<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 2000
Commission File No. 333-95945
MATTRESS DISCOUNTERS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
52-1710722
(I.R.S. Employer Identification No.)
9822 Fallard Court
Upper Marlboro, MD 20722
(Address of principal executive offices)
(301) 856-6755
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
No X Yes
---------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at 07/01/00 Class
----------------------- -----
100 Common Stock, $.01 Par Value
<PAGE>
MATTRESS DISCOUNTERS CORPORATION
--------------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
<S> <C> <C>
Consolidated Balance Sheets
as of January 1, 2000 and July 1, 2000 (unaudited)....................................................... 3
Consolidated Statements of Operations (unaudited)
For the Three Months and Six Months Ended
June 30, 1999 and July 1, 2000........................................................................... 4
Consolidated Statements of
Cash Flows - (unaudited) For the Six Months
Ended June 30, 1999 and July 1, 2000..................................................................... 5
Consolidated Statement of Stockholder's
Equity - (unaudited) For the Six Months
Ended July 1, 2000....................................................................................... 6
Notes to Consolidated
Financial Statements (Unaudited)......................................................................... 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................................... 10
Item 3 Quantitative and Qualitative Disclosures About
Market Risks............................................................................................. 14
PART II OTHER INFORMATION
Item 1 Legal Proceedings........................................................................................ 15
Item 2 Changes in Securities.................................................................................... 15
Item 3 Defaults upon Senior Securities.......................................................................... 15
Item 4 Submission of Matters to a Vote of Security Holders...................................................... 15
Item 5 Other Information........................................................................................ 15
Item 6 Exhibits and Reports on Form 8-K......................................................................... 15
Signatures......................................................................................................... 16
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of January 1, 2000 and July 1, 2000
<TABLE>
<CAPTION>
<S> <C> <C>
January 1, July 1,
---------- -------
2000 2000
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 7,511,772 $ 10,247,833
Accounts receivable..................................................... 5,333,775 10,069,750
Inventories............................................................. 16,257,356 17,750,927
Prepaid expenses and other current assets............................... 828,111 692,436
Due from affiliate...................................................... 3,086,561 2,042,539
Deferred tax asset...................................................... 840,000 840,000
------------ ------------
Total current assets................................................. 33,857,575 41,643,485
Property and equipment, net............................................... 10,583,397 10,475,974
Debt issue costs and other assets......................................... 10,423,837 10,277,776
Goodwill and other intangibles, net....................................... 56,142,894 55,383,904
Deferred tax asset........................................................ 91,925,000 92,173,686
------------ ------------
Total assets......................................................... $202,932,703 $209,954,825
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt....................................... $ 267,755 $ 177,525
Accounts payable........................................................ 17,067,993 22,795,913
Accrued expenses........................................................ 19,403,490 23,736,588
------------ ------------
Total current liabilities............................................ 36,739,238 46,710,026
Long-term debt, excluding current portion................................. 133,373,541 133,595,432
Other noncurrent liabilities.............................................. 4,421,813 4,125,075
------------ ------------
Total liabilities.................................................... 174,534,592 184,430,533
------------ ------------
Stockholder's equity:
Common stock............................................................ 1 1
Additional paid-in capital.............................................. 29,845,297 27,145,296
Accumulated deficit..................................................... (1,447,187) (1,621,005)
------------ ------------
Total stockholder's equity 28,398,111 25,524,292
------------ ------------
Total liabilities and stockholder's equity........................... $202,932,703 $209,954,825
============ ============
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended
June 30, 1999 and July 1, 2000
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
------------------- ------------------- ----------------- -----------------
June 30, 1999 July 1, 2000 June 30, 1999 July 1, 2000
------------------- ------------------- ----------------- -----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales...................................... $63,692,629 $66,197,046 $129,060,457 $138,026,941
Cost of sales.................................. 40,767,677 41,424,921 84,424,052 88,348,231
----------- ----------- ------------ ------------
Gross profit.............................. 22,924,952 24,772,125 44,636,405 49,678,710
General and administrative expenses............ 16,258,302 19,275,024 33,661,989 40,406,596
----------- ----------- ------------ ------------
Income from operations.................... 6,666,650 5,497,101 10,974,416 9,272,114
Other income (expense):
Interest income.......................... 23,665 191,616 43,776 317,392
Interest expense......................... (14,606) (5,041,010) (31,200) (10,012,010)
----------- ----------- ------------ ------------
Income (loss) before provision for
(benefit from) income taxes................ 6,675,709 647,707 10,986,992 (422,504)
Provision for (benefit from) income taxes...... 3,397,914 346,351 5,391,246 (248,686)
----------- ----------- ------------ ------------
Net income (loss)......................... $ 3,277,795 $ 301,356 $ 5,595,746 $ (173,818)
=========== =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1999 and July 1, 2000
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
---------------- ----------------
June 30, 1999 July 1, 2000
------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,595,746 $ (173,818)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization............................................... 2,469,776 2,364,038
Accretion of discount on Senior Notes....................................... --- 279,849
Amortization of debt issue costs............................................ --- 663,066
Deferred income taxes....................................................... 1,709,112 (248,686)
Loss (gain) on disposition of property and equipment........................ 16,353 (21,977)
Changes in operating assets and liabilities:
Accounts receivable...................................................... (4,349,833) (4,735,975)
Inventories.............................................................. (1,490,983) (1,493,571)
Prepaid expenses and other current assets................................ (9,901) 135,675
Due from affiliate....................................................... 4,106,829 1,044,022
Accounts payable......................................................... 3,554,229 5,727,920
Accrued expenses......................................................... (6,388,570) 4,333,098
Other noncurrent liabilities............................................. (248,976) (296,738)
---------- ---------
Net cash provided by operating activities: 4,963,782 7,576,903
---------- ---------
Cash flows from investing activities:
Property and equipment expenditures......................................... (1,803,763) (1,524,209)
Expenditures for intangible assets.......................................... (311,382) ---
Other....................................................................... 3,487 54,073
---------- ----------
Net cash used in investing activities........................... (2,111,658) (1,470,136)
---------- ----------
Cash flows from financing activities:
Payments on long-term debt and capital lease obligations.................... (139,159) (148,188)
Payment of debt issue costs................................................. --- (522,517)
Repurchase of stock options................................................. --- (2,700,001)
---------- ----------
Net cash used in financing activities........................... (139,159) (3,370,706)
---------- ----------
Net increase in cash and cash equivalents 2,712,965 2,736,061
Cash and cash equivalents, beginning of period........................................ (1,271,425) 7,511,772
----------- -----------
Cash and cash equivalents, end of period.............................................. $ 1,441,540 $10,247,833
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
MATTRESS DISCOUNTERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
For the Six Months Ended July 1, 2000 (unaudited)
<TABLE>
<CAPTION>
Additional Total
---------- -----
Common Paid-In Accumulated Stockholder's
------- ------- ----------- -------------
Stock Capital Deficit Equity
----- ------- ------- ------
<S> <C> <C> <C> <C>
Balances as of January 1, 2000........... $ 1 $29,845,297 $(1,447,187) $28,398,111
Repurchase of stock options (2,700,001) (2,700,001)
Net loss................................. (173,818) (173,818)
----------- ------------ ----------- -----------
Balances as of July 1, 2000.............. $ 1 $27,145,296 $(1,621,005) $25,524,292
=========== ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
-6-
<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 July 1, 2000, and the periods presented herein include the
accounts of Mattress Discounters Corporation ("Mattress Discounters"), and its
wholly owned subsidiaries T.J.B., Inc. ("T.J.B."), and The Bedding Experts,
Inc. ("Bedding Experts") (collectively referred to as the "Company"). All
significant intercompany accounts and transactions of the Company have been
eliminated. The financial position and operating results of the entities for
periods prior to August 5, 1999, were combined in the financial statements as
each entity was under common ownership and control by Heilig-Meyers Company
("Heilig-Meyers") through August 5, 1999. Immediately prior to the closing of
the recapitalization of the Company's parent on August 6, 1999, Heilig-Meyers
contributed all of the issued and outstanding stock of Mattress Discounters,
T.J.B. and Bedding Experts to the capital of Heilig-Meyers Associates, Inc., a
Virginia corporation ("HMA"). Immediately after this capital contribution,
Mattress Discounters, T.J.B. and Bedding Experts became wholly owned
subsidiaries of HMA. Immediately after the recapitalization of the Company's
parent, the issued and outstanding stock of T.J.B. and Bedding Experts was
contributed to the capital of Mattress Discounters. Accordingly, subsequent to
August 6, 1999, the financial statements have been consolidated. For consistency
of presentation, the combined financial statements throughout this quarterly
report are referred to as consolidated, rather than combined financial
statements. However, the existence of common ownership and control of the
entities through August 5, 1999, could have resulted in operating results or
financial position of the entities that would be significantly different from
those that would have been achieved if the enterprises were autonomous.
The accompanying unaudited consolidated financial statements should be read
together with the audited consolidated financial statements for the ten-month
period ended January 1, 2000.
The accompanying unaudited consolidated financial statements contain all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position of the Company at July 1, 2000, and its results of
operations and cash flows for the periods presented herein. All adjustments in
the periods presented herein are normal and recurring in nature.
On November 5, 1999, the Company elected to change its fiscal year end from
the last day of February to the closest Saturday to December 31, beginning with
the year ended January 1, 2000.
On July 28, 2000, the Company entered into 15 leases in the Chicago market.
2. Severance Expense
During the six-months ended July 1, 2000, the Company entered into
separation agreements with certain of the Company's executives, in connection
with the resignations of those executives. The Company has paid and recorded
severance expense of approximately $1.8 million during the first six months of
calendar 2000, including $90,000 from the repurchase of Holdings' stock
options, and paid approximately $2.7 million to repurchase the Holdings' stock
options granted to these executives in connection with the Recapitalization.
The repurchase of stock options has been recorded as a reduction of additional
paid-in capital.
3. Inventories
Inventories are summarized as follows, as of January 1, 2000 and July 1,
2000:
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<PAGE>
<TABLE>
<CAPTION>
January 1, 2000 July 1, 2000
(Unaudited)
<S> <C> <C>
Finished Goods $14,291,184 $16,282,239
Work in Process 175,876 182,567
Raw Materials 1,790,296 1,286,121
----------- -----------
$16,257,356 $17,750,927
=========== ===========
</TABLE>
4. Income Taxes
The provision for income taxes in the consolidated financial statements for
periods prior to August 6, 1999, reflect tax calculations on a stand-alone basis
and do not reflect actual taxes owed by the Company on the Heilig-Meyers Company
consolidated tax return through August 5, 1999.
The effective rate for income taxes for the six months ended July 1, 2000 was
58.9%, compared to 49.1% for the six months ended June 30, 1999, due to
nondeductible goodwill and state income taxes. The increase in the effective
income tax rate during the six months ended July 1, 2000, is a result of
increased nondeductible expenses relative to pretax income (loss).
5. Segment Information
Retail--Sale of mattresses and bedding products through 262 and 241 retail
locations as of July 1, 2000 and June 30, 1999, respectively.
Manufacturing--Manufacture and sale of mattresses, box springs and
foundations to the retail segment and to Heilig-Meyers and affiliates at
current market prices.
The accounting policies of these segments are the same as those described in
the summary of significant accounting policies. All intersegment sales prices
are market-based. The Company evaluates performance based on the operating
earnings of the respective business units.
Summarized unaudited financial information concerning the Company's reportable
segments is shown in the following table (amounts in thousands):
<TABLE>
<CAPTION>
Interco.
Period Retail Manufacturing -------- Consolidated
------ ------ -------------------------- Elim. ------------
-----
Retail
------
Segment Affiliates Total
-------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues....... 3 months ended 7/1/00 $ 62,404 $ 9,943 $ 3,793 $13,736 $ 9,943 $ 66,197
3 months ended 6/30/99 60,803 10,097 2,889 12,986 10,097 63,692
6 months ended 7/1/00 125,573 19,564 12,454 32,018 19,564 138,027
6 months ended 6/30/99 117,491 18,892 11,569 30,461 18,892 129,060
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Corporate/
Period Retail Manufacturing ---------- Consolidated
------- ------ ------------- Other ------------
-----
<S> <C> <C> <C> <C> <C>
Segment profit/(1)/........... 3 months ended 7/1/00 $ 2,802 $2,695 $ -- $ 5,497
3 months ended 6/30/99 4,273 2,394 6,667
6 months ended 7/1/00 2,747 6,525 -- 9,272
6 months ended 6/30/99 5,498 5,476 -- 10,974
Depreciation and 3 months ended 7/1/00 925 234 -- 1,159
Amortization.............. 3 months ended 6/30/99 977 257 -- 1,234
6 months ended 7/1/00 1,869 495 -- 2,364
6 months ended 6/30/99 1,933 537 -- 2,470
Capital expenditures.......... 3 months ended 7/1/00 965 89 -- 1,054
3 months ended 6/30/99 354 237 -- 591
6 months ended 7/1/00 1,375 149 -- 1,524
6 months ended 6/30/99 1,403 401 -- 1,804
Identifiable assets/(2)/...... 7/1/2000 24,218 4,009 181,728 209,955
6/30/1999 25,184 4,044 71,311 100,539
</TABLE>
----------------
(1) Segment profit represents earnings before interest and the provision for
income taxes.
(2) Identifiable assets represent only inventories and net property and
equipment in the retail and manufacturing segments. All other assets are
included in Corporate/Other. For management purposes, depreciation and
amortization of corporate identifiable assets are allocated to the retail
and manufacturing segments.
6. Summarized Financial Information
The Company's Senior Credit Facility and Senior Notes are guaranteed, fully,
jointly and severally, and unconditionally by all of the Mattress Discounters'
current and future, direct and indirect subsidiaries. Each of Mattress
Discounters' current subsidiaries is wholly owned. The following table sets
forth the "summarized financial information" of Mattress Discounters ("Parent").
<TABLE>
<CAPTION>
January 1, 2000 July 1, 2000
--------------- ------------
(unaudited)
(in thousands) (in thousands)
<S> <C> <C>
Balance Sheet Data:
Current assets $ 25,872 $ 30,722
Noncurrent assets 164,681 164,318
Current liabilities 26,723 33,974
Noncurrent liabilities 135,432 135,542
Total stockholder's equity 28,398 25,524
Three-months Three-months Six-months Six-months
ended ended ended ended
June 30, 1999 July 1, 2000 June 30, 1999 July 1, 2000
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
(in thousands) (in thousands) (in thousands) (in thousands)
Operating Data:
Net sales $37,211 $ 55,185 $ 77,630 $88,378
Gross profit 14,091 19,688 27,523 32,762
Net income (loss) 2,115 301 3,783 (174)
</TABLE>
-9-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Mattress Discounters Corporation (MDC) operates in two segments: mattress
retailing and mattress manufacturing. We currently operate our retail business
through a nationwide network of 262 stores in 15 markets. Our manufacturing
segment consists of three manufacturing facilities that produce mattresses for
sale in our retail stores under the Comfort Source brand and for third parties
under separate brands. During the six months ended July 1, 2000, our
manufacturing facilities provided 29% of the cost of our retail purchases.
On August 6, 1999, our parent company, Mattress Holding Corporation or
Holdings, consummated a merger and recapitalization pursuant to a transaction
agreement, dated as of May 28, 1999, among Heilig-Meyers, Heilig-Meyers
Associates, Inc. and MD Acquisition Corporation, a Virginia corporation owned by
various Bain Capital investment funds and affiliates and other institutional
investors.
A portion of the following discussion and analysis of financial condition and
results of operations relates to periods prior to the completion of the
transactions contemplated by the transaction agreement. As a result of
consummating a merger and recapitalization of our parent, we entered into a
financing arrangement and accordingly, have a different capital structure.
Accordingly, the results of operations subsequent to the consummation of the
transactions contemplated by the transaction agreement will not necessarily be
comparable to prior periods.
The financial position and operating results of the entities as of dates and
for periods ended subsequent to January 3, 1998, but prior to August 5, 1999,
were combined in the financial statements as each entity was under common
ownership and control by Heilig-Meyers through August 5, 1999. Effective
August 6, 1999, the financial statements have been prepared on a consolidated
basis pursuant to the transactions discussed elsewhere in this quarterly report.
Three Months Ended July 1, 2000 Compared to Three Months Ended June 30, 1999
Net sales: The Company's net sales for the three months ended July 1, 2000
increased $2.5 million or 3.9% to $66.2 million from $63.7 million for the three
months ended June 30, 1999. The increase represents an increase in our retail
net sales of $1.6 million and an increase of $0.9 in the external net sales of
our manufacturing operation. Our net sales from retail operations, manufacturing
sales to our retail operations, and manufacturing sales to external retailers
were $62.4 million, $9.9 million, and $3.8 million, respectively, in the three
months ended July 1, 2000, and $60.8 million, $10.1 million and $2.9 million,
respectively, in the three months ended June 30, 1999.
Overall, MDC's retail sales for the three months ended July 1, 2000 increased
$1.6 million or 2.6%. The increase in retail sales for the three months ended
July 1, 2000 is attributable to (1) a $3.4 million net increase resulting from
net store openings since June 30, 1999, and (2) a $1.8 million decrease in
comparable store sales. The decrease in comparable store sales is comprised of
a 0.6% increase in our markets excluding Chicago for the three months ended
July 1, 2000, offset by a 27.7% decrease in comparable store sales in Chicago
for the three months ended July 1, 2000. Most of the decline in Chicago's sales
occurred in April, when the Company chose not to run a low margin promotion that
had been utilized in the prior year. In May and June, Chicago's comparable store
sales declines were 9.4% and 9.1%, respectively. Management continues to drive
key initiatives to improve Chicago's operating performance.
Net sales generated by the Company's manufacturing operations during the three
months ended July 1, 2000, increased $0.7 million to $13.7 million from $13.0
million for the three months ended June 30, 1999. The majority of manufacturing
output is consumed by our retail operations. The output related to retail sales
decreased by $0.2 million due primarily to a shift in mix from Comfort Source to
Sealy products. Sales to external retailers increased $0.9 million to $3.8
million from $2.9 million.
-10-
<PAGE>
Gross profit: Gross profit for the three months ended July 1, 2000 increased
$1.9 million or 8.1% to $24.8 million from $22.9 million for the three months
ended June 30, 1999. As a percentage of net sales, gross profit was 37.4% in
the three months ended July 1, 2000, compared to 36.0% in the three months ended
June 30, 1999. Retail gross profit for the three months ended July 1, 2000 was
$21.7 million, an increase of $1.5 million or 7.6%, while manufacturing gross
profit was $3.1 million, an increase of $0.3 million or 11.5% over last year.
Retail gross profit expressed as a percentage of net retail sales was 34.7% in
the three months ended July 1, 2000, compared to 33.2% in the three months ended
June 30, 1999. The increase in the gross profit percentage is primarily due to a
shift in mix to higher margin bedding products and improved margins on the new
product line-up.
Manufacturing gross profit expressed as a percentage of manufacturing sales
was 22.3% in the three months ended July 1, 2000, compared to 21.2% in the three
months ended June 30, 1999. This increase in gross profit percentage is
primarily due to a shift to higher price point and higher margin products and
lower materials costs during the three months ended July 1, 2000, compared to
the three months ended June 30, 1999.
General and administrative expenses: General and administrative expenses for
the three months ended July 1, 2000 increased $3.0 million or 18.6% to $19.3
million from $16.3 million for the three months ended June 30, 1999. As a
percentage of net sales, general and administrative expenses were 29.0% in the
three months ended July 1, 2000, compared to 25.7% in the three months ended
June 30, 1999. The increase is a result of increased payroll expense largely
from $0.4 million in severance costs and $0.8 million in increased sales
commissions due to higher overall sales and improved margins, as well as
increased consulting/management fees, and employee recruiting expenses.
Interest expense: Interest expense for the three months ended July 1, 2000
increased to $5.0 million due to interest expense on the Senior Notes.
Provision for income taxes: The effective income tax rate for the three
months ended July 1, 2000, was 53.5% compared to 50.9% for the three months
ended June 30, 1999. The Company's effective tax rate differs from the federal
statutory rate primarily as a result of non-deductible goodwill. The increase
in the effective income tax rate during the three months ended July 1, 2000, is
a result of increased nondeductible expenses relative to pretax income.
Net income: Primarily as a result of the reasons discussed above, net income
decreased to $0.3 million or 0.5% of net sales in the three months ended July 1,
2000, from $3.3 million or 5.1% of net sales in the three months ended June 30,
1999.
Six Months Ended July 1, 2000 Compared to Six Months Ended June 30, 1999
Net sales: Net sales for the six months ended July 1, 2000 increased $8.9
million or 6.9% to $138.0 million from $129.1 million for the six months ended
June 30, 1999. The increase is comprised of greater retail net sales of $8.1
million and an increase of $0.9 million in the external net sales of our
manufacturing operation. Net sales from retail operations, manufacturing sales
to our retail operations, and manufacturing sales to external retailers were
$125.6 million, $19.6 million, and $12.5 million, respectively, in the six
months ended July 1, 2000, and $117.5 million, $18.9 million and $11.6 million,
respectively, in the six months ended June 30, 1999.
Overall, retail sales for the six months ended July 1, 2000 increased $8.1
million or 6.9%. The increase in retail sales for the six months ended July 1,
2000 is attributable to (1) a $6.5 million net increase resulting from net store
openings since June 30, 1999, and (2) a $1.6 million increase in comparable
store sales. The increase in comparable store sales is comprised of a 4.6%
increase in our markets excluding Chicago for the six months ended July 1, 2000,
offset by a 19.2% decrease in comparable store sales in Chicago for the six
months ended July 1, 2000. Management continues to drive key initiatives to
improve Chicago's operating performance.
Net sales generated by manufacturing operations during the six months ended
July 1, 2000 increased $1.6 million to $32.0 million from $30.5 million for the
six months ended June 30, 1999. The majority of our manufacturing output is
consumed by our retail operations. The output related to retail sales increased
by $0.7
-11-
<PAGE>
million due primarily to overall growth in retail sales, which was offset by a
shift in mix from Comfort Source to Sealy products. Sales to external retailers
increased $0.9 million to $12.5 from $11.6 million.
Gross profit: Gross profit for the six months ended July 1, 2000 increased
$5.0 million or 11.3% to $49.7 million from $44.6 million for the six months
ended June 30, 1999. As a percentage of net sales, gross profit was 36.0% in
the six months ended July 1, 2000, compared to 34.6% in the six months ended
June 30, 1999. Retail gross profit for the six months ended July 1, 2000 was
$42.2 million, an increase of $3.7 million or 9.7%, while manufacturing gross
profit was $7.5 million, an increase of $1.3 million or 21.3% over last year.
Retail gross profit expressed as a percentage of net retail sales was 33.6% in
the six months ended July 1, 2000, compared to 32.7% in the six months ended
June 30, 1999. The increase in the gross profit percentage is primarily due to a
shift in mix to higher margin bedding products and improved margins on the new
product line-up.
Manufacturing gross profit expressed as a percentage of manufacturing sales
was 23.4% in the six months ended July 1, 2000, compared to 20.3% in the six
months ended June 30, 1999. This increase in gross profit percentage is
primarily due to shift to higher price point and higher margin products and
lower materials costs during the six months ended July 1, 2000, compared to the
six months ended June 30, 1999.
General and administrative expenses: General and administrative expenses for
the six months ended July 1, 2000 increased $6.7 million or 20.0% to $40.4
million from $33.7 million for the six months ended June 30, 1999. As a
percentage of net sales, general and administrative expenses were 29.3% in the
six months ended July 1, 2000, compared to 26.1% in the six months ended June
30, 1999. The increase is a result of increased payroll expense largely from
$1.8 million in severance costs and $1.9 million in increased sales commissions
due to higher overall sales and improved margins, as well as increased
consulting/management fees, and employee recruiting expenses.
Interest expense: Interest expense for the six months ended July 1, 2000
increased to $10.0 million due to interest expense on the Senior Notes.
Provision for (benefit from) income taxes: The Company's effective income
tax rate for the six months ended July 1, 2000, was 58.9% compared to 49.1% for
the six months ended June 30, 1999. The effective tax rate differs from the
federal statutory rate primarily as a result of non-deductible goodwill. The
increase in the effective income tax rate during the six months ended July 1,
2000, is a result of increased nondeductible expenses relative to pretax income
(loss).
Net income (loss): Primarily as a result of the reasons discussed above, net
income (loss) decreased to ($.2) million or (0.1%) of net sales in the six
months ended July 1, 2000 from $5.6 million or 4.3% of net sales in the six
months ended June 30, 1999.
Liquidity and Capital Resources
Prior to the leveraged recapitalization, MDC's principal source of funds had
been cash flows from operations and the use of funds consisted primarily of
capital expenditures for new store openings and, a significant use of our funds
was the funding of accounts receivable to Heilig-Meyers and non-interest bearing
loans to Heilig-Meyers. Cash and cash equivalents at July 1, 2000 and
January 1, 2000 were approximately $10.2 million and $7.5 million, respectively.
In connection with the leveraged recapitalization, the Company incurred
significant amounts of debt requiring interest payments on the senior notes and
interest payments and principal payments under the senior credit facility. Our
liquidity needs relate to working capital, capital expenditures and potential
acquisitions.
We intend to fund our working capital, capital expenditures and debt service
requirements through cash flow generated from operations and borrowings under
the senior credit facility.
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In addition, the senior credit facility requires that we maintain specified
financial ratios. At July 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. As of August 3, 2000, we had $19.9 million of availability
under our senior credit facility.
Net cash provided by operating activities for the six months ended July 1,
2000 was $7.6 million, a $2.6 million increase from the $5.0 million of cash
provided by operating activities for the six months ended June 30, 1999. The
key driver of increased cash flow was reduced working capital.
Our principal use of cash for investing activities has historically been
capital expenditures for new store openings. Total capital expenditures for
each of the six months ended July 1, 2000 and June 30, 1999 were $1.5 million
and $1.8 million, respectively.
Net cash used for financing activities was $3.4 million for the six months
ended July 1, 2000, and $0.1 million for the six months ended June 30, 1999.
Cash used in financing activities primarily relates to the repurchase of stock
options for $2.7 million.
Seasonality
The Company's operations are not seasonal in nature. In the twelve months
ended January 1, 2000 MDC generated 23.2%, 24.5%, 28.1% and 24.2% of our retail
net sales in the first through the fourth quarter, respectively.
Management
Subsequent to the end of the first quarter, there have been changes to the
management team of Mattress Discounters. Richard Branch, the Vice President of
Marketing for Mattress Discounters left the Company during the middle of July to
pursue new opportunities. Barbara Schechter and Bryan J. Flanagan have recently
joined the company as Vice President of Marketing, and new Chief Financial
Officer, respectively.
Forward-Looking Statements
This document includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. Although we believe that our assumptions made in connection with
the forward-looking statements are reasonable, we cannot assure you that our
assumptions and expectations will prove to have been correct. These forward-
looking statements are subject to various risks, uncertainties and assumptions
about us, including, among other things:
. anticipated growth strategies and pursuit of potential acquisition
opportunities
. dependence upon our senior management team
. increased future competition
. possibility of fluctuations in the cost of raw materials and loss of
suppliers
. changes in economic and market conditions
. dependence on Sealy
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. the transactions may result in the termination of some of our leases
. reliance on certain trademarks and other intellectual property
. ability to return our stores in the Chicago market to profitability.
MDC undertakes no obligation to publicly update or review any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We do not believe that we have material quantitative or qualitative market
risk exposures.
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<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(3) Exhibits
--------
27.1 Financial Data Schedule.
(4) Reports on Form 8K
------------------
None.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATTRESS DISCOUNTERS CORPORATION
/s/ Bryan J. Flanagan
_________________________________________
August 14, 2000 Name: Bryan J. Flanagan
Title: Chief Financial Officer
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