<PAGE>
As filed with the Securities and Exchange Commission on March 30, 2000
Registration No. 333-95945
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 1
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
(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. [_]
----------------
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Title of Each Class of Amount Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered Per Unit(1) Price(1) Fee
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mattress Discounters
Corporation 12 5/8%
Senior Subordinated
Notes due 2007......... $140,000,000 $1,000 $140,000,000 $36,960
- -------------------------------------------------------------------------------
Guarantees(2)........... N/A N/A N/A N/A
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2) based upon the book value of the securities
as of , 1999.
(2) The guarantee by each of T.J.B., Inc. and The Bedding Experts, Inc. of the
payment of principal and interest on the notes is being registered hereby.
Pursuant to Rule 457(g), no registration fee is required with respect to
the guarantees.
----------------
The Registrant hereby amends this Registration Statement on any date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on the date as the Commission, acting
pursuant to said Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<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.)
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>
<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 Subordinated Notes due 2007 in exchange for
$140,000,000 12 5/8% Series B Senior Subordinated 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 10.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the exchange notes or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 10
Use of Proceeds..................... 17
Capitalization...................... 17
Unaudited Pro Forma Financial Data.. 18
Selected Historical Financial Data.. 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 23
Business............................ 32
Management.......................... 42
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Principal Shareholders............. 45
Certain Relationships and Related
Transactions...................... 47
Description of Capital Stock of
Holdings.......................... 49
Description of Senior Credit
Facility.......................... 50
Description of the Notes........... 52
Exchange Offer..................... 89
Federal Income Tax Considerations.. 97
Plan of Distribution............... 98
Legal Matters...................... 99
Experts............................ 99
Available Information.............. 101
Index to Financial Statements...... F-1
</TABLE>
----------------
In this prospectus, unless otherwise indicated, (1) "we," "our" and "us"
refer to Mattress Discounters Corporation, T.J.B., Inc. and The Bedding
Experts, Inc. as a consolidated or combined entity, (2) "MDC" refers to the
combined operations of Mattress Discounters Corporation and T.J.B., Inc. for
periods prior to Heilig-Meyers' acquisition of those entities on July 2, 1997,
(3) "Bain Capital" refers to Bain Capital, Inc. and its affiliates and (4)
"equity investors" refers to Bain Capital and certain other investors. All
references to "mattresses" refer to conventional mattresses, box springs and
foundations. All references to mattress market size and historical growth are
derived from wholesale dollar shipments in the United States, as gathered by
International Sleep Products Association or ISPA. Unless otherwise indicated,
all references to market share data for retailers and retail channels reflect
United States data as gathered by Furniture Today. Where necessary, wholesale
data is converted into retail data by dividing by 55%, which assumes a 45%
gross margin for mattresses at retail. Use of the term "markets" represent
regional marketing areas as defined by ISPA. All references to a "fiscal" year
refer to our fiscal year ending on the last day of February of that year.
However, on November 5, 1999, Mattress Discounters elected to change its
fiscal year end from the last day in February to the closest Saturday to
December 31, beginning with the year ended January 1, 2000.
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
subordinated 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>
Conditions to the Exchange
Offer........................... Based on an interpretation by the staff of the
Securities and Exchange Commission in no-action letters
issued to third parties, we believe that you may offer
for resale, resell or otherwise transfer the exchange
notes without complying with the registration and
prospectus delivery provisions of the Securities Act of
1933, provided that:
. the exchange notes are acquired in the ordinary
course of your business,
. you do not intend to participate and have no
arrangement or understanding with any person to
participate in the distribution of the exchange
notes and
. you are not our "affiliate" within the meaning of
Rule 405 under the Securities Act of 1933.
Our obligation to accept for exchange, or to issue the
exchange notes in exchange for, any old notes is
subject to:
. customary conditions relating to compliance with any
applicable law,
. any applicable interpretation by any staff of the
Securities and Exchange Commission, or
. any order of any governmental agency or court of
law.
We currently expect that each of the conditions will be
satisfied and that no waivers will be necessary. See
"The Exchange Offer--Conditions."
Procedures for Tendering Old
Notes........................... Each holder of old notes wishing to accept the exchange
offer must complete, sign and date the Letter of
Transmittal, or a facsimile. The holder must mail or
otherwise deliver the Letter of Transmittal, or
facsimile, together with the old notes and any other
required documentation, to the exchange agent at the
address in the section "The Exchange Offer" under the
heading "Procedures for Tendering Old Notes."
Use of Proceeds.................. We will not receive any proceeds from the exchange of
notes according to the terms of our exchange offer.
Exchange Agent................... 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 such 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 such indebtedness.
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--Certain Covenants."
Risk Factors
See "Risk Factors" beginning on page 10 and the other information in this
prospectus prior to deciding to invest in the exchange notes.
Mattress Discounters Corporation
We believe we are the largest retailer of mattresses in the United States.
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 252 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 the largest mattress retailer in six of these markets. For the
twelve months ended January 1, 2000, we generated net sales of $263.0 million.
Through our exclusive purchase contract with Sealy Mattress Company, we are
the largest retailer of Sealy products. According to ISPA, Sealy is the largest
manufacturer of mattresses in North America, with a 22% U.S. market share.
Sealy products accounted for approximately 64% of our retail mattress sales for
the ten months ended January 1, 2000 and include such well-known brand names as
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 margins. Sales of our Comfort Source
brand mattresses accounted for 36% of our retail mattress sales for the ten
months ended January 1, 2000.
4
<PAGE>
The Transactions
Through a series of transactions that closed on August 6, 1999, the equity
investors and some members of our management acquired approximately 93% of
outstanding shares of common stock of Mattress Holding Corporation, or
Holdings. 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 Holdings
. 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 Holdings 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
. the granting by Holdings 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, 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, and to
discharge certain lease obligations of Mattress Discounters aggregating
approximately $42,000.
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, 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
5
<PAGE>
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.
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
Holdings junior subordinated notes(/2/)(/5/)............ 17.5
New equity investment in Mattress Discounters Holding,
LLC..................................................... 76.2
Heilig-Meyers' rollover equity in Holdings(/3/)......... 6.0
------
Total................................................... $239.8
======
Uses of Funds:
Cash merger consideration(/4/)(/5/)..................... $204.2
Heilig-Meyers' rollover equity in Holdings(/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 Holdings junior subordinated notes were issued to Heilig-Meyers by
Holdings as a non-cash portion of the consideration due to Heilig-Meyers at
closing. See "Certain 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 Holdings common stock.
(4) Represents the cash portion of the consideration paid by Holdings to
Heilig-Meyers in the transactions.
(5) In December 1999, pursuant to the transaction agreement, Heilig-Meyers
agreed to pay to Holdings 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.
6
<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 notes
thereto 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 such 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 thereto included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
Pro Forma
----------------------
Ten Months Ended
----------------------
January 1, 2000(/1/)
----------------------
(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(/2/) .............................. 14,714
Ratio of earnings to fixed charges(/3/).................. 0.99x
</TABLE>
- --------
(1) See "Unaudited Pro Forma Financial Data" and notes thereto.
(2) Excludes amortization of deferred financing fees and original issue
discount.
(3) 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.
7
<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 pursuant to the transactions discussed elsewhere in this
prospectus. 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 statement of operations data for
the fiscal year ended February 28, 1999 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. Our summary historical aggregated statement of operations data
for the fiscal year ended February 28, 1998 was derived by aggregating
statement of operations data from (1) our audited combined financial statements
for the eight months ended February 28, 1998 that are included elsewhere in
this prospectus, plus (2) the unaudited statement of operations for Bedding
Experts for the four months ended July 1, 1997 plus (3) the unaudited combined
statement of operations data for MDC (Mattress Discounters Corporation and
T.J.B.) for the four months ended July 1, 1997. The summary historical combined
statement of operations data of MDC for the year ended December 28, 1996 and
the summary historical combined balance sheet data as of December 28, 1996 were
derived from audited combined financial statements. As described in the notes
to the financial statements, certain 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. Bedding Experts' summary historical financial
data for the year ended December 31, 1996 has not been presented due to the
absence of reliable accounting and financial records during this period.
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," the audited consolidated and combined financial
statements and our unaudited condensed combined interim financial statements
and accompanying notes thereto included elsewhere in this prospectus.
8
<PAGE>
Summary Historical Financial Data
(dollars in thousands)
<TABLE>
<CAPTION>
MDC MDC/Company Company
------------ -------------- ----------------------------------------------
Aggregated
Fiscal Year Fiscal Year
Year Ended Ended Ended Ten Months Ended
December 28, February 28, February 28, ---------------------------------
1996(/1/) 1998(/1/)(/2/) 1999 December 31, 1998 January 1, 2000
------------ -------------- ------------ ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Operating Data:
Net sales............... $169,020 $230,923 $245,461 $201,183 $218,768
Gross profit............ 56,285 79,621 88,863 74,669 77,670
General and
administrative
expenses............... 51,940 62,933 67,261 55,742 60,895
Non-recurring operating
expenses............... -- -- -- -- 4,556
Income from operations.. 4,345 16,688 21,601 18,927 12,219
Interest income
(expense), net......... 548 316 128 126 (7,836)
Other income (expense),
net.................... (471) 71 322 450 (97)
Income before provision
for income taxes....... 4,422 17,075 22,052 19,504 4,286
Net income(/3/)......... $ 4,422 $ 11,678 $ 12,690 $ 11,238 $ 2,104
Other Financial Data:
Depreciation and
amortization........... $ 2,214 $ 3,569 $ 4,541 $ 3,771 $ 4,063
Capital expenditures.... 1,823 3,183 5,162 4,297 2,615
Balance Sheet Data (end
of period):
Working capital......... 517 (9,318) 1,137 (9,372) (2,882)
Total assets............ 36,180 97,394 101,488 93,346 202,933
Other Data (end of
period):
Number of stores........ 162 227 236 231 252
Same store sales
growth................. (3.4%) 2.0% 1.5% 3.8% (0.0%)
</TABLE>
- --------
(1) 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 such 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.
(2) Represents the aggregation of (1) our audited combined financial statements
for the eight months ended February 28, 1998 plus (2) the unaudited
statement of operations data for Bedding Experts for the four months ended
July 1, 1997 plus (3) the unaudited combined statement of operations data
for MDC for the four months ended July 1, 1997. This presentation is not in
accordance with generally accepted accounting principles and has been
presented for informational purposes only. If this financial data were
presented on a pro forma basis assuming (1) Heilig-Meyers' acquisition of
MDC had taken place on March 1, 1997 and (2) Bedding Experts and MDC were
"C" corporations during the full period from March 1, 1997 to February 28,
1998, amortization expense and the provision for income taxes would have
increased $570 and $1,433 respectively. Income from operations and net
income would have been $16,118 and $9,675, respectively.
(3) 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 four 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.
9
<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
January 1, 2000
---------------------
(dollars in millions)
<S> <C>
Total debt, including the exchange notes and capital
lease obligations.................................. $133.6
Total stockholder's equity.......................... 28.4
</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 January 1, 2000, we and the guarantors have outstanding approximately
$133.6 million of indebtedness (excluding 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, such as
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
10
<PAGE>
of the collateral. Thus, 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 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 thereof may be limited to
an amount equal to the sum of (i) the purchase price, and (ii) 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 pursuant 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
11
<PAGE>
. enter into sale and leaseback transactions
. create liens
. sell assets
. enter into certain 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. Such acceleration 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 a majority of our landlords. We have
already obtained consents from a number of our landlords and intend to seek
consents from some or all of the remaining landlords. If we seek such 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. 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 such
acquisitions 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 transactions that, in their
judgment, could enhance their equity investment, even though such transactions
might involve risks to the holders of the exchange notes.
12
<PAGE>
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 such as Jordan's Furniture in Massachusetts, department store
chains with bedding departments such as The May Company and the Macy's and
Bloomingdale's stores of Federated Department Stores, Inc., sleep shops such
as 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 such higher costs
to our customers.
Leggett & Platt is our primary vendor, supplying us with approximately 35%
of our raw materials in fiscal 1999. Although we attempt to reduce the risks
of dependence on a single external source, if Leggett & Platt or any other
supplier were to discontinue or delay supplying our raw materials for any
reason, such discontinuance or delay could have a negative affect on our
profitability. 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.
We are dependent on the continued services of our senior management team.
Although we believe we could replace key employees in an orderly fashion
should the need arise, the loss of such 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 such 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 certain 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
13
<PAGE>
and names, and we may not be able to successfully resolve such conflicts. 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 Holdings' 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.
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
such compliance 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 such 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 such indebtedness and, at the time of the incurrence of
the indebtedness, we:
. were insolvent or rendered insolvent by reason of any of the
transactions;
. were engaged, or about to engage, in a business or transaction for which
the assets remaining with such 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 as such debts matured.
14
<PAGE>
In addition, any payment by us or that subsidiary guarantor pursuant to its
subsidiary guarantee could be voided and required to be returned to us or the
subsidiary guarantor, or to a fund for the benefit of our creditors or the
creditors of the subsidiary guarantor.
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 such 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
such event, 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 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, certain important corporate events, such as 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."
15
<PAGE>
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 such 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 certain 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.
16
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from this exchange offer.
CAPITALIZATION
The following table sets forth our capitalization as of January 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 notes
accompanying them appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of
January 1, 2000
---------------------
(dollars in millions)
<S> <C>
Cash and cash equivalents................................. $ 7.5
======
Debt:
Old notes(/1/).......................................... $133.0
Senior credit facility(/2/)............................. --
Other debt and obligations, including current portion... 0.6
------
Total debt............................................ 133.6
Stockholder's equity...................................... 28.4
------
Total capitalization.................................. $162.0
======
</TABLE>
- --------
(1) Net of unamortized discount of $7.0 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."
17
<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 statements of operations for the ten
months ended January 1, 2000 give 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 pursuant to the
transactions discussed elsewhere in 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 the 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 certain assumptions that our
management believes are reasonable. The unaudited pro forma financial data and
accompanying notes should be read in conjunction with our audited consolidated
financial statements and related 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.
18
<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)
Non-recurring 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.
19
<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 certain 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 ten months ended January 1,
2000.
(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 Holdings 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
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.
20
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
Set forth below are our selected historical consolidated and combined
financial data of Bedding Experts and of MDC 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 pursuant to the
transactions discussed elsewhere in this prospectus. 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,
certain amounts included in the financial statements have been retroactively
restated. Amounts presented below reflect the restatements. The selected
historical combined financial data of MDC for the years ended December 31,
1994, 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; however, historical financial data prior to December 29, 1996 has
not been presented in our selected historical combined financial data due to
the absence of reliable accounting and financial records during such periods
of time. We have presented the selected historical combined financial data for
MDC for the years ended December 28, 1996, December 30, 1995 and December 31,
1994 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 such data for subsequent periods.
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.
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
consolidated and combined financial statements and our unaudited condensed
consolidated interim financial statements included elsewhere in this
prospectus.
21
<PAGE>
Selected Historical Combined Financial Data
(dollars in thousands)
<TABLE>
<CAPTION>
Bedding
MDC(/1/) Experts
--------------------------------------------- -------------
Years Ended December
----------------------------- Six Months Six Months
Ended July 1, Ended July 1,
31, 1994 30, 1995 28, 1996 1997 1997
-------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Operating Data:
Net sales........... $160,264 $170,261 $169,020 $ 83,714 $20,738
Gross profit........ 57,525 57,830 56,285 27,433 6,995
General and
administrative
expenses........... 50,416 53,581 51,940 27,122 5,292
Non-recurring
operating
expenses........... -- -- -- -- --
Income from
operations......... 7,109 4,249 4,345 311 1,703
Interest income
(expense), net..... 661 624 548 328 9
Other income
(expense), net..... 330 (1,262) (471) (554) 1,202
Income before
provision for
income taxes....... 8,100 3,611 4,422 85 2,914
Net income(/3/)..... 8,100 3,611 4,422 85 2,914
Other Financial
Data:
Depreciation and
amortization....... $ 1,464 $ 2,003 $ 2,214 $ 1,007 $ 108
Capital
expenditures....... 2,954 3,038 1,823 1,592 424
Ratio of earnings to
fixed
charges(/4/)....... 3.06x 1.83x 1.92x 1.04x 7.24x
Balance Sheet Data
(end of period):
Working capital
(deficit).......... $ 6,762 $ (1,156) $ 517 $(14,242) $ (972)
Total assets........ 34,247 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.... 143 150 162 170 53
Same store sales
growth............. 9.8% (3.8%) (3.4%) --(/5/) --(/5/)
<CAPTION>
Company(/2/)
------------------------------------------------
Eight Fiscal
Months Year Ten Months Ended
Ended Ended ------------------------
Feb. 28, Feb. 28, December 31, January 1,
1998 1999 1998 2000
------------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Operating Data:
Net sales........... $159,752 $245,461 $201,183 $218,768
Gross profit........ 55,886 88,863 74,669 77,670
General and
administrative
expenses........... 40,627 67,261 55,742 60,895
Non-recurring
operating
expenses........... -- -- -- 4,556
Income from
operations......... 15,259 21,601 18,927 12,219
Interest income
(expense), net..... 88 128 126 (7,836)
Other income
(expense), net..... (532) 322 450 (97)
Income before
provision for
income taxes....... 14,815 22,052 19,504 4,286
Net income(/3/)..... 9,418 12,690 11,238 2,104
Other Financial
Data:
Depreciation and
amortization....... $ 2,648 $ 4,541 $ 3,771 $ 4,063
Capital
expenditures....... 2,122 5,162 4,297 2,615
Ratio of earnings to
fixed
charges(/4/)....... 4.36x 4.62x 4.95x 1.32x
Balance Sheet Data
(end of period):
Working capital
(deficit).......... $ (9,372) $ 1,137 $ (8,492) $ (2,882)
Total assets........ 93,346 101,488 91,776 202,933
Long-term debt and
capital lease
obligations........ 629 426 448 133,374
Total debt and
capital lease
obligations........ 920 656 697 133,641
Other Data (end of
period):
Number of stores.... 227 236 231 252
Same store sales
growth............. --(/5/) 1.5% 3.8% (0.0%)
</TABLE>
- -------
(1) 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 31, 1994, December 30, 1995 and December 28,
1996 and the six months ended July 1, 1997, may not be comparable to such
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.
(2) Includes the combined results of Mattress Discounters Corporation, T.J.B.,
and Bedding Experts. Bedding Experts was acquired on January 3, 1998 by
Heilig-Meyers in a transaction accounted for as a pooling of interests.
(3) 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 31, 1994, 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.
(4) 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.
(5) Our same store sales growth when aggregated with MDC for the 12 months
ended February 28, 1998 was 2.0%.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We believe we are the largest retailer 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 252
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.
For the ten-months ended January 1, 2000, our manufacturing facilities
provided product accounting for 30% 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 pursuant to 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. Bedding Experts'
financial data has been included in the aggregated fiscal year ended February
28, 1998. However, Bedding Experts historical financial data prior to December
29, 1996 has not been presented herein due to the absence of reliable
accounting and financial records during such periods.
On August 6, 1999, our parent company, Mattress Holding Corporation or
Holdings, consummated a merger and recapitalization pursuant to a transaction
agreement (the "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 pursuant to the transactions discussed elsewhere in this prospectus. The
following discussion compares our results of operations for 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
aggregated fiscal year ended February 28, 1998 (referred to as "Fiscal 1998").
The aggregated fiscal year represents the aggregation of (1) our audited
combined results of operations for the eight months ended February 28, 1998
plus (2) the unaudited statement of operations of Bedding Experts for the four
months ended July 1, 1997 plus (3) the unaudited combined results of
operations of MDC (using its predecessor basis of accounting) for the
23
<PAGE>
four months ended July 1, 1997. Such aggregation has been performed to aid our
discussion and analysis of the results of operations between fiscal 1998 and
fiscal 1999.
Our results of operations for the aggregated fiscal year ended February 28,
1998 are then compared to the results of operations of MDC (using its
predecessor basis of accounting), for the year ended December 28, 1996.
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. We have presented the results of operations of 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 to aid our discussion and analysis of the
results of operations between fiscal 1998 and 1996.
As described in the notes to the financial statements, certain amounts
included in the financial statements have been retroactively restated. The
amounts included in the following discussion reflect the restatements.
The following table sets forth our combined 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 thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
MDC /
MDC Company Company
------------ ------------ ----------------------------------------------
Aggregated
Fiscal Year Fiscal Year
Year Ended Ended Ended Ten Months Ended
December 28, February 28, February 28, ---------------------------------
1996 1998 1999 December 31, 1998 January 1, 2000
------------ ------------ ------------ ----------------- ---------------
(audited) (unaudited) (audited) (unaudited) (audited)
<S> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit............ 33.3 34.5 36.2 37.1 35.5
General and
administrative
expenses............... 30.7 27.2 27.4 27.7 27.8
Non-recurring operating
expenses............... -- -- -- -- 2.1
----- ----- ----- ----- -----
Operating income........ 2.6 7.3 8.8 9.4 5.6
Interest income
(expense), net......... 0.3 0.1 0.1 0.1 (3.6)
Other income (expense),
net.................... (0.3) 0.0 0.1 0.2 --
----- ----- ----- ----- -----
Income before provision
for income taxes....... 2.6 7.4 9.0 9.7 2.0
Provision for income
taxes.................. 0.0 2.4 3.8 4.1 1.0
----- ----- ----- ----- -----
Net income.............. 2.6% 5.0% 5.2% 5.6% 1.0%
===== ===== ===== ===== =====
</TABLE>
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.
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
24
<PAGE>
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 and related operational issues. 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 shift in mix from Comfort Source to
Sealy products. 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.
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. 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, 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
25
<PAGE>
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 the
Company's reevaluation of certain customer deductions, chargebacks from credit
card companies, and unrecoverable funds from providers of third party finance.
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.
Nonrecurring Operating Expenses: Nonrecurring 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.
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 Aggregated Fiscal Year
Ended February 28, 1998
Net Sales: Our net sales for fiscal 1999 increased $14.5 million or 6.3% to
$245.5 million, from $231.0 million for fiscal 1998. The increase represents
an increase in our retail net sales of $8.7 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 $237.0
million, $38.2 million, and $8.4 million, respectively, for fiscal 1999 and
$228.4 million, $30.1 million, and $2.6 million, respectively, for fiscal
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) a 1.5% increase
in comparable store sales, (2) a $2.0 million increase resulting from net
store openings during fiscal 1999 and (3) a $3.6 million net increase
resulting from having a full year's worth of sales during fiscal 1999 for
stores that we
26
<PAGE>
opened during fiscal 1998. The increase in comparable store sales is comprised
of a 3.7% increase in our markets excluding Chicago and a 6.7% decrease in
comparable store sales in Chicago. The comparable store sales decline in
Chicago was primarily attributable to high sales force and management turnover
at these stores in the latter part of fiscal 1999.
The increase in our retail net sales was partially offset by a $6.0 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 $14.6 million or 6.6%.
Sales generated by our manufacturing operation during fiscal 1999 increased
$13.9 million or 42%, to $46.6 million. Sales to our retail operations
increased by $8.1 million to $38.2 million from $30.1 million, primarily due
to (1) the introduction of our Comfort Source branded products into Bedding
Experts stores during fiscal 1999, (2) the impact of expanding retail sales
and (3) 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 $9.3 million or 11.7%
to $88.9 million from $79.6 million in fiscal 1998. As a percentage of net
sales, gross profit was 36.2% in fiscal 1999 compared to 34.5% in fiscal 1998.
Our retail gross profit for fiscal 1999 was $79.6 million, an increase of $5.7
million or 7.7% from fiscal 1998, while our manufacturing gross profit was
$9.3 million, an increase of $3.6 million or 63% from $5.7 million in fiscal
1998.
Our retail gross profit expressed as a percentage of net retail sales was
33.6% in fiscal 1999 compared to 32.4% in fiscal 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
fiscal 1998. Occupancy expense dropped primarily due to exiting the high cost
New Jersey market.
Our manufacturing gross profit expressed as a percentage of manufacturing
sales was 19.9% in fiscal 1999 compared to 17.4% in fiscal 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 $4.4 million or 7.0% to $67.3 million from $62.9
million in fiscal 1998. As a percentage of net sales, general and
administrative expenses were 27.4% in fiscal 1999 compared to 27.2% in fiscal
1998. This increase was partially due to the corporate overhead allocations
from Heilig-Meyers in fiscal 1999 of $1.9 million. No such allocations
occurred in fiscal 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 effective decrease is primarily due to 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 a major
vendor.
Other Income (Expense), Net: Other income (expense), net, for fiscal 1999
increased $0.2 million to $0.3 million from $0.1 million for fiscal 1998.
Other income decreased to $0.3 million in fiscal 1999 as compared to $1.4
million in fiscal 1998. The primary reason for this decrease was a one-time
payment received from a vendor in fiscal 1998 related to the signing of a
long-term supply contract. Other expense also decreased from $1.3 million in
fiscal 1998 to zero in fiscal 1999. Other expense in fiscal 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 32.3% in fiscal 1998. The increase in effective
income tax rate was attributable to the change in tax
27
<PAGE>
status during fiscal 1998 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. 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
$11.7 million, or 5.0% of net sales in fiscal 1998.
Aggregated Fiscal Year Ended February 28, 1998 Compared to the Year Ended
December 28, 1996
Net Sales: Our net sales for fiscal 1998 increased $62 million or 36.7% to
$231.0 million from $169.0 million in 1996. The increase represents an
increase in our retail net sales of $59.3 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 $228.4
million, $30.1 million, and $2.6 million, respectively in fiscal 1998 and
$169.0 million, $22.5 million, and $0 million, respectively, in 1996.
Manufacturing sales to our retail operations are eliminated in the
consolidation of our segments.
The increase in our retail net sales is attributable to the following
factors: (1) the impact of Heilig-Meyers' acquisition of Bedding Experts,
pursuant to which our fiscal 1998 results of operations include $46.4 million
of net sales compared to zero net sales being included in 1996; (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 a full year's worth of net sales from stores
opened in 1996.
Net sales generated by our manufacturing operation during fiscal 1998 were
$32.7 million, an increase of $10.2 million or 45.3% from 1996. This increase
in manufacturing sales is attributable to (1) an increase of $7.6 million in
sales to our retail operations and (2) $2.6 million of net sales sold to
Heilig-Meyers during fiscal 1998. Prior to fiscal 1998 we generated no
manufacturing sales to external retailers.
Gross Profit: Gross profit in fiscal 1998 increased $23.3 million or 41.4%
to $79.6 million from $56.3 million in 1996. As a percentage of net sales
gross profit was 34.5% in fiscal 1998 compared to 33.3% in 1996. Our retail
gross profit for fiscal 1998 was $73.9 million, an increase of $21.0 million
or 40.0% from 1996, while our manufacturing gross profit was $5.7 million, an
increase of $2.3 million or 67.6% over the prior year.
Our retail gross profit expressed as a percentage of net retail sales was
32.4% in fiscal 1998 compared to 31.3% in 1996. This increase in gross profit
percentage is due primarily to (1) the inclusion of Bedding Experts'
operations which generated higher gross margins relative to MDC; and (2)
improved mix/pricing due in part to a new incentive pay program for store
managers and sales personnel.
Our manufacturing gross profit expressed as a percentage of manufacturing
sales was 17.4% in fiscal 1998 compared to 15.1% in 1996. 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 1998 increased $11.0 million or 21.1% to $62.9 million from $51.9
million for 1996. As a percentage of net sales, general and administrative
expenses were 27.2% in fiscal 1998 compared to 30.7% in 1996. The absolute
increase in these expenses relates to the impact of the Bedding Experts
acquisition. Bedding Experts' general and administrative expenses included in
fiscal 1998 were approximately $11.2 million. Excluding the impact of Bedding
Experts, general and administrative expenses, on a
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comparable basis, were 27.9% in fiscal 1998 compared to 30.4% in 1996. 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 fiscal 1998 from 1996, it was
more than offset by increased cooperative advertising benefits from a new
supply agreement entered into with a major vendor in fiscal 1998. This
reduction in net advertising costs was offset by (1) goodwill amortization of
$0.9 recorded in fiscal 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 fiscal 1998
increased $0.6 million to $0.1 million from an expense of ($0.5 million) for
1996. Other income increased to $1.4 million in fiscal 1998 as compared to
$0.2 million in 1996. The primary reason for this increase was a one-time
payment received from a vendor in fiscal 1998 related to the signing of a
supply contract. The increase in other expense from ($0.7 million) in 1996 to
($1.3 million) in fiscal 1998 consisted primarily of fees related to the
January 3, 1998 acquisition of Bedding Experts.
Provision for Income Taxes: Our effective income tax rate was 32.3% in
fiscal 1998 as compared to zero in 1996. 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. State income taxes of $0.3 million are included in general and
administrative expenses in 1996.
Net Income: Primarily as a result of the reasons discussed above, net
income increased to $11.7 million, or 5.0% of net sales in fiscal 1998 from
$4.4 million, or 2.6% of net sales in 1996.
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 has been capital
expenditures for new store openings. Beginning in fiscal 1999, a significant
use of our funds has been the funding of accounts receivable from Heilig-
Meyers and non-interest bearing loans to Heilig-Meyers. Our cash and cash
equivalents at January 1, 2000 and February 28, 1999 were approximately $7.5
million and $1.4 million, respectively.
In connection with the leveraged recapitalization, we incurred significant
amounts of debt requiring interest payments on the Senior Notes and interest
payments and principal payments under the Senior Credit Facility. Our
liquidity needs relate to working capital, capital expenditures and potential
acquisitions.
We intend to fund our working capital, capital expenditures and debt
service requirements through cash flow generated from operations and
borrowings under the Senior Credit Facility.
In addition, the Senior Credit Facility requires that we maintain specified
financial ratios. At January 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 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
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<PAGE>
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 1999 was $1.8 million,
a $13.3 million decline from the $15.1 million generated in Fiscal 1998. This
decrease resulted primarily from an increase in working capital partially
offset by an increase in earnings before depreciation and amortization. The
net increase (decrease) in working capital, excluding cash, was $15.1 million
and $(2.6) million for fiscal years ended 1999 and 1998, respectively. This
increase resulted from (1) 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 income 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 fiscal 1998. Excluding the impact
of the funding of the non-interest bearing loans, net of settlement of income
taxes, to Heilig-Meyers, cash flows from operations would have been $8.3
million and $9.4 million for the fiscal years ended 1999 and 1998,
respectively.
Net cash provided by operations for Fiscal 1998 increased by $2.9 million
to $15.1 million from $12.2 million in 1996. This increase is primarily the
result of an increase in earnings before depreciation and amortization in part
due to the inclusion of Bedding Experts in fiscal 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 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 Fiscal 1998 and 1996, our capital expenditures were $3.2 million and
$1.8 million, respectively.The increase in capital expenditures in fiscal 1998
from 1996 is primarily attributable to the net increase in retail stores and
purchase of land and buildings for approximately $0.6 million. In 1996 we had
net cash proceeds from the sale and maturities of investment securities of
$3.6 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 $6.0 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;
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<PAGE>
. 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.
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 fiscal year ended
February 28, 1999 we generated 24.3%, 26.6%, 24.5% and 24.6% of our net sales
in the first through the four fiscal quarters, 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 certain 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 the largest retailer of mattresses in the United States.
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 252 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 the largest mattress retailer in six
of these markets. For the twelve months ended January 1, 2000, we generated
net sales of $263.0 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 89% of their revenue from the sale of mattresses and 11% 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 ISPA, Sealy is the largest manufacturer of
mattresses in North America, with a 22% U.S. market share. Sealy products
accounted for approximately 64% of our retail mattress sales for the ten
months ended January 1, 2000 and include such well-known brand names as
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 margins. Sales of our Comfort Source
brand mattresses accounted for 36% of our retail mattress sales for the ten
months ended January 1, 2000.
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
13.4% and 34.4%, 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 20
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, 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, such as 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 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 certain 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 the largest specialty sleep shop in the United
States, and we believe we are the largest retailer of mattresses in the United
States. 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 the leading mattress retailer 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.
Largest 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,
such as 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.
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 36% of our retail mattress sales for the ten months ended
January 1, 2000.
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
. generate higher sales conversion rates
. 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. 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 shipping a mattress and the
desire of customers to touch and feel the product prior to making a
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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 252 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 January 1,
2000:
<TABLE>
<CAPTION>
Market Stores Year Entered
------ ------ ------------
<S> <C> <C>
Chicago, IL....................... 55 1998(/1/)
Washington, DC.................... 33 1978
Los Angeles, CA................... 29 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........................ 9 1998
Pittsburgh, PA.................... 9 1994
Sacramento, CA.................... 8 1997
Richmond, VA...................... 7 1983
Miami, FL......................... 7 1998
Orlando, FL....................... 3 1999
Tampa, FL......................... 5 1998
---
Total........................... 252
===
</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 91% 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.
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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
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<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 70
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
39
<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 certain 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 such as Jordan's Furniture in Massachusetts, department store
chains such as The May Company and Federated Department Stores, Inc., and
sleep shops such as Sleepy's and Mattress Giant.
Employees
At January 1, 2000, we employed 1,427 people, none of whom are represented
by a labor union. We employed 217 people in our three factories: 115 people in
Maryland, 53 people in California and 49 people in Alabama. We employed 1,029
people in our retail operation, including distribution and home delivery. In
addition, we employed 181 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 certain unregistered trademarks that are used in our business. In
addition, we own several U.S. copyright registrations.
Legal and Environmental
We have no known environmental, legal or other liabilities, the resolution
of which could reasonably be expected to have a material adverse effect on us
or our operations. We are a party to litigation from time to time in the
ordinary course of business. No pending or threatened litigation exists where
the resolution could reasonably be expected to have a material adverse effect
on us or our operations.
40
<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 an amendment to this agreement, in connection
with the transactions Sealy has become 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 certain 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.
41
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain 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.......... 33 Chief Financial Officer and Director
Raymond T. Bojanowski...... 44 Executive Vice President
Richard L. Branch.......... 43 Senior Vice President--Advertising and Marketing
Deborah Boyd............... 31 Vice President--Human Resources
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 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.
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 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.
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.
42
<PAGE>
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, and Raymond Bojanowski--
Executive Vice President. 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. 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. Mr. Bojanowski's agreement provides for an annual
base salary of $275,000, subject to annual increase by the board of directors
of Holdings, plus a performance bonus of up to 60% of the base salary. 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 we will continue to pay his base
salary for a period of 12 months from termination.
In addition we have entered into an employment agreement with Richard
Branch--Senior Vice President--Advertising and Marketing. Mr. Branch's
agreement has an initial 12 month term and perpetual 12 month terms thereafter
unless terminated by either party. Mr. Branch's agreement provides for an
annual base salary of $200,000, plus a performance bonus based on a percentage
of the base salary. The agreement provides that if we terminate Mr. Branch's
employment without cause, we will continue to pay his base salary for a period
of 12 months from termination.
Management Equity Participation
To provide financial incentives for Messrs. Bojanowski, Branch and Gornery,
they have been issued options to acquire shares of Holdings' common stock.
Such options will be immediately exercisable. In addition, to provide
additional financial incentives, we will grant options to purchase
43
<PAGE>
shares of Holdings' common stock to those employees, as well as to certain
other key employees. Such options will vest and become exercisable (i) in
increments on certain threshold dates or (ii) upon a sale of Mattress
Discounters Corporation. When an employee's employment with us is terminated
for any reason, such employee's unvested options will automatically expire,
the exercise period for the vested options will be reduced to a period ending
no later than 180 days after the date of termination, and, if such termination
occurs prior to a qualified initial public offering of Holdings' common stock,
Holdings will have the right to repurchase any of its common stock then held
by such employee. Our management team owns new stock and options together
representing up to approximately 5.5% of Holdings' common stock on a fully
diluted basis.
Executive Compensation
Summary Compensation Table
The following table sets forth, for the ten month fiscal year ended January
1, 2000, the compensation paid to all individuals who performed the functions
of chief executive officer, and our next most highly compensated executive
officers during that period.
<TABLE>
<CAPTION>
Annual Compensation
---------------------
Fiscal Salary Bonus
Name and Principal Position Year ($) ($)
- --------------------------- ------ ------- ------
<S> <C> <C> <C>
Steven M. Lytell(/1/).................................... 1999 416,667 --
Executive Vice President
Stephen A. Walker........................................ 1999 23,077 --
Chief Executive Officer
Jon M. Studner(/2/)...................................... 1999 291,667 --
Senior Vice President
Raymond T. Bojanowski.................................... 1999 229,883 11,494
Senior Vice President--Sales
Richard L. Branch........................................ 1999 166,667 8,333
Vice President--Advertising and Marketing
Thomas J. Budsock(/3/) .................................. 1999 125,000 --
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. Budsock's employment terminated on January 14, 2000.
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.
44
<PAGE>
PRINCIPAL SHAREHOLDERS
We are a wholly-owned subsidiary of Holdings. The outstanding equity
securities of Holdings 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 Holdings, including the
election of directors. Holdings 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 Holdings is authorized to issue preferred stock, par value $0.01
per share, with such designations and other terms as may be stated in the
resolutions providing for the issue of any such preferred stock adopted from
time to time by the Board of Directors.
The following tables set forth certain 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 (assuming, for each such
person, the exercise of options exercisable within 60 days of February 29,
2000). 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(/1/)
------------------------------------------
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:
Mattress Discounters Holding
L.L.C.(/2/)(/3/)................. 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(/4/)........ 67,500 * 7,500 *
Richard L. Branch(/4/)............ 26,250 * 2,917 *
Deborah Boyd...................... -- -- -- --
Robert D. Gorney(/4/)............. 7,500 * 833 *
Michael Mauler.................... -- -- -- --
Josh Bekenstein(/5/).............. 4,597,606 37.8 510,845 37.3
Michael Krupka(/5/)............... 4,597,606 37.8 510,845 37.3
James B. Hirshorn(/6/)............ 1,213,768 10.0 134,863 9.8
Andrew S. Janower(/7/)............ 1,827,361 15.0 203,040 14.8
Joe L. Gonzalez(/8/).............. -- -- -- --
Directors and Executive Officers
as a group (11 persons).......... 6,526,217 53.6 725,135 53.0
</TABLE>
- --------
* represents less than 1%
(1) As used in this table, 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 and warrants exercisable within sixty days. This table does not
include the warrants.
(2) The members of Mattress Discounters Holding L.L.C. ("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 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. Accordingly, the LLCs may be
deemed to beneficially own certain shares owned by Holdings LLC, although
the LLCs disclaim such beneficial ownership.
45
<PAGE>
(3) 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 will indirectly own approximately 22.5%, 11.2%
and 3.7%, respectively, of the Class A common stock and the Class L common
stock.
(4) 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.
(5) Excludes 4,615,486 shares of Class A common stock and 512,832 shares of
Class L common stock indirectly owned by the LLCs, which BCP may be deemed
to beneficially own by virtue of its right to vote such shares. Mr.
Bekenstein and Mr. Krupka are Managing Directors of Bain Capital, Inc.,
limited partners of BCP, the sole general partner of Bain Fund VI, and
Managing Directors of Bain Capital Investors VI, Inc., the sole general
partner of BCP. In addition, (i) Bain Capital, Inc., of which each of
Messrs. Bekenstein and Krupka is a Managing Director, is the managing
general partner of each of the BCIPs and 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 Bain Fund VI and the BCIPs through their interest in Holdings
LLC. Each of Mr. Bekenstein and Mr. Krupka disclaims beneficial ownership
of any such shares.
(6) 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.
(7) 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.
(8) 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.
46
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stockholders Agreement
Holdings and all holders of shares of its common stock entered into a
Stockholders Agreement on August 6, 1999.
The Stockholders Agreement provides (i) that the Boards of Directors of
Holdings will consist of five members, four of whom shall be selected by Bain
Capital and one of whom shall be selected by HPC, (ii) 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, (iii) that if Holdings 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), Holdings will
first offer to sell to the other holders of common stock their percentage of
the shares of such issuance equal to the percentage of common stock held by
such person at the time of such issuance, (iv) that upon the Board of
Directors of Holdings and holders of a majority of outstanding shares of
common stock approving a sale of substantially all the assets of Holdings or
substantially all the outstanding capital stock of Holdings, each holder of
common stock will consent to such sale and sell their common stock as so
requested, and (v) in the event that the Board of Directors of Holdings 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 Holdings, and the managing underwriters
advise Holdings that in their opinion the aggregate number of shares of common
stock which Mattress Holding Corporation and the holders of its common stock
elect to include in such offering exceeds the number which can be sold in such
offering without adversely affecting the marketability of such offering, the
number of such shares sold in such offering shall be allocated: (i) first, the
securities Holdings proposed to sell, (ii) second, the shares of common stock
requested to be included in such registration, pro rata among the holders of
such shares on the basis of the number of shares owned by each such holder,
and (iii) third, other securities requested to be included in such
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 such
underwritten registration) unless the underwriters managing the registered
offering otherwise agree.
Advisory Agreement
In connection with the transactions, we entered into an advisory agreement
with Bain Capital pursuant to which it provides financial advisory and
consulting services. In exchange for such services, Bain Capital is entitled
to an aggregate annual shareholder advisory fee of $1.0 million (to be
adjusted
47
<PAGE>
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.
Holdings Junior Subordinated Notes
Holdings 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 Holdings, 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
Holdings junior subordinated notes are scheduled to mature one year after the
scheduled maturity of the exchange notes. The Holdings 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.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF HOLDINGS
Set forth below is certain information concerning Holdings' capital stock
and a brief summary of certain significant 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 Holdings (a copy of
which is available from Holdings) and the Virginia Act. See "Available
Information."
Common Stock
The common stock of Holdings 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 Holdings), 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 such 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
such 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 Holdings.
Except as described above, the holders of shares of the common stock of
Holdings 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 Holdings's common stock. The holders of shares of common
stock are not subject to further calls or assessments by Holdings.
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 Holdings' 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 certain bank holding regulations may convert
Class A shares into Class B shares and Class L shares into Class M shares.
See "Certain 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 Holdings' common stock and warrants.
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Preferred Stock
There are 10 million shares of preferred stock, par value $.01 per share,
of Holdings authorized for issuance, and no shares of preferred stock have
been issued and are outstanding. Holdings' Board of Directors may issue from
time to time, in one or more series, shares of preferred stock, with such
rights and preferences as permitted by law.
In connection with the issuance of the old notes, Holdings 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 Holdings' fully diluted common stock. The warrants expire
on July 15, 2007.
Each warrant entitles the holder to acquire, on or after the exercisability
date 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 Holdings.
Holders of warrants do not, by virtue of being such holders, have any
rights of stockholders of Holdings, except that holders are entitled to
receive distributions in respect of any Class A common stock or Class L common
stock of Holdings as though the warrants had been exercised.
Liability and Indemnification
Holdings's articles of incorporation provides that Holdings 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.
Such indemnification is not exclusive of other indemnification rights arising
under any bylaw, vote of disinterested directors or shareholders or otherwise.
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. The revolving loans under the senior credit facility are due by
August 5, 2005.
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 our 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
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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 such repayments do not result in
corresponding commitment reductions.
Security; Guaranty. Each of our direct and indirect domestic subsidiaries
and Holdings (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 or (2) Eurodollar rate plus a margin. 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.
Fees. We paid some fees in connection with the senior credit facility,
including: (1) letter of credit 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 certain customary
affirmative covenants and make certain 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, certain events of
bankruptcy and insolvency, ERISA violations, material judgment defaults,
cross-defaults to certain 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 "--
Certain 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 such 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
such 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
The exchange notes are redeemable at our option, in whole or in part, at
any time on or after July 15, 2004. 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>
In addition, 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, provided, however, that at least 65% of the aggregate principal
amount of the exchange notes originally issued, including any additional notes
must remain outstanding immediately after giving effect to each such
redemption. Notice of any such redemption must be given within 60 days after
the date of the closing of the relevant Equity Offering.
In addition, at any time prior to July 15, 2004, the exchange notes may be
redeemed, as a whole but not in part, at our option 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 pursuant to 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 then listed on a national securities exchange, the trustee will
select the exchange notes to be redeemed on a pro rata basis, by lot or by
such method as the trustee shall deem fair and appropriate. Exchange notes
redeemed in part must be redeemed only in integral multiples of $1,000. If a
partial redemption is made with the net cash proceeds of an Equity Offering,
selection of the exchange notes for redemption must be made by the trustee
only 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 such method
is otherwise prohibited. Notice of redemption must be mailed by first-class
mail at least 30 but not more than 60 days before the redemption date to each
holder of notes to be redeemed at its registered address. If any note is to be
redeemed in part only, the notice of redemption that relates to such note
shall state the portion of the principal amount thereof to be redeemed. A new
note in a principal amount equal to the unredeemed portion thereof will be
issued in the name of the holder thereof upon cancellation of the original
note. On and after the redemption date, interest will cease to accrue on notes
or portions thereof called for redemption as long as we have deposited with
the paying agent for the notes funds in satisfaction of the applicable
redemption price pursuant to the indenture.
Note Guarantees
Payment of the exchange notes will be guaranteed by each of the guarantors
unconditionally on a joint and several basis including our obligation to pay
principal, premium, if any, and interest with respect to the notes. The
guarantees will be senior unsecured obligations of the guarantors. The
obligations of each guarantor under its guarantee will rank equally with all
senior unsecured
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indebtedness of such guarantor, senior in right of payment to all subordinated
indebtedness of such guarantor and effectively subordinated to such
guarantor's secured indebtedness to the extent of the value of the assets
securing such indebtedness. The guarantors are also guaranteeing all our
obligations under the senior credit facility. Each 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 pursuant to its contribution obligations
under the indenture, will result in the obligations of such guarantor under
its guarantee not constituting a fraudulent conveyance or fraudulent transfer
under Federal or state law. Each guarantor that makes a payment or
distribution under a guarantee shall be entitled to a contribution from each
other guarantor in a pro rata amount, based on the net assets of each
guarantor determined in accordance with GAAP.
We will cause each Restricted Subsidiary issuing a guarantee after the
Issue Date to execute and deliver to the trustee a supplemental indenture in
form reasonably satisfactory to the trustee pursuant to which such Restricted
Subsidiary shall become a party to the indenture and thereby unconditionally
guarantee all of our obligations under the notes and the indenture on the
terms set forth therein. Thereafter, such Restricted Subsidiary shall (unless
released in accordance with the terms of this indenture) be a guarantor for
all purposes of the indenture.
The indenture provides that if, subject to the requirements of the first
paragraph under "--Certain 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 "Certain 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 "Certain Covenants--Disposition of
Proceeds of Asset Sales" and within the time limits specified by such
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 "--Certain
Covenants--Limitation on Guarantees by Restricted Subsidiaries."
Any guarantor that is designated an Unrestricted Subsidiary pursuant to and
in accordance with 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
Upon the occurrence of a Change of Control, 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 thereof (the "Change of Control Offer") the
offer price will be in cash equal to 101% of the aggregate principal amount
thereof plus accrued and unpaid interest thereon, 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 notes on the date
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specified in such 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"), pursuant to the procedures required by the indenture and
described in such notice. 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 the 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 notes or portions thereof properly tendered
pursuant to 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 thereof so tendered and
(3) deliver or cause to be delivered to the trustee the notes so
accepted together with an Officers' Certificate stating the aggregate
principal amount of the notes or portions thereof being purchased by us.
The paying agent will promptly mail each holder of notes so tendered the
Change of Control Payment for such notes. The trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each
holder a new note equal in principal amount to any unpurchased portion of the
notes surrendered, if any; provided that each such new note will be in a
principal amount of $1,000 or an integral multiple thereof. 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 certain change of control events with
respect to the Company would constitute a default thereunder. In the event a
Change of Control occurs at a time when we are prohibited from purchasing
notes, we could seek the consent of our lenders under the senior credit
facility to the purchase of notes or could attempt to refinance the borrowings
under the senior credit facility. If we do not obtain such a consent or repay
such borrowings, we will remain prohibited from purchasing notes. In such
case, our failure to purchase tendered 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 notes to require us to
repurchase or redeem the 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 notes validly tendered and not withdrawn under such Change of
Control Offer or
(2) We exercise our option to purchase all the notes upon a Change of
Control as described above under the caption "--Optional Redemption."
Certain 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,
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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
(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:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) 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
(c) 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)(i), (3), (4), (6), (7), (8) and (9) of the next succeeding
paragraph), is less than the sum, without duplication, of
(i) 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
(ii) 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
(iii) 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.
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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
(i) solely in exchange for shares of our Qualified Capital Stock
(the "Refunding Capital Stock"), or
(ii) 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 (i) 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
(i) 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
(ii) 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 Parent for the purpose of permitting, and in an amount
equal to the amount required to permit, Parent to redeem or repurchase
Parent'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 pursuant to 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'
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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 Parent will not be
deemed to constitute a Restricted Payment under the indenture;
(6) the making of distributions, loans or advances to Parent in an
amount not to exceed $750,000 per annum in order to permit Parent to pay
the ordinary operating expenses of Parent (including, without limitation,
directors' fees, indemnification obligations, professional fees and
expenses, but excluding any payments on or repurchases of the Seller Note);
(7) payments to Parent in respect of taxes pursuant to the terms of the
Tax Allocation Agreement 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 Parent to
allow Parent to contemporaneously redeem, repurchase or otherwise retire
the Seller 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 pursuant to clauses (1), (2)(ii),
(5), (10) and (11) shall be included in such calculation. However, such
expenditures pursuant to 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)(i), (3), (4), (6), (7), (8) and
(9) shall be excluded from such 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 the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
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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
(i) 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
(ii) 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"):
(i) 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;
(ii) 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 (ii) 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 (vii), (ix) and
(xv) below or pursuant to the first paragraph hereof;
(iii) our other Indebtedness and that of our Subsidiaries outstanding on
the date of the Indenture for so long as such Indebtedness remains
outstanding;
(iv) Interest Swap Obligations covering our Indebtedness. However, any
Indebtedness to which any such 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;
(v) our Indebtedness under Currency Agreements;
(vi) 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
(vi);
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(vii) 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 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 (vii) 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.
(viii) guarantees by us and the guarantors of each other's Indebtedness.
However such Indebtedness must be permitted to be incurred under the
indenture;
(ix) 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);
(x) 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;
(xi) 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;
(xii) obligations in respect of performance and surety bonds and
completion guarantees provided by us or any Restricted Subsidiary in the
ordinary course of business;
(xiii) any refinancing, modification, replacement, renewal, restatement,
refunding, deferral, extension, substitution, supplement, reissuance or
resale (collectively, "Refinancings" and the
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term "Refinanced" shall have a correlative meaning) of existing or future
Indebtedness (other than Indebtedness incurred pursuant to clauses (ii),
(iv), (v), (vi), (viii), (ix), (x), (xi), (xii), (xiv) and (xv) 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
(1) 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
(2) 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;
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;
(xiv) 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
(xv) 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 (xv) and the aggregate liquidation value of all other Permitted
Domestic Subsidiary Preferred Stock issued pursuant to this clause (xv),
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 (i) through (xv)
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
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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 Consolidated Fixed Charges of the Company as accrued. For purposes
of determining whether the requirement in clause (ii) 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 (i) 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 or proceeds that is senior in priority to such
Liens and (ii) 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;
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(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;
(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:
(i) 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);
(ii) 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 such 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,
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(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
(iii) 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
(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 (iii)(A) and (iii)(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 (iii)(A), (iii)(B) or (iii)(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 (iii)(A), (iii)(B) and (iii)(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 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").
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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
(i) at least 75% of the consideration for such Asset Sale constitutes
Productive Assets, cash, Cash Equivalents and/or Marketable Securities and
(ii) 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 as shown on
the register of 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 Proceeds Offer,
Holders 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 properly
tender notes in an amount exceeding the Net Proceeds Offer Amount, notes of
tendering Holders 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 pursuant to
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:
(i) 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;
(ii) 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 pursuant to a supplemental indenture
in a form reasonably satisfactory to the trustee;
(iii) immediately after such transaction no Default or Event of Default
exists; and
(iv) 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
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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 the Consolidated Fixed Charge Coverage Ratio of the Company
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.
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:
(i) 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;
(ii) immediately after giving effect to such transaction, no Default or
Event of Default exists; and
(iii) 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;
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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
(i) 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
(ii) 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 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:
(i) 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;
(ii) 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;
(iii) transactions effected as part of a Qualified Securitization
Transaction;
(iv) 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 in any material respect than the original agreement as in effect on
the date of the indenture;
(v) Restricted Payments permitted by the indenture;
(vi) 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;
(vii) payments or loans to employees or consultants that are approved by
our Board of Directors in good faith;
(viii) 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
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entered into after the date of the indenture shall only be permitted by
this clause (viii) 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;
(ix) transactions permitted by, and complying with, the provisions of
the covenant described under "--Merger, Consolidation, or Sale of Assets";
(x) 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
(xi) 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 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 (i) 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 (ii) 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 (i) Indebtedness permitted to be incurred
pursuant to clause (ix) of the second paragraph of the "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant and (ii) 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.
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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
(i) 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 of the
Company 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
(ii) 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":
(i) 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;
(ii) 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);
(iii) 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;
(iv) 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;
(v) 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;
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(vi) 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
(vii) 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 (vii) 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 indenture or the notes to the contrary, will become
immediately due and payable. If an Event or Default specified in clause (vii)
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 "--Certain
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.
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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 (or, with respect to a Default or Event of Default
specified in clause (vii) 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:
(i) 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;
(ii) 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;
(iii) 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
(iv) 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 (vii) 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:
(i) 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;
(ii) 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;
(iii) 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
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funds pursuant to this provision becoming or being deemed to be an
"investment company" under the Investment Act; and
(iv) 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 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
(i) cure any ambiguity, defect or inconsistency,
(ii) provide for uncertificated notes in addition to or in place of
certificated notes,
(iii) 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,
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(iv) 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 such Holder, or
(v) comply with requirements of the Commission to effect or maintain the
qualification of the indenture under the Trust Indenture Act.
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
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, (i) 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
(ii) neither Chase Securities Inc. nor any of its Affiliates shall be our
Affiliates.
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"all or substantially all" shall have the meaning given such phrase in the
Revised Model Business Corporation Act.
"Applicable Premium" means, with respect to any note on any redemption
date, the greater of (i) 1.0% of the principal amount of such note or (ii) 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.
"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
(i) a transaction or series of related transactions for which we or our
Restricted Subsidiaries receive aggregate consideration of less than $1.0
million;
(ii) 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 "--Certain Covenants--Merger,
Consolidation, or Sale of Assets" or any disposition that constitutes a
Change of Control;
(iii) 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;
(iv) the factoring of accounts receivable arising in the ordinary course
of business pursuant to arrangements customary in the industry;
(v) the licensing of intellectual property in the ordinary course of
business;
(vi) disposals or replacements of obsolete, uneconomical, negligible,
wornout or surplus property in the ordinary course of business;
(vii) 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
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(viii) 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 (viii), 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
(i) in the case of a corporation, corporate stock;
(ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
(iii) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(iv) 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:
(i) 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 acquisition thereof;
(ii) 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 S&P or Moody's;
(iii) 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;
(iv) 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 acquisition thereof
combined capital and surplus of not less than $200.0 million;
(v) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (i) above entered
into with any bank meeting the qualifications specified in clause (iv)
above; and
(vi) investments in money market funds which invest substantially all
their assets in securities of the types described in clauses (i) through
(v) above.
"Change of Control" means the occurrence of one or more of the following
events:
(i) 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;
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(ii) 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);
(iii) 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
(iv) the first day on which a majority of the members of our Board of
Directors of the Company or Parent are not Continuing Directors.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of such Person's
(i) Consolidated Net Income and
(ii) 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,
(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
(i) 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
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(ii) 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,
(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
(i) Consolidated Interest Expense (before amortization or write-off of
debt issuance costs and before amortization of original issue discount
relating to this offering),
(ii) 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
(iii) 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 "--Certain Covenants--Restricted Payments."
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication,
(i) 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,
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(ii) the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period, and
(iii) 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,
(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)(i) of the first paragraph of the
covenant described under the caption "--Certain Covenants--Restricted
Payments," any amounts included pursuant to clause (c)(iii) of the first
paragraph of such 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)(i) of the first paragraph of the covenant
described under the caption "--Certain 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 (i) was a member of such Board of Directors on
the date of the indenture or (ii) was nominated for election or elected to
such Board of Directors by any of the Principals or with the approval of a
majority of the Continuing Directors who were members of such Board at the
time of such nomination or election.
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"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect us or
any of our Restricted Subsidiaries against fluctuations in currency values.
"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. Such Officers'
Certificate shall state the basis of such valulation, 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 the
calculation set forth in clause (c) (ii) of the first paragraph of the
covenant described under the caption '"--Certain 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 pursuant to such provisions unless such repurchase or
redemption complies with the covenant described above under the caption "--
Certain 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).
"Equity Offering" means any offering of Parent's or our Qualified Capital
Stock; provided that, in the event of any Equity Offering by Parent, Parent
contributes to our common equity capital (other than as Disqualified Stock)
the portion of the net cash proceeds of such Equity Offering necessary to pay
the aggregate redemption price (plus accrued interest to the redemption date)
of the notes to be redeemed.
"Four-Quarter Period" has the meaning specified in the definition of
Consolidated Fixed Charge Coverage Ratio.
"GAAP" means generally accepted accounting principles described in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without
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limitation, by way of a pledge of assets or through letters of credit or
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantor" means (i) each Restricted Subsidiary in existence on the date
of the indenture and (ii) each other Restricted Subsidiary, formed, created or
acquired before or after the date of the indenture, required to become a
Guarantor after the date of the indenture, in each case subject to the
covenant described under "--Certain Covenants--Limitation on Guarantees by
Restricted Subsidiaries" above.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under
(i) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements (including Interest Swap Obligations) and
(ii) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates (including Currency Agreements).
"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
(i) the accreted value thereof, in the case of any Indebtedness issued
with original issue discount, and
(ii) 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.
"Interest Swap Obligations" means the obligations of any Person, pursuant
to any arrangement with any other Person, whereby, directly or indirectly,
such Person is entitled to receive from time to time periodic payments
calculated by applying either a floating or a fixed rate of interest on a
stated notional amount in exchange for periodic payments made by such other
Persons calculated by applying a fixed or a floating rate of interest on the
same notional amount.
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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 such Subsidiary 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."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell or give a
security interest in and any
filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"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.
"Moody's" means Moody's Investors Service, Inc.
"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
(i) 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;
(ii) 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
(iii) 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.
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"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.
"Parent" means Mattress Discounters Holding Corporation, a Virginia
corporation.
"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.
"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 pursuant to clause (xvi) 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
(i) Bain Capital, Inc. or one of its Affiliates is a party to such
Shareholders Agreement,
(ii) 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
(iii) 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 the Parent.
"Permitted Investments" means
(i) 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;
(ii) cash and Cash Equivalents;
(iii) Investments existing on the date of the indenture;
(iv) loans and advances to our employees and officers and those of our
Restricted Subsidiaries in the ordinary course of business;
(v) accounts receivable created or acquired in the ordinary course of
business;
(vi) Currency Agreements and Interest Swap Obligations entered into in
the ordinary course of our businesses and otherwise in compliance with the
indenture;
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(vii) 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;
(viii) Guarantees by us of Indebtedness otherwise permitted to be
incurred by our Restricted Subsidiaries that are Guarantors under the
indenture;
(ix) additional Investments having an aggregate fair market value, taken
together with all other Investments made pursuant to this clause (ix) 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);
(x) 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;
(xi) Investments the payment for which consists exclusively of our
Qualified Capital Stock; and
(xii) 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 "--Certain Covenants--Disposition of
Proceeds of Asset Sales."
"Permitted Liens" means the following types of Liens:
(i) 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 pursuant to GAAP;
(ii) 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;
(iii) 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);
(iv) judgment Liens not giving rise to an Event of Default;
(v) 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;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation;
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(vii) 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;
(viii) 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;
(ix) 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;
(x) 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;
(xi) 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;
(xii) Liens securing Indebtedness incurred in reliance on clause (vii)
of the second paragraph of the covenant described above under the caption
"--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock" so long as such Lien extends to no assets other than the assets
acquired;
(xiii) 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;
(xiv) 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;
(xv) leases or subleases granted to others that do not materially
interfere with the ordinary course of our business and any of our
Restricted Subsidiaries;
(xvi) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(xvii) 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;
(xiii) Liens on assets of Unrestricted Subsidiaries that secure Non-
Recourse Debt of Unrestricted Subsidiaries; and
(xix) Liens existing on the date of the Indenture, together with any
Liens securing Indebtedness incurred in reliance on clause (xiii) 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.
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"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
(i) directly attributable to an Asset Acquisition and calculated on a
basis that is consistent with Regulation S-X under the Securities Act or
(ii) 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 (i) and (ii), 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.
"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.
"S&P" means Standard & Poor's.
"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
(i) is guaranteed by us or any Restricted Subsidiary of ours
(excluding guarantees of Obligations (other than the principal of, and
interest on, Indebtedness)) pursuant to Standard Securitization
Undertakings,
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(ii) is recourse to or obligates us or any Restricted Subsidiary of
ours in any way other than pursuant to Standard Securitization
Undertakings or
(iii) 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 pursuant to 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.
"Seller Note" means the Junior Subordinated Promissory Notes issued by
Parent to the sellers in the Recapitalization.
"Senior Credit Facility" means that certain Credit Agreement, dated as of
the date of the indenture, by and among the Company, Parent, the Guarantors,
BankBoston, N.A. and Canadian Imperial Bank of Commerce, as Co-Agents, The
Chase Manhattan Bank, as Administrative Agent, and the financial institutions
party thereto, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case
as amended (including any amendment and restatement thereof), modified,
renewed, refunded, replaced, refinanced or restructured (including, without
limitation, any amendment increasing the amount of available borrowing
thereunder) from time to time and whether with the same or any other agent,
lender or group of lenders.
"Shareholders Agreement" means, collectively that certain shareholders
agreement and that certain voting agreement, each dated as of the date of the
indenture, among Bain Capital, Inc. and the other shareholders of Parent named
as parties therein from time to time.
"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.
"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.
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"Subsidiary" means, with respect to any Person,
(i) 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
(ii) 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.
"Tax Allocation Agreement" means the tax allocation agreement among the
Parent, any holding company of the Parent, us and our Subsidiaries dated as of
the date of the indenture.
"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.
"Treasury Rate" means, as of any redemption date, the yield to maturity as
of such redemption date of United States Treasury securities with a constant
maturity (as compiled and published in the most recent Federal Reserve
Statistical Release H. 15 (519) that has become publicly available at least
two Business Days prior to such redemption date (or, if such Statistical
Release is no longer published, any publicly available source of similar
market data)) most nearly equal to the period from such redemption date to
July 15, 2004; provided, however, that if the period from such redemption date
to July 15, 2004 is less than one year, the weekly average yield on actually
traded United States Treasury securities adjusted to a constant maturity of
one year shall be used.
"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.
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'
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Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described above under the caption
"Certain 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 "--Certain 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
(i) such Indebtedness is permitted under the covenant described under
the caption "--Certain 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,
(ii) such Subsidiary shall execute a Note Guarantee and deliver an
Opinion of Counsel, in each case, if required by the terms of the Indenture
and
(iii) no Default or Event of Default would be in existence following
such designation.
"U.S. Subsidiary" means any of our Restricted Subsidiaries that is
incorporated in a State in the United States or the District of Columbia.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing
(i) 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
(ii) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
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EXCHANGE OFFER
Terms of the Exchange Offer; Period for Tendering Old Notes
Upon the terms and subject to the conditions in this prospectus and in the
letter of transmittal, we will accept any and all notes validly tendered and
not withdrawn prior to 5:00 p.m., New York City time, on the expiration date.
We will issue $1,000 principal amount of exchange notes in exchange for each
$1,000 principal amount of outstanding notes accepted in the exchange offer.
Holders may tender some or all of their notes pursuant to the exchange offer.
However, notes may be tendered only in integral multiples of $1,000.
The form and terms of the exchange notes are the same as the form and terms
of the notes except that:
(1) the exchange notes have been registered under the Securities Act of
1933 and hence will not bear legends restricting their transfer thereof;
and
(2) the holders of the exchange notes will not be entitled to rights
under the registration rights agreement. These rights include the
provisions for an increase in the interest rate on the notes in some
circumstances relating to the timing of the exchange offer. All of these
rights will terminate when the exchange offer is terminated. The exchange
notes will evidence the same debt as the notes. Holders of exchange notes
will be entitled to the benefits of the indenture.
As of the date of this prospectus, $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.
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 such facsimile,
together with the notes and any other required documents, to the
exchange agent prior to 5:00 p.m., New York City time, on the expiration
date.
To tender notes effectively, the holder must complete the letter of
transmittal and other required documents and the exchange agent must receive
all the documents prior to 5:00 p.m., New York City time, on the expiration
date. Delivery of the notes may be made by book-entry transfer in accordance
with the procedures described below. The exchange agent must receive
confirmation of book-entry transfer prior to the expiration date.
The tender by a holder and the acceptance of the tender by us will
constitute agreement between the holder and us under the terms and subject to
the conditions in this prospectus and in the letter of transmittal.
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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 such holders.
Any beneficial owner whose notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should promptly instruct the registered holder to tender on the
beneficial owner's behalf. See "Instruction to Registered Holder and/or Book-
Entry Transfer Facility Participant from Owner" included with the letter of
transmittal.
An institution that is a member firm of the Medallion system must guarantee
signatures on a letter of transmittal or a notice of withdrawal unless the
notes are tendered:
(1) by a registered holder who has not completed the box entitled
"Special Registration Instructions" or "Special Delivery Instructions" on
the letter of transmittal; or
(2) for the account of member firm of the Medallion system.
If the letter of transmittal is signed by a person other than the
registered holder of any notes listed in that letter of transmittal, the notes
must be endorsed or accompanied by a properly completed bond power, signed by
the registered holder as the registered holder's name appears on the notes. An
institution that is a member firm of the Medallion System must guarantee the
signature.
Trustees, executors, administrators, guardians, attorneys-in-fact, offices
of corporations or others acting in a fiduciary or representative capacity
should indicate their capacities when signing the letter of transmittal or any
notes or bond powers. Evidence satisfactory to us of their authority to so act
must be submitted with the letter of transmittal.
We understand that the exchange agent will make a request promptly after
the date of this prospectus to establish accounts with respect to the notes at
the book-entry transfer facility, The Depository Trust Company, for the
purpose of facilitating the exchange offer. Subject to the establishment of
the accounts, any financial institution that is a participant in The
Depository Trust Company's system may make book-entry delivery of notes. To do
so, the financial institution should cause the book-entry transfer facility to
transfer the notes into the exchange agent's account with respect to the notes
following the book-entry transfer facility's procedures for transfer. Delivery
of the notes may be effected through book-entry transfer into the exchange
agent's account at the book-entry transfer facility. However, the holder must
transmit and the exchange agent must receive or confirm an appropriate letter
of transmittal properly completed and duly executed with any required
signature guarantee and all other required documents on or prior to the
expiration date, or, if the guaranteed delivery procedures described below are
complied with, within the time period provided under such procedures. Delivery
of documents to the book-entry transfer facility does not constitute delivery
to the exchange agent.
The Depositary and The Depository Trust Company have confirmed that the
exchange offer is eligible for The Depository Trust Company Automated Tender
Offer Program. Accordingly, The Depository Trust Company participants may
electronically transmit their acceptance of the exchange offer by causing The
Depository Trust Company to transfer notes to the depositary in accordance
with The Depository Trust Company's Automated Tender Offer Program procedures
for transfer. The Depository Trust Company will then send an "agent's message"
to the Depositary.
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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 such participant.
In the case of an agent's message relating to guaranteed delivery, the term
means a message transmitted by The Depository Trust Company and received by
the Depositary, which states that The Depository Trust Company has received an
express acknowledgment from the participant in The Depository Trust Company
tendering notes that such participant has received and agrees to be bound by
the notice of guaranteed delivery.
Notwithstanding the foregoing, in order to validly tender in the exchange
offer with respect to securities transferred through the Automated Tender
Offer Program, a The Depository Trust Company participant using Automated
Tender Offer Program must also properly complete and duly execute the
applicable letter of transmittal and deliver it to the Depositary.
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 such notification. Tenders of notes will not be deemed to have been made
until such defects or irregularities have been cured or waived. Any notes
received by the exchange agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned
by the exchange agent to the tendering holders, unless otherwise provided in
the letter of transmittal, as soon as practicable following the expiration
date.
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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 such notes 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) such 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 such notice of
withdrawal must:
(1) specify the name of the person having deposited the notes to be
withdrawn;
(2) identify the notes to be withdrawn (including the certificate
number(s) and principal amount of such notes, or, in the case of notes
transferred by book-entry transfer, the name and number of the account at
the book-entry transfer facility to be credited);
(3) be signed by the holder in the same manner as the original signature
on the letter of transmittal by which such 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 such notices. Our determination shall be final
and binding on all parties. We will not deem notes so withdrawn to have been
validly tendered for purposes of the exchange offer. We will not issue
exchange notes for withdrawn notes unless you validly retender the withdrawn
notes. We will return any notes which have been tendered but which are not
accepted for exchange to the holder of the notes at our cost as soon as
practicable after withdrawal, rejection of tender or termination of the
exchange offer. You may retender properly withdrawn notes by following one of
the procedures described above under the heading "Procedures for Tendering Old
Notes" at any time prior to the expiration date.
Conditions
Notwithstanding any other term of the exchange offer, we shall not be
required to accept for exchange, or exchange exchange notes for, any notes,
and may terminate or amend the exchange offer as provided in this prospectus
before the acceptance of the notes, if:
(1) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the exchange offer
which, in our sole judgment, might materially impair our ability to proceed
with the exchange offer or any development has occurred in any existing
action or proceeding which may be harmful to us or any of our subsidiaries;
or
(2) any law, statute, rule, regulation or interpretation by the staff of
the Securities and Exchange Commission is proposed, adopted or enacted,
which, in our sole judgment, might impair our ability to proceed with the
exchange offer or impair the contemplated benefits of the exchange offer to
us; or
(3) any governmental approval has not been obtained, which we believe,
in our sole discretion, is necessary for the consummation of the exchange
offer as outlined in this prospectus.
If we determine in our sole discretion that any of the conditions are not
satisfied, we may:
(1) refuse to accept any notes and return all tendered notes to the
tendering holders;
(2) extend the exchange offer and retain all notes tendered prior to the
expiration of the exchange offer, subject, however, to the rights of
holders to withdraw their notes; or
(3) waive such unsatisfied conditions of the exchange offer and accept
all properly tendered notes which have not been withdrawn.
Exchange Agent
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 pursuant to Rule 144A,
to a person inside the United States who is a qualified institutional buyer
according to Rule 144A under the Securities
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Act of 1933 or pursuant to another exemption from the registration
requirements of the Securities Act of 1933, based upon an opinion of
counsel reasonably acceptable to us;
(3) outside the United States to a foreign person in a transaction
meeting the requirements of Rule 904 under the Securities Act of 1933; or
(4) under an effective registration statement under the Securities Act
of 1933 in each case in accordance with any applicable securities laws of
any state of the United States.
Resales of the Exchange Notes
Based on interpretations by the staff of the Securities and Exchange
Commission in no-action letters issued to third parties, we believe that a
holder or other person who receives exchange notes will be allowed to resell
the exchange notes to the public without further registration under the
Securities Act of 1933 and without delivering a prospectus that satisfies the
requirements of Section 10 of the Securities Act of 1933. The holder (other
than a person that is our "affiliate" within the meaning of Rule 405 under the
Securities Act of 1933) who receives exchange notes in exchange for notes in
the ordinary course of business and who is not participating, need not intend
to participate or have an arrangement or understanding with any person to
participate in the distribution of the exchange notes. However, if any holder
acquires exchange notes in the exchange offer for the purpose of distributing
or participating in a distribution of the exchange notes, the holder cannot
rely on the position of the staff of the Securities and Exchange Commission
enunciated in the no-action letters or any similar interpretive letters. A
holder who acquires exchange notes in order to distribute them must comply
with the registration and prospectus delivery requirements of the Securities
Act of 1933 in connection with any resale transaction, unless an exemption
from registration is otherwise available. Further, each broker-dealer that
receives exchange notes for its own account in exchange for notes as a result
of market-making activities or other trading activities must acknowledge that
it will deliver a prospectus in connection with any resale of such exchange
notes.
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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 pursuant to the exchange offer
will not be treated as an "exchange" for federal income tax purposes because
the exchange notes will not be considered to differ materially in kind or
extent from the old notes. Rather, the exchange notes received by a holder
will be treated as a continuation of the old notes in the hands of 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.
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<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 any such resale 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
such methods of resale,
. at market prices prevailing at the time of resale,
. at prices related to such prevailing market prices or
. at negotiated prices.
Any resale may be made directly to purchasers or to or through brokers or
dealers. Brokers or dealers may receive compensation in the form of
commissions or concessions from any broker-dealer or the purchasers of any
such exchange notes. An "underwriter" within the meaning of the Securities Act
of 1933 includes
(1) any broker-dealer that resells exchange notes that were received by
it for its own account pursuant to the exchange offer or
(2) any broker or dealer that participates in a distribution of such
exchange notes.
Any profit on any resale of exchange notes and any commissions or concessions
received by any persons may be deemed to be underwriting compensation under
the Securities Act of 1933. The letter of transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act of 1933.
Based on interpretations by the staff of the Securities and Exchange
Commission in no-action letters issued to third parties, we believe that a
holder or other person who receives exchange notes will be allowed to resell
the exchange notes to the public without further registration under the
Securities Act of 1933 and without delivering to the purchasers of the
exchange notes a prospectus that satisfies the requirements of Section 10 of
the Securities Act of 1933. The holder (other than a person that is an
"affiliate" of 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.
98
<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 such no-action letters or any similar
interpretive letters. The holder must comply with the registration and
prospectus delivery requirements of the Securities Act of 1933 in connection
with any resale transaction. A secondary resale transaction should be covered
by an effective registration statement containing the selling security holder
information required by Item 507 or 508, as applicable, of Regulation S-K
under the Securities Act of 1933, unless an exemption from registration is
otherwise available.
Further, each broker-dealer that receives exchange notes for its own
account in exchange for old notes, where the old notes were acquired by such
participating broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of any exchange notes. We and each of our guarantor
subsidiaries have agreed, for a period of not less than 90 days from the
consummation of the exchange offer, to make this prospectus available to any
broker-dealer for use in connection with any such resale.
For a period of not less than 90 days after the expiration date we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests those
documents in the letter of transmittal. We and each of our guarantor
subsidiaries have jointly and severally agreed to pay all expenses incident to
the exchange offer, including the expenses of one counsel for the holders of
the old notes, other than commissions or concessions of any brokers or
dealers. We will indemnify the holders of the old notes against liabilities
under the Securities Act of 1933, including any broker-dealers.
LEGAL MATTERS
Certain legal matters with respect to the issuance of the exchange notes
will be passed upon for us by Kirkland & Ellis, New York, New York, 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.
Certain partners of Kirkland & Ellis indirectly own a portion of the equity
of Holdings.
EXPERTS
The consolidated financial statements of Mattress Discounters Corporation
and 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 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 from Heilig-Meyers Company
applicable to the Company) 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. (the "Company") 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,
99
<PAGE>
as stated in their 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 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), 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.
100
<PAGE>
AVAILABLE INFORMATION
We and our guarantor subsidiaries have filed with the Securities and
Exchange Commission a Registration Statement on Form S-4, the "Exchange Offer
Registration Statement," which term shall encompass all amendments, exhibits,
annexes and schedules thereto, pursuant to the Securities Act of 1933, and the
rules and regulations promulgated thereunder, covering the exchange notes
being offered. This prospectus does not contain all the information in the
exchange offer registration statement. For further information with respect to
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 are not necessarily complete. For a
more complete understanding and description of each contract, agreement or
other document filed as an exhibit to the exchange offer registration
statement, we encourage you to read the documents contained in the exhibits.
The exchange offer registration statement, including the exhibits thereto,
can be inspected and copied at the public reference facilities maintained by
the Securities and Exchange Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Regional Offices of the Securities and
Exchange Commission at Seven World Trade Center, Suite 1300, New York, New
York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such materials can be obtained from the Public Reference
Section of the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Securities and
Exchange Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission. The address of
such Web site is: http://www.sec.gov.
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 pursuant to the informational requirements of the Securities
Exchange Act of 1934.
Under the indenture, we shall file with the trustee annual, quarterly and
other reports after we file such reports with the Securities and Exchange
Commission. Annual reports delivered to the trustee and the holders of
exchange notes will contain financial information that has been examined and
reported upon, with an opinion expressed by an independent public accountant.
We will also furnish such other reports as may be required by law.
Information contained in this prospectus contains "forward-looking
statements" which can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "will,"
101
<PAGE>
"should," or "anticipates" or the negative thereof or other similar
terminology, or by discussions of strategy. Our actual results could differ
materially from those anticipated by any such forward-looking statements as a
result of factors described in the "Risk Factors" beginning on page 10 and
elsewhere in this prospectus.
The market and industry data presented in this prospectus are based upon
third-party data, including information compiled by the International Sleep
Products Association and Furniture Today, market research reports regarding
consumer habits, analyst reports and other publicly available information.
While we believe that such estimates are reasonable and reliable, estimates
cannot always be verified by information available from independent sources.
Accordingly, readers are cautioned not to place undue reliance on such market
share data.
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 appearng
in this prospectus are the property of their respective holders.
102
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Mattress Discounters Corporation and Subsidiaries
Report of Independent Accountants......................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of January 1, 2000 and February 28,
1999................................................................... F-4
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-5
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-6
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-7
Notes to Consolidated Financial Statements.............................. F-8
Mattress Discounters Corporation and T.J.B., Inc.
Combined Financial Statements:
Independent Auditors' Report............................................ F-25
Combined Balance Sheet as of July 1, 1997............................... F-26
Combined Statement of Operations and Retained Earnings for the period
from December 29, 1996 to July 1, 1997................................. F-27
Combined Statement of Cash Flows for the period from December 29, 1996
to July 1, 1997........................................................ F-28
Notes to Combined Financial Statements.................................. F-29
</TABLE>
F-1
<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-2
<PAGE>
[LOGO OF DELOITTE & TOUCHE]
INDEPENDENT AUDITORS' REPORT
To the Stockholder and Board of Directors
Mattress Discounters
Richmond, Virginia
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
June 5, 1999 (March 27, 2000
as to paragraph 11 of
note 2)
F-3
<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-4
<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............ 13,743,017 103,866,763 156,598,163 141,098,503
----------- ------------ ------------ ------------
Gross profit........... 6,994,869 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
Nonrecurring operating
expenses................ -- -- -- 4,556,313
----------- ------------ ------------ ------------
Income from
operations............ 1,703,101 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............. 1,202,072 (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-5
<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-6
<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-7
<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-8
<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, and 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 fair market value of the stock at
that date. 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-9
<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
F-10
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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--Cost incurred for advertising are expensed in the period
in which the advertising takes place. 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-11
<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-12
<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-13
<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-14
<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-15
<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 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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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>
Period(/1/) Retail Manufacturing
----------- -------- --------------------------
Retail Interco.
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-22
<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 9 3/4% Senior Notes are
guaranteed, fully, jointly and severally, and unconditionally, on a senior
subordinated basis by all of the Mattress Discounters' current and future,
direct and indirect subsidiaries (the "Subsidiary Guarantors"). 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-23
<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-24
<PAGE>
Logo of Deloitte & Touche, LLP
INDEPENDENT AUDITORS' REPORT
To the Stockholder and Board of Directors
Mattress Discounters
Richmond, Virginia
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
June 5, 1999 (March 27, 2000
as to paragraph 12 of
note 1)
F-25
<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-26
<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.............................. 27,121,876
------------
INCOME FROM OPERATIONS........................................... 310,864
OTHER INCOME (EXPENSE):
Interest income, net of interest expense....................... 328,336
Other income................................................... 91,022
Other expense.................................................. (644,854)
------------
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-27
<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-28
<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.
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-29
<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--Cost incurred for advertising are expensed when the
initial advertising takes place.
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-30
<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-31
<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-32
<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 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 certain severance benefits 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.
* * * * * *
F-33
<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 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 February 1, 2000.
Mattress Discounters Corporation
By: /s/ Stephen A. Walker
----------------------------------
Name:Stephen A. Walker
Title: Chief Executive Officer
and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen A. Walker and James B. Hirshorn and
each of them, as true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead,
in any and all capacities (including his capacity as a director and/or officer
of Mattress Discounters Corporation), to sign any or all amendments (including
post-effective amendments) to this registration statement and any subsequent
registration statement filed pursuant to Rule 462(b) under the Securities Act
of 1933, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-4 has been signed by the following persons in
the capacities indicated on February 1, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Stephen A. Walker Chief Executive Officer and
___________________________________________ Director (principal
Stephen A. Walker executive officer)
/s/ James B. Hirshorn Chief Financial Officer and
___________________________________________ Director
James B. Hirshorn (principal financial
officer)
/s/ Joshua Bekenstein Director
___________________________________________
Joshua Bekenstein
/s/ Michael Krupka Vice President and Director
___________________________________________
Michael Krupka
Director
___________________________________________
Andrew S. Janower
Director
___________________________________________
Joe L. Gonzalez
</TABLE>
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this 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 February 1, 2000.
The Bedding Experts, Inc.
By: /s/ Stephen A. Walker
----------------------------------
Name:Stephen A. Walker
Title: Chief Executive Officer
and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen A. Walker and James B. Hirshorn and
each of them, as true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead,
in any and all capacities (including his capacity as a director and/or officer
of The Bedding Experts, Inc.), to sign any or all amendments (including post-
effective amendments) to this registration statement and any subsequent
registration statement filed pursuant to Rule 462(b) under the Securities Act
of 1933, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-4 has been signed by the following persons in
the capacities indicated on February 1, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Stephen A. Walker Chief Executive Officer and
___________________________________________ Director (principal
Stephen A. Walker executive officer)
/s/ James B. Hirshorn Vice President, Secretary,
___________________________________________ Treasurer and Director
James B. Hirshorn (principal financial
officer)
/s/ Joshua Bekenstein Director
___________________________________________
Joshua Bekenstein
/s/ Michael Krupka Vice President and Director
___________________________________________
Michael Krupka
Director
___________________________________________
Andrew S. Janower
Director
___________________________________________
Joe L. Gonzalez
</TABLE>
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this 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 February 1, 2000.
T.J.B., Inc.
By: /s/ Stephen A. Walker
----------------------------------
Name:Stephen A. Walker
Title: Chief Executive Officer
and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen A. Walker and James B. Hirshorn and
each of them, as true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead,
in any and all capacities (including his capacity as a director and/or officer
of T.J.B., Inc.), to sign any or all amendments (including post-effective
amendments) to this registration statement and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-4 has been signed by the following persons in
the capacities indicated on February 1, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Stephen A. Walker Chief Executive Officer and
___________________________________________ Director (principal
Stephen A. Walker executive director)
/s/ James B. Hirshorn Vice President, Secretary,
___________________________________________ Treasurer and Director
James B. Hirshorn (principal financial
officer)
/s/ Joshua Bekenstein Director
___________________________________________
Joshua Bekenstein
/s/ Michael Krupka Vice President and Director
___________________________________________
Michael Krupka
Director
___________________________________________
Andrew S. Janower
Director
___________________________________________
Joe L. Gonzalez
</TABLE>
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.***
</TABLE>
II-7
<PAGE>
<TABLE>
<C> <S>
10.11 Indemnity Agreement, dated May 28, 1999 by and among Heilig-Meyers
Company, Bain Capital, Inc., and Mattress Discounters Acquisition
Corporation.*
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 Reserved.
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, 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 Reserved.
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, 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 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,
31, 1994 30, 1995 28, 1996 1997 1997 1998 1999 1998 2000
-------- -------- -------- ------ -------- ------------ ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before provision for
income taxes............... $8,100 $3,611 $4,422 $ 85 $2,914 $14,815 $22,052 $19,504 $ 4,286
Plus: fixed charges.......... 3,929 4,376 4,785 2,333 467 4,404 6,085 4,435 13,466
------- ------- ------- ------ ------- ------- ------- ------- -------
12,029 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. $ (661) $ (624) $ (548) $ (328) $ (9) $ (88) $ (128) $ (126) $ 7,836
One-third of rent
and expense(1)............ 4,590 5,000 5,333 2,661 476 4,492 6,213 5,061 5,630
------- ------- ------- ------ ------- ------- ------- ------- -------
$ 3,929 $4,376 $4,785 $2,333 $ 467 $4,404 $6,085 4,935 13,466
------- ------- ------- ------ ------- ------- ------- ------- -------
Earnings to fixed charges
ratio...................... 3.06 1.83 1.92 1.04 7.24 4.36 4.62 4.95 1.32
======= ======= ======= ====== ======= ======= ======= ======= =======
</TABLE>
- ------------------------------------
COMPUTATION OF PRO FORMA RATIO OF EARNINGS TO FIXED
CHARGES AFTER ADJUSTMENT FOR ISSUANCE OF SENIOR
SUBORDINATED NOTES
---------------------------------------------------
<TABLE>
<CAPTION>
Pro forma
--------------------------------------------
Year Ended Ten Months Ended
February 28, December 31, January 1,
1999 1998 2000
------------- ------------ -----------
<S> <C> <C> <C>
Earnings:
Income before provision for
income taxes............. 2,534 3,174 (326)
Plus: fixed charges........ 25,761 21,350 22,073
------------- ------ ------
28,295 24,524 21,747
============= ====== ======
Fixed Charges:
Interest expense (income),
net including amortization
of debt discounts and debt
issuance expense.......... 19,548 16,289 16,443
One-third of rent expense. (1) 6,213 5,061 5,630
------------ ------ ------
25,761 21,350 22,073
------------ ------ ------
Earnings to fixed charges
ratio.................... 1.10 1.15 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. 1 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 11 of Note 2) 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. 1 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) 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
March 28, 2000
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this 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
March 28, 2000
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 10-MOS
<FISCAL-YEAR-END> FEB-28-1999 JAN-01-2000
<PERIOD-START> MAR-01-1998 MAR-01-1999
<PERIOD-END> FEB-28-1999 JAN-01-2000
<CASH> 1,365,805 7,511,772
<SECURITIES> 0 0
<RECEIVABLES> 5,681,413 5,333,775
<ALLOWANCES> 0 0
<INVENTORY> 15,590,944 16,257,356
<CURRENT-ASSETS> 31,168,300 33,857,575
<PP&E> 22,535,443 24,865,864
<DEPRECIATION> 11,695,629 14,282,467
<TOTAL-ASSETS> 101,488,379 202,932,703
<CURRENT-LIABILITIES> 30,030,811 36,236,675
<BONDS> 425,883 133,373,541
0 0
0 0
<COMMON> 29,050 29,050
<OTHER-SE> 66,035,173 27,663,624
<TOTAL-LIABILITY-AND-EQUITY> 101,488,379 202,932,703
<SALES> 245,460,833 218,768,387
<TOTAL-REVENUES> 245,460,833 218,768,387
<CGS> 156,598,163 141,098,503
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 66,939,148 65,548,961
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (128,324) 7,835,595
<INCOME-PRETAX> 22,051,846 4,285,328
<INCOME-TAX> 9,361,576 2,181,218
<INCOME-CONTINUING> 12,690,270 2,104,110
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 12,690,270 2,104,110
<EPS-BASIC> 0.00 0.00
<EPS-DILUTED> 0.00 0.00
</TABLE>
