace or disrepute or economic harm, (iii) substantial and repeated failure
to perform duties as reasonably directed by the Board, which is not cured, if
curable, to the Board's reasonable satisfaction in all material respects within
thirty (30) days after the Board or the designee thereof gives written notice
thereof to Executive or (iv) any other material breach of this Agreement which
is not cured, if curable, to the Board's reasonable satisfaction within 15 days
after written notice thereof to Executive (provided, that a breach of Sections
5, 6 or 7 shall be material and the applicable cure period shall be 3 days).
5. Confidential Information. Executive acknowledges that the
------------------------
information, observations and data (including trade secrets) obtained by him
while employed by the Company and the Subsidiaries concerning the business or
affairs of the Company or any Subsidiary ("Confidential Information") are the
------------------------
property of the Company or such Subsidiary. Therefore, Executive agrees that he
shall not disclose to any unauthorized person or use for his own purposes any
Confidential Information without the prior written consent of the Board, unless
and to the extent that the Confidential Information becomes generally known to
and available for use by the public other than as a result of Executive's acts
or omissions. Executive shall deliver to the Company at the termination or
expiration of the Employment Period, or at any other time the Company may
request, all memoranda, notes, plans, records, reports, computer tapes,
printouts and software and other documents and data (and copies thereof)
embodying or relating to the Confidential Information, Work Product (as defined
below) or the business of the Company or any Subsidiaries which he may then
possess or have under his control.
6. Inventions and Patents. Executive acknowledges that all inventions,
----------------------
innovations, improvements, developments, methods, designs, analyses, drawings,
reports and all similar or related information (whether or not patentable) which
relate to the Company's or any Subsidiary's actual or anticipated business,
research and development or existing or future products or services and which
are conceived, developed or made by Executive while employed by the Company or
any Subsidiary ("Work Product") belong to the Company or such Subsidiary.
------------
Executive shall promptly disclose such Work Product to the Board and, at the
Company's expense, perform all actions reasonably requested by the Board
(whether during or after the Employment Period) to establish and confirm such
ownership (including, without limitation, assignments, consents, powers of
attorney and other instruments).
7. Non-Compete, Non-Solicitation.
-----------------------------
(a) In further consideration of the compensation to be paid to Executive
hereunder, Executive acknowledges that in the course of his employment with the
Company and the Subsidiaries he shall become familiar, and he has become
familiar, with the Company's trade secrets and with other Confidential
Information and that his services have been and shall be of special, unique and
extraordinary value to the Company and the Subsidiaries. Therefore, Executive
agrees that, during the Employment Period and for 18 months thereafter (the
"Noncompete Period"), he shall not directly or indirectly own any interest in,
-----------------
operate, manage, control, participate in, consult
-4-
<PAGE>
with, advise, render services for, or in any manner engage in any business
(including by himself or in association with any person, firm, corporate or
other business organization or through any other entity) in competition with, or
potential competition with, the businesses of the Company or the Subsidiaries as
such businesses exist or are in process on the date of the termination or
expiration of the Employment Period, within the United States. Nothing herein
shall prohibit Executive from being a passive owner of not more than 2% of the
outstanding stock of any class of a corporation which is publicly traded, so
long as Executive has no active participation in the business of such
corporation.
(b) During the Noncompete Period, Executive shall not directly or
indirectly through another entity (i) induce or attempt to induce any employee
of the Company or any Subsidiary to leave the employ of the Company or such
Subsidiary, or in any way interfere with the relationship between the Company or
any Subsidiary and any employee thereof, (ii) hire any person who was an
employee of the Company or any Subsidiary at any time during the year prior to
the termination of the Employment Period or (iii) induce or attempt to induce
any customer, supplier, licensee, licensor, franchisee or other business
relation of the Company or any Subsidiary to cease doing business with the
Company or such Subsidiary, or in any way interfere with the relationship
between any such customer, supplier, licensee, licensor, franchisee or business
relation and the Company or any Subsidiary (including, without limitation,
making any negative or disparaging statements or communications regarding the
Company or any Subsidiary).
(c) Executive agrees that: (i) the covenants set forth in this Section 7
are reasonable in geographical and temporal scope and in all other respects and
that he has reviewed the provisions of this Agreement with his legal counsel,
(ii) the Company would not have entered into this Agreement but for the
covenants of Executive contained herein, and (iii) the covenants contained
herein have been made in order to induce the Company to enter into this
Agreement.
(d) If, at the time of enforcement of this Section 7, a court shall hold
that the duration, scope or area restrictions stated herein are unreasonable
under circumstances then existing, the parties agree that the maximum duration,
scope or area reasonable under such circumstances shall be substituted for the
stated duration, scope or area and that the court shall be allowed to revise the
restrictions contained herein to cover the maximum period, scope and area
permitted by law.
(e) Executive recognizes and affirms that in the event of his breach of
any provision of this Section 7, money damages would be inadequate and the
Company would have no adequate remedy at law. Accordingly, the Executive agrees
that in the event of the breach or a threatened breach by Executive of any of
the provisions of this Section 7, the Company, in addition and supplementary to
other rights and remedies existing in its favor, shall be entitled to specific
performance and/or injunctive or other equitable relief from a court of
competent jurisdiction in order to enforce or prevent any violations of the
provisions hereof (without posting a bond or other security). In addition, in
the event of an alleged breach or violation by Executive of this Section 7, the
Noncompete Period shall be tolled until such breach or violation has been duly
cured.
-5-
<PAGE>
8. Executive's Representations. Executive hereby represents and warrants
---------------------------
to the Company that (i) the execution, delivery and performance of this
Agreement by Executive do not and shall not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which he is bound, (ii) Executive is
not a party to or bound by any employment agreement, noncompete agreement or
confidentiality agreement with any other person or entity and (iii) upon the
execution and delivery of this Agreement by the Company, this Agreement shall be
the valid and binding obligation of Executive, enforceable in accordance with
its terms. Executive hereby acknowledges and represents that he has consulted
with independent legal counsel regarding his rights and obligations under this
Agreement and that he fully understands the terms and conditions contained
herein.
9. Survival. Sections 5 through 18 shall survive and continue in full
--------
force in accordance with their terms notwithstanding the expiration or
termination of the Employment Period.
10. Notices. All notices, demands or other communications to be given or
-------
delivered under or by reason of the provisions of this Agreement will be in
writing and will be deemed to have been given when delivered personally, mailed
by certified or registered mail, return receipt requested and postage prepaid,
or sent via a nationally recognized overnight courier, or sent via facsimile to
the recipient with telephonic confirmation by the sending party. Such notices,
demands and other communications will be sent to the address indicated below:
To Executive:
------------
3732 Baccurate Way
Marietta, GA 30062
Attention: Steve Newton
Telecopy No.: (770) 518-5154
Telephone No.: (770) 518-5152
To the Company:
--------------
Mattress Discounters Corporation
9822 Fallard Court
Upper Marlboro, MD 20772
Attention: Board of Directors
Telecopy No.: (301) 856-4591
Telephone No.: (301) 856-6755
With copies to:
--------------
Bain Capital, Inc.
Two Copley Place
-6-
<PAGE>
Boston, MA 02116
Attention: Michael Krupka
Telecopy No.: (617) 572-3274
Telephone No.: (617) 572-2753
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, NY 10022
Attention: Lance C. Balk, Esq.
Telecopy No.: (212) 446-4900
Telephone No.: (212) 446-4800
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so
delivered, sent or mailed.
11. Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any action in any other jurisdiction, but this Agreement
shall be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained herein.
12. Complete Agreement. This Agreement embodies the complete agreement
------------------
and understanding among the parties and supersedes and preempts any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any way, but
excluding any breaches thereof by either party prior to the date hereof.
13. No Strict Construction. The language used in this Agreement shall be
----------------------
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction shall be applied against any party.
14. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
15. Successors and Assigns. This Agreement is intended to bind and
----------------------
inure to the benefit of and be enforceable by Executive, the Company and their
respective heirs, successors and assigns; provided that the rights and
obligations of Executive under this Agreement shall not be assignable.
-7-
<PAGE>
16. Governing Law. All issues and questions concerning the construction,
-------------
validity, enforcement and interpretation of this Agreement and the exhibits and
schedules hereto shall be governed by, and construed in accordance with, the
laws of the State of New York, without giving effect to any choice of law or
conflict of law rules or provisions (whether of the State of New York or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of New York.
17. Amendment and Waiver. The provisions of this Agreement may be amended
--------------------
or waived only with the prior written consent of the Company and Executive, and
no course of conduct or failure or delay in enforcing the provisions of this
Agreement shall affect the validity, binding effect or enforceability of this
Agreement.
18. Remedies. Each of the parties to this Agreement will be entitled to
--------
enforce its rights under this Agreement specifically, to recover damages and
costs (including reasonable attorneys' fees) caused by any breach of any
provision of this Agreement and to exercise all other rights existing in its
favor. The parties hereto agree and acknowledge that money damages may not be an
adequate remedy for any breach of the provisions of this Agreement and that any
party may in its sole discretion apply to any court of law or equity of
competent jurisdiction (without posting any bond or deposit) for specific
performance and/or other injunctive relief in order to enforce or prevent any
violations of the provisions of this Agreement.
* * * * *
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
MATTRESS DISCOUNTERS CORPORATION
By: /S/ Stephen Walker
------------------------------
Its: Chief Executive Officer
------------------------------
/S/ Steve Newton
------------------------------
Steve Newton
A-1
<PAGE>
EXHIBIT 10.28
MATTRESS DISCOUNTERS CORPORATION
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made as of January 10, 2000, between Mattress Discounters
Corporation, a Delaware corporation (the "Company"), and Michael Mauler
-------
("Executive").
- -----------
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive, and Executive
----------
hereby accepts employment with the Company, upon the terms and conditions set
forth in this Agreement for the period beginning on the date hereof and ending
as provided in Section 4 hereof (the "Employment Period").
-----------------
2. Position and Duties.
-------------------
(a) During the Employment Period, Executive shall serve as the Vice
President of Operations of the Company and shall have the normal duties,
responsibilities and authority of the Vice President of Operations, subject to
the power of the Company's President and the Company's board of directors (the
"Board") to expand or limit such duties, responsibilities and authority and to
-----
override actions of officers of the Company.
(b) During the Employment Period, Executive shall report to the Company's
[President][CEO] and shall devote his best efforts and his full business time
and attention (except for permitted vacation periods and reasonable periods of
illness or other incapacity other than Disability) to the business and affairs
of the Company and its Subsidiaries. Executive shall perform his duties and
responsibilities to the Company and its Subsidiaries hereunder to the best of
his abilities in a diligent, trustworthy, businesslike and efficient manner.
(c) For purposes of this Agreement, "Subsidiaries" shall mean any
------------
corporation or other entity of which the securities or other ownership interests
having the voting power to elect a majority of the board of directors or other
governing body are, at the time of determination, owned by the Company, directly
or through one or more Subsidiaries. For purposes hereof, the Company shall be
deemed to have a majority ownership interest in a partnership, limited liability
company (without voting securities), association or other business entity if the
Company, directly or through one or more Subsidiaries, shall be allocated a
majority of partnership, limited liability company, association or other
business entity gains or losses or shall be or control the managing director or
general partner of such partnership, limited liability company, association or
other business entity. For purposes of this Agreement, "Disability" means the
----------
inability, due to illness, accident, injury,
<PAGE>
physical or mental incapacity or other disability, of the Executive to carry out
effectively his duties and obligations to the Company or to participate
effectively and actively in the management of the Company or a Subsidiary of the
Company for a period or periods aggregating at least 90 days (whether or not
consecutive) during any twelve-month period, as determined in the reasonable
judgment of the Board.
3. Compensation and Benefits.
-------------------------
(a) During the Employment Period, Executive's base salary shall be
$150,000, per annum or such higher rate as the Board may designate from time to
time (the "Base Salary"), which salary shall be payable in regular installments
-----------
in accordance with the Company's general payroll practices. In addition, during
the Employment Period, Executive shall be entitled to participate in all of the
Company's employee compensatory and benefit programs for which senior executive
employees of the Company and its Subsidiaries are generally eligible. Executive
shall be entitled to three weeks of paid vacation per full year of employment.
(b) During the Employment Period, the Company shall reimburse Executive
for all reasonable expenses incurred by him in the course of performing his
duties and responsibilities under this Agreement which are consistent with the
Company's policies in effect from time to time with respect to travel,
entertainment and other business expenses, subject to the Company's requirements
with respect to reporting and documentation of such expenses.
(c) In addition to the Base Salary, the Board will award a bonus to
Executive of up to 60% of the Base Salary [based on performance based goals
established by the Board] with a target bonus of 30% of the Base Salary.
(d) The Company will provide Executive with the following amounts (the
"Relocation Payments") to reimburse Executive for his relocation expenses
--------------------
(provided that Executive must complete his relocation on or prior to June [30],
2000 in order to receive such Relocation Payments) (i) an amount equal to the
real estate broker's fee Executive actually pays in connection with the sale of
his ________, __ home (such amount not to exceed 6% of the sale price of such
home), (ii) up to $25,000 for reasonable out-of-pocket moving expenses which
Executive actually incurs and for which Executive provides the Company with
itemized receipts, and (iii) reasonable out-of-pocket closing costs in
connection with the purchase of housing in the Washington, D.C./Baltimore, MD
area. The Company will pay Executive the Relocation Payments within two business
days after Executive actually relocates to the Washington, D.C./Baltimore, MD
area. Until the earlier of such relocation and June [30], 2000, the Company will
(i) reimburse Executive for travel expenses and coach airline tickets between
his ________, __ home and Mattress Discounters Corporation's executive offices
for one round trip per week (Executive will attempt to obtain the most
economical fares available) and (ii) provide Executive with a temporary
furnished lodging in the Washington, D.C./Baltimore, MD area.
-2-
<PAGE>
(e) The Company will pay to Executive an amount equal to $50,000 less the
gross amount Executive actually receives from his prior employer for Executive's
1999 year end bonus, but in any event not to exceed $20,000.
(f) All amounts payable to Executive as compensation hereunder shall be
subject to customary withholding by the Company.
4. Term.
----
(a) The initial Employment Period shall end on January 9, 2001 and will
thereafter be automatically extended for consecutive [12] month periods unless
notice of termination is delivered by either party to the other at least 90 days
prior to the end of such period; provided that (i) the Employment Period shall
terminate prior to such date immediately upon Executive's resignation, death or
Disability and (ii) the Employment Period may be terminated by the Company at
any time prior to such date for Cause (as defined below) or without Cause.
Except as otherwise provided herein, any termination of the Employment Period by
the Company shall be effective as specified in a written notice from the Company
to Executive.
(b) If the Employment Period is terminated by the Company or its
successors in interest without Cause, Executive shall be entitled to continue to
receive his Base Salary payable in regular installments for a period of six (6)
months from the date of termination (the "Severance Period"), if and only if
----------------
Executive has executed and delivered to the Company a General Release in the
form of Exhibit A attached hereto and only so long as Executive has not breached
the provisions of Sections 5, 6 and 7 hereof; provided, that if Executive
obtains employment at any time during the Severance Period, then the payments to
be made pursuant to this Section 4(b) shall immediately cease and Executive
shall not be entitled to receive any further payments under this Agreement. The
amounts payable pursuant to this Section 4(b) may be payable, at Company's
discretion, in one lump sum payment within 30 days following termination of the
Employment Period.
(c) If the Employment Period is terminated by the Company for Cause or is
terminated pursuant to clause (a)(i) above or expires and is not renewed
hereunder, Executive shall only be entitled to receive his Base Salary through
the date of termination or expiration.
(d) Except as otherwise expressly provided herein, all of Executive's
rights to salary, bonuses, fringe benefits and other compensation hereunder
which accrue or become payable after the termination or expiration of the
Employment Period shall cease upon such termination or expiration. The Company
may offset any amounts Executive owes it or its Subsidiaries against any amounts
it owes Executive hereunder.
(e) For purposes of this Agreement, "Cause" shall mean (i) the commission
-----
of a felony or other crime involving moral turpitude or the commission of any
other act or omission involving dishonesty, disloyalty or fraud with respect to
the Company or any of its Subsidiaries or any of their customers or suppliers,
(ii) chronic drug or alcohol abuse or other repeated conduct
-3-
<PAGE>
causing the Company or any of its Subsidiaries substantial public disgrace or
disrepute or economic harm, (iii) substantial and repeated failure to perform
duties as reasonably directed by the Board, which is not cured, if curable, to
the Board's reasonable satisfaction in all material respects within thirty (30)
days after the Board or the designee thereof gives written notice thereof to
Executive, (iv) any other act or omission of Executive which would in law permit
an employer to, without notice or payment in lieu of notice, terminate the
employment of an employee or (v) any other material breach of this Agreement
which is not cured, if curable, to the Board's reasonable satisfaction within 15
days after written notice thereof to Executive (provided, that a breach of
Sections 5, 6 or 7 shall be material and the applicable cure period shall be 3
days).
5. Confidential Information. Executive acknowledges that the information,
------------------------
observations and data (including trade secrets) obtained by him while employed
by the Company and its Subsidiaries concerning the business or affairs of the
Company or any Subsidiary ("Confidential Information") are the property of the
------------------------
Company or such Subsidiary. Therefore, Executive agrees that he shall not
disclose to any unauthorized person or use for his own purposes any Confidential
Information without the prior written consent of the Board, unless and to the
extent that the Confidential Information becomes generally known to and
available for use by the public other than as a result of Executive's acts or
omissions. Executive shall deliver to the Company at the termination or
expiration of the Employment Period, or at any other time the Company may
request, all memoranda, notes, plans, records, reports, computer tapes,
printouts and software and other documents and data (and copies thereof)
embodying or relating to the Confidential Information, Work Product (as defined
below) or the business of the Company or any Subsidiaries which he may then
possess or have under his control.
6. Inventions and Patents. Executive acknowledges that all inventions,
----------------------
innovations, improvements, developments, methods, designs, analyses, drawings,
reports and all similar or related information (whether or not patentable) which
relate to the Company's or any of its Subsidiaries' actual or anticipated
business, research and development or existing or future products or services
and which are conceived, developed or made by Executive while employed by the
Company and its Subsidiaries ("Work Product") belong to the Company or such
------------
Subsidiary. Executive shall promptly disclose such Work Product to the Board
and, at the Company's expense, perform all actions reasonably requested by the
Board (whether during or after the Employment Period) to establish and confirm
such ownership (including, without limitation, assignments, consents, powers of
attorney and other instruments).
7. Non-Compete, Non-Solicitation.
-----------------------------
(a) In further consideration of the compensation to be paid to Executive
hereunder, Executive acknowledges that in the course of his employment with the
Company and its Subsidiaries he shall become familiar, and he has become
familiar, with the Company's trade secrets and with other Confidential
Information and that his services have been and shall be of special, unique and
extraordinary value to the Company and its Subsidiaries. Therefore, Executive
agrees that, during the Employment Period and for three years thereafter (the
"Noncompete Period"), he
-----------------
-4-
<PAGE>
shall not directly or indirectly own any interest in, operate, manage, control,
participate in, consult with, advise, render services for, or in any manner
engage in any business (including by himself or in association with any person,
firm, corporate or other business organization or through any other entity) in
competition with, or potential competition with, the businesses of the Company
or its Subsidiaries as such businesses exist or are in process on the date of
the termination or expiration of the Employment Period, within any geographical
area in which the Company or its Subsidiaries engage or plan to engage in such
businesses. Nothing herein shall prohibit Executive from being a passive owner
of not more than 2% of the outstanding stock of any class of a corporation which
is publicly traded, so long as Executive has no active participation in the
business of such corporation.
(b) During the Noncompete Period, Executive shall not directly or
indirectly through another entity (i) induce or attempt to induce any employee
of the Company or any Subsidiary to leave the employ of the Company or such
Subsidiary, or in any way interfere with the relationship between the Company or
any Subsidiary and any employee thereof, (ii) hire any person who was an
employee of the Company or any Subsidiary at any time during the Employment
Period or (iii) induce or attempt to induce any customer, supplier, licensee,
licensor, franchisee or other business relation of the Company or any Subsidiary
to cease doing business with the Company or such Subsidiary, or in any way
interfere with the relationship between any such customer, supplier, licensee,
licensor, franchisee or business relation and the Company or any Subsidiary
(including, without limitation, making any negative or disparaging statements or
communications regarding the Company or its Subsidiaries).
(c) Executive agrees that: (i) the covenants set forth in this Section 7
are reasonable in geographical and temporal scope and in all other respects and
that he has reviewed the provisions of this Agreement with his legal counsel,
(ii) the Company would not have entered into this Agreement but for the
covenants of Executive contained herein, and (iii) the covenants contained
herein have been made in order to induce the Company to enter into this
Agreement.
(d) If, at the time of enforcement of this Section 7, a court shall hold
that the duration, scope or area restrictions stated herein are unreasonable
under circumstances then existing, the parties agree that the maximum duration,
scope or area reasonable under such circumstances shall be substituted for the
stated duration, scope or area and that the court shall be allowed to revise the
restrictions contained herein to cover the maximum period, scope and area
permitted by law.
(e) Executive recognizes and affirms that in the event of his breach of
any provision of this Section 7, money damages would be inadequate and the
Company would have no adequate remedy at law. Accordingly, the Executive agrees
that in the event of the breach or a threatened breach by Executive of any of
the provisions of this Section 7, the Company, in addition and supplementary to
other rights and remedies existing in its favor, shall be entitled to specific
performance and/or injunctive or other equitable relief from a court of
competent jurisdiction in order to enforce or prevent any violations of the
provisions hereof (without posting a bond or other security). In addition, in
the event of an alleged breach or violation by Executive of this Section 7, the
Noncompete Period shall be tolled until such breach or violation has been duly
cured.
-5-
<PAGE>
8. Executive's Representations. Executive hereby represents and warrants
---------------------------
to the Company that (i) the execution, delivery and performance of this
Agreement by Executive do not and shall not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which he is bound, (ii) Executive is
not a party to or bound by any employment agreement, noncompete agreement or
confidentiality agreement with any other person or entity and (iii) upon the
execution and delivery of this Agreement by the Company, this Agreement shall be
the valid and binding obligation of Executive, enforceable in accordance with
its terms. Executive hereby acknowledges and represents that he has consulted
with independent legal counsel regarding his rights and obligations under this
Agreement and that he fully understands the terms and conditions contained
herein.
9. Survival. Sections 5 through 19 shall survive and continue in full
--------
force in accordance with their terms notwithstanding the expiration or
termination of the Employment Period.
10. Notices. All notices, demands or other communications to be given or
-------
delivered under or by reason of the provisions of this Agreement will be in
writing and will be deemed to have been given when delivered personally, mailed
by certified or registered mail, return receipt requested and postage prepaid,
or sent via a nationally recognized overnight courier, or sent via facsimile to
the recipient with telephonic confirmation by the sending party. Such notices,
demands and other communications will be sent to the address indicated below:
To Executive:
------------
__________________
_____, __ _____
Attention: Michael Mauler
Telecopy No.:
Telephone No.:
To the Company:
--------------
Mattress Discounters Corporation
9822 Fallard Court
Upper Marlboro, MD 20772
Attention: Board of Directors
Telecopy No.: (301) 856-4591
Telephone No.: (301) 856-6755
With copies to:
--------------
Bain Capital, Inc.
Two Copley Place
-6-
<PAGE>
Boston, MA 02116
Attention: Michael Krupka
Telecopy No.: (617) 572-3274
Telephone No.: (617) 572-2753
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, NY 10022
Attention: Lance C. Balk, Esq.
Telecopy No.: (212) 446-4900
Telephone No.: (212) 446-4800
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so
delivered, sent or mailed.
11. Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any action in any other jurisdiction, but this Agreement
shall be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained herein.
12. Complete Agreement. This Agreement embodies the complete agreement
------------------
and understanding among the parties and supersedes and preempts any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any way
(including, without limitation, the Employment Agreement between the parties
hereto, dated January 1, 1997), but excluding any breaches thereof by either
party prior to the date hereof.
13. No Strict Construction. The language used in this Agreement shall be
----------------------
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction shall be applied against any party.
14. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
15. Successors and Assigns. This Agreement is intended to bind and inure
----------------------
to the benefit of and be enforceable by Executive, the Company and their
respective heirs, successors and
-7-
<PAGE>
assigns; provided that the rights and obligations of Executive under this
Agreement shall not be assignable.
16. Governing Law. All issues and questions concerning the construction,
-------------
validity, enforcement and interpretation of this Agreement and the exhibits and
schedules hereto shall be governed by, and construed in accordance with, the
laws of the State of Delaware, without giving effect to any choice of law or
conflict of law rules or provisions (whether of the State of Delaware or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
17. Amendment and Waiver. The provisions of this Agreement may be amended
--------------------
or waived only with the prior written consent of the Company and Executive, and
no course of conduct or failure or delay in enforcing the provisions of this
Agreement shall affect the validity, binding effect or enforceability of this
Agreement.
18. Remedies. Each of the parties to this Agreement will be entitled to
--------
enforce its rights under this Agreement specifically, to recover damages and
costs (including reasonable attorneys' fees) caused by any breach of any
provision of this Agreement and to exercise all other rights existing in its
favor. The parties hereto agree and acknowledge that money damages may not be an
adequate remedy for any breach of the provisions of this Agreement and that any
party may in its sole discretion apply to any court of law or equity of
competent jurisdiction (without posting any bond or deposit) for specific
performance and/or other injunctive relief in order to enforce or prevent any
violations of the provisions of this Agreement.
* * * * *
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
MATTRESS DISCOUNTERS CORPORATION
By: /S/ Stephen Walker
------------------------------
Its: Chief Executive Officer
-----------------------------
/S/ Michael Mauler
----------------------------------
Michael Mauler
A-1
<PAGE>
EXHIBIT 12.1
MATTRESS DISCOUNTERS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
<TABLE>
<CAPTION>
Bedding
MDC Experts Company
------------------------------------ ------- ---------------------------------------------
Eight
Six Months Six Months Months Fiscal Year
Year Ended December Ended Ended Ended Ended Ten Months Ended
July 1, July 1, February 28, February 28, December 31, January 1,
30, 1995 28, 1996 1997 1997 1998 1999 1998 2000
-------- -------- ------ -------- ------------ ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before provision for
income taxes............... $3,611 $4,422 $ 85 $2,914 $14,815 $22,052 $19,504 $ 4,286
Plus: fixed charges.......... 4,376 4,785 2,333 467 4,404 6,085 4,435 13,466
------- ------- ------ ------- ------- ------- ------- -------
7,987 9,207 2,418 3,381 19,219 28,137 24,439 17,752
------- ------- ------ ------- ------- ------- ------- -------
Fixed Charges:
Interest expense (income),
net including amortization
of debt discounts
and debt issuance expense. $ (624) $ (548) $ (328) $ (9) $ (88) $ (128) $ (126) $ 7,836
One-third of rent
and expense(1)............ 5,000 5,333 2,661 476 4,492 6,213 5,061 5,630
------- ------- ------ ------- ------- ------- ------- -------
$4,376 $4,785 $2,333 $ 467 $4,404 $6,085 4,935 13,466
------- ------- ------ ------- ------- ------- ------- -------
Earnings to fixed charges
ratio...................... 1.83 1.92 1.04 7.24 4.36 4.62 4.95 1.32
======= ======= ====== ======= ======= ======= ======= =======
<CAPTION>
Three Months Three Months
Ended March 31, 1999 Ended April 1, 2000
-------------------- -------------------
<S> <C> <C>
Earnings:
Income before provision for
income taxes............... 4,311 (1,070)
Plus: fixed charges.......... 1,603 6,567
------------ ------------
5,914 5,497
------------ ------------
Fixed Charges:
Interest expense (income),
net including amortization
of debt discounts
and debt issuance expense. (3) 4,845
One-third of rent
and expense(1)............ 1,606 1,722
------------ ------------
1,603 6,567
------------ ------------
Earnings to fixed charges
ratio...................... 3.69 0.84
============ ============
</TABLE>
COMPUTATION OF PRO FORMA RATIO OF EARNINGS TO FIXED
CHARGES AFTER ADJUSTMENT FOR ISSUANCE OF SENIOR
SUBORDINATED NOTES
---------------------------------------------------
<TABLE>
<CAPTION>
Pro forma
------------------
Ten Months Ended
January 1,
2000
-----------
<S> <C>
Earnings:
Income before provision for
income taxes............. (326)
Plus: fixed charges........ 22,073
------
21,747
======
Fixed Charges:
Interest expense (income),
net including amortization
of debt discounts and debt
issuance expense.......... 16,443
One-third of rent expense. (1 5,630
------
22,073
------
Earnings to fixed charges
ratio.................... 0.99
======
</TABLE>
(1) Represents the portion of operating rental expense which our management
believes is representative of the interest component of rental expense.
These amounts exclude common and maintenance costs related to our lease
agreements.
<PAGE>
Exhibit 23.2
Independent Auditors' Consent
We consent to the use in this Amendment No. 2 to Registration Statement No. 333-
95945 of Mattress Discounters Corporation on Form S-4 of our report dated June
5, 1999 (March 27, 2000 as to paragraph 12 of Note 2, under the heading Revenues
and Costs of Sales related to the adoption of a new method of accounting for
revenue recognition) on the financial statements of Mattress Discounters
Corporation, T.J.B., Inc. and The Bedding Experts, Inc. (which report expresses
an unqualified opinion and includes two explanatory paragraphs referring to: (1)
the combined financial statements that have been prepared from the separate
records maintained by the Company and may not necessarily be indicative of the
conditions that would have existed or the results of operations if the Company
had been operated as an unaffiliated entity and describes that portions of
certain income and expenses represent allocations made from Heilig-Meyers
Company applicable to the Company and (2) the adoption of a new method of
accounting for revenue recognition), appearing in the Prospectus, which is part
of such Registration Statement.
We also consent to the use in this Amendment No. 2 to Registration Statement No.
333-95945 of Mattress Discounters Corporation on Form S-4 of our report dated
June 5, 1999 (March 27, 2000 as to paragraph 12 of Note 1, under the heading
Revenues and Costs of Sales related to the adoption of a new method of
accounting for revenue recognition) on the financial statements of Mattress
Discounters Corporation and T.J.B., Inc., (which report expresses an unqualified
opinion and includes an explanatory paragraph referring to the adoption of a new
method of accounting for revenue recognition) appearing in the Prospectus, which
is a part of such Registration Statement, and to the reference to us under the
heading as "Experts" in such Prospectus.
Deloitte & Touche LLP
Richmond, Virginia
May 22, 2000
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this amendment No. 2 to the Registration
Statement on Form S-4 of Mattress Discounters Corporation and Subsidiaries of
our report dated March 10, 2000, relating to the consolidated financial
statements of Mattress Discounters Corporation and Subsidiaries as of January 1,
2000, and for the ten-months then ended, which appears in such Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
PricewaterhouseCoopers LLP
McLean, Virginia
May 22, 2000
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-2000
<PERIOD-START> JAN-02-2000
<PERIOD-END> APR-01-2000
<CASH> 8,408,910
<SECURITIES> 0
<RECEIVABLES> 5,836,954
<ALLOWANCES> 0
<INVENTORY> 14,541,611
<CURRENT-ASSETS> 34,383,570
<PP&E> 25,329,468
<DEPRECIATION> 15,103,279
<TOTAL-ASSETS> 203,033,839
<CURRENT-LIABILITIES> 39,685,949
<BONDS> 133,482,288
0
0
<COMMON> 1
<OTHER-SE> 25,560,435
<TOTAL-LIABILITY-AND-EQUITY> 203,033,839
<SALES> 71,829,895
<TOTAL-REVENUES> 71,829,895
<CGS> 46,923,310
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 21,131,572
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,845,224
<INCOME-PRETAX> (1,070,211)
<INCOME-TAX> (595,037)
<INCOME-CONTINUING> (475,174)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (475,174)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
